To recognize the importance of Independent Directors it is necessary to view the modern day corporate governance, the board of Directors and the inter relation of Independent Directors within this framework in achieving the objectives of any enterprise.

‘’Corporate Governance is holding the balance between economic and social goals and between individual and communal goals. The Governance framework is there to encourage the efficient use of resources and equally to require accountability for the stewardship of those resources. The aim is to align as nearly as possible the interests of individuals, corporations and society. The incentive to corporations is to achieve their corporate aims and to attract investment. The incentive for states is to strengthen their economics and discourage fraud and management.’’

Sir Adrian Cadbury (1999) ‘’ Corporate Governance : A Framework for                           implementation ‘’ World Bank.

In Short, ‘’ Corporate Governance is about promoting corporate fairness, transparency, and accountability’’. The core objective of Corporate Governance are focus, predictability, transparency, participation, accountability, efficiency and effectiveness and stakeholders satisfaction.

Corporate Governance arrangements are key determinants of an organizations relationships with the world and encompass :

1.      The power given to management

2.      Control over management’s use os power (e.g. Through institutions such as Board of Directors);

3.      Managements accountability to stakeholders

4.      The Formal and informal processes by which stakeholders influence managements decision.

CORPORATE GOVERNANCE MEASURES :

In General, Corporate Governance measures include appointing non-executive Directors, placing constraints on management power and ownership concentration, as well as ensuring proper disclosure of Financial information and executive compensation. Many companies have established ethics and/or social responsibility committees on their Boards to review strategic plans, assess progress and offer guidance on social responsibility of their business. In addition to having committees and Boards, some Companies have adopted guidelines governing their own policies and practices around such issues like Board diversity, independence, and compensation.

Indian Companies are required to comply with Clause 49 of the listing agreement primarily focusing on following areas :

1.      Board composition and procedure

2.      Audit committee responsibilities

3.      Subsidiary Companies

4.      Risk Management

5.      CEO/CFO Certification of Financial Statements and Internal Controls.

6.      Legal Compliance

7.      Other Disclosures.

CORPORATE GOVERNANCE AND BOARD OF DIRECTORS :

Before we discuss on the role and responsibilities of an independent Directors/audit committee, an examination of key functions of the overall board that they form part of is necessary as these also concern them directly.

IMPORTANT ARE :

Ø  Guiding Corporate strategy, major plans of actions, Risk policy, annual business plans, overseeing ,major capital expenditures, acquisition and disposals.

Ø  Monitoring managerial performance, conflicts of interest of management, Board members and shareholders including misuse of Corporate assets and abuse in related party transactions.

Ø  Achieving adequate returns for Shareholders.

Ø  Compliance with laws and regulations including maintaining integrity of accounting and financial reporting systems, internal and operational controls, syatem for evaluating risk management etc.

Ø  Interest of Stakeholders, such as employees etc.

Ø  Corporate Social Responsibilities.

WHO IS AN INDEPENDENT DIRECTOR/AUDIT COMMITTEE 

1.      INDEPENDENT DIRETOR :

Definition of Independent Director as contained in Clause 49 of the Listing Agreement :

For the purpose of the sub clause (ii), the expression Independent Director shall mean a non executive Director of the Company who :

v  Apart from receiving directors remuneration, does not have any material pecuniary relationship or transaction with the Company, its promoters, its directors, its senior management or its holding Company, its subsidiaries and associates which may affect the independence of the director,

v  Is not related to promoters or persons occupying management positions at the board level or at one level below the board;

v  Has not been an executive or was not partner or an executive during the preceding three years, of any of the following :

·        The statutory audit firm or the internal audit firm that is associated with the company, and;

·        The legal firm(s) and consulting firms(s) that have a material association with the Company.

·        Is not a material supplier, service provider or customer or a lessor or lessee of the Company, which may affect independence of the Director;

·        Is not a substantial shareholder of the company i.e. owning two % or more of the block of voting shares.

·        Is not less than 21 years of age

·        And, who, in the opinion of the Board, is a person of integrity and possesses relevant expertise and experience.
 

2.      AUDIT COMMITTEE :

Clause 49 of Listing Agreement provides that :

v  The Audit Committee shall have minimum three Directors as members. Two Thirds of the members of audit committee shall be independent directors.

v  All members of audit committee shall be financially literate and at least one member shall have accounting or related financial management expertise.

v  The Chairman of the Committee shall be an Independent Director;

v  The Chairman shall be present at Annual General Meeting to answer shareholder queries;

v  The audit Committee should invite such of the executives, as it considers appropriate (and particularly the head of the Finance Function) to be present at the meetings of the Committee, but on occasions it may also meet without the presence of any executives of the Company. The Finance Director, head of internal audit and when required a representatives of the external auditor shall be present as invitees for the meetings of the audit Committee;

v  The Company Secretary shall act as the Secretary to the Committee.

WHY HAVE AN INDEPENDENT DIRECTORS ON THE BOARD

There are several distinct benefits that an independent board of directors can bring to a company, ranging from Long term survival to improved internal controls.

Independent Directors in the Board can :

·        Counterbalance management weakness in a company.

·        Ensure legal and ethical behavior at the company, while strengthening accounting controls.

·        Extend the ‘’reach’’ of a company through contacts, expertise, and access to debt and equity capital.

·        Be a source of well-conceived, binding, long-term decisions for a company.

·        Help a company survive, grow, and prosper over time through improved succession planning through membership in the nomination committee etc.

ROLE OF INDEPENDENT DIRECTOR/AUDIT COMMITTEE:

The Role of Independent Director and of Audit Committee include the following :

Ø  Oversight of the Company’s financial reporting process and the disclosures of its financial information to ensure that the financial statement is correct, sufficient and credible.

Ø  Recommending the appointment and removal of internal auditor, fixation of audit fees and also approval for payment for any other services.

Ø  Review with management, the annual financial statements before approval by the Board with particular reference to Directors Responsibility Statement, Changes in Accounting Policy, major accounting estimates, audit findings adjustments, compliance with listing and other legal requirements, disclosures of related party transactions and qualification in the draft audit report.

Ø  Review of quarterly financial statements.

Ø  Reviewing with management, performance of statutory auditors, adequacy of internal audit function including their structure, frequency, reporting.

Ø  Discussing significant finding of internal auditors, including internal investigations made by them into areas of fraud, irregularities or major failures of internal control systems.

Ø  Discussion with external auditors before the audit commences about nature and scope of audit as well as post-audit discussion to ascertain any area of concern.

Ø   Reviewing the Whistle Blower Mechanism.

Ø  Reviewing the Company’s financial and risk management policies.

Ø  To look into the reasons for substantial defaults in the payment to the depositors, debenture holders, shareholders and creditors.

Ø  Review uses/application of funds from public issues, rights issues, preferential issues etc.

Ø   Disclose shareholding in the listed Company.

Apart from this Independent Directors have a direct role in reviewing performance of Senior management in their functioning.

Very often, Independent Directors, bring in special expertise, that provides guidance to the company in its strategic policies.

Finally, directors whether independent, executive, non-executive must seek to balance their roles as strategic advisors and setting good governance practices.

 CONCLUSION :

      Ensure independence from management

      Must hold themselves accountable for the performanceof their boardrooms throughrigorous annual evaluations.

      Build knowledge capabilities in areas of strategy, implementation and globalization.

      Must harness power of information technology more successfully to ensure ready access to critical information.

      Move their mandate from serving solely shareholders to serving broader set of constituents.

It is by adopting the above that society will see the role that boards need to provide – ‘’that of real leadership’’.