ABSTRACT
Independent directors play a crucial role in enhancing corporate governance by ensuring objectivity, transparency, and accountability in decision-making processes within organizations. Their primary function is to provide an unbiased perspective, free from conflicts of interest, particularly in the areas of financial oversight, executive compensation, and strategic direction. Independent directors contribute to mitigating agency problems between management and shareholders, thereby protecting the interests of minority investors. They also serve as a key safeguard against potential corporate fraud and unethical practices. While their influence is often defined by legal frameworks and corporate governance codes, the effectiveness of independent directors largely depends on their experience, expertise, and commitment to the company’s long-term success. This paper examines the evolving role of independent directors, their legal and ethical responsibilities, and the challenges they face in fulfilling their duties within dynamic corporate environments.
- INTRODUCTION
Being real owners the shareholders appoint the directors through a simple majority resolution passed at the general meetings. Therefore the directors are accountable to the owners. Directors are having fiduciary duty to the shareholders, not to the management. That doesn’t mean an adverse or an uncooperative Board. However, the plan and ideas of management may be different from that of shareholders. If any act of the management affects the shareholders’ interest, the non- executive directors of the company should raise objections and speak in the interest of the shareholders. This is precisely the reason why ‘independence’ has become such a significant issue to determining the composition of company’s Board. With such notion, the security market regulator, the SEBI insisted to constitute the Boards of listed companies with the combination of executive and independent non-executive directors.
An active, knowledgeable and independent Board only can achieve the highest standards of corporate governance. Company’s Board should be constituted with such an objective. This objective can be achieved through appointment of independent directors. They can bring all elements of objectivity to Board process and such neutrality will protect general interests of the company and that will be beneficial to minority and smaller shareholders. The very purpose behind the appointment of independent directors is to scrutiny each and every activities of Board and to ensure independence and neutrality in the Board.
In India, the term independent director was coined first time by the CII’s “Desirable Corporate Governance Code 1998” and this Code recommended constituting the Board of listed companies with professionally competent, independent non-executive directors. In 1999, the Birla Committee defined the term ‘independent director’ first time in the Indian corporate regime and enlightened the importance of those directors in the improvement of corporate governance standards. In accordance with the recommendations of above said both Committees’ reports, the SEBI inserted Clause 49 in its Listing Agreement in 2000. After that, the independent director concept has been strengthened by the Reports of Naresh Chandra Committee 2002, Narayana Moorty Committee 2003, JJ Irani Committee 2004, Corporate Governance Voluntary Guidelines 2009, Kotak Mahindra Committee on Corporate Governance 2017. However the Companies Act 1956 was silent in respect of appointment, role, functions, duty and liability of independent directors.