An independent director is a non-executive director of a company who helps the company in improving corporate credibility and governance standards. He/ She must not have any kind of relationship with the company that may affect the independence of his/ her judgment.
The term “Independent Director” has been defined in the Companies Act – 2013 along with several new requirements relating to their appointment, duties, role, and responsibilities.
Rules pertaining to the appointment of Independent directors
- The board of directors of a company must constitute both executive and non-executive directors.
- Appointment process of independent directors shall be independent of the company management. While selecting independent directors, the Board shall ensure that there is an appropriate balance of skill, experience and knowledge in the Board so as to enable the Board to discharge its functions and duties effectively.
- The appointment of independent director(s) of the company shall be approved at the meeting of the shareholders.
- The appointment of independent directors shall be formalised through a letter of appointment, which shall set out:
- The term of appointment.
- The expectation of the Board from the appointed director. The Board-level committee(s) in which the director is expected to serve and its tasks.
- The fiduciary duties that come with such an appointment along with accompanying liabilities.
- The Code of Business Ethics that the company expects its directors and employees to follow.
- The list of activities that a director must not involve in, during the tenure of the appointment.
- The remuneration, mentioning periodic fee, reimbursement of expenses for participation in the Boards and other meetings, profit related commission, if any.
The re-appointment of independent director shall be on the basis of report of performance evaluation.
Resignation or removal:
- The resignation or removal of an independent director shall be in the same manner as is provided in sections 168 and 169 of the Act.
- An independent director who resigns or is removed from the Board of the company shall be replaced by a new independent director within a period of not more than one hundred and eighty days from the date of such resignation or removal.
- Where the company fulfils the requirement of independent directors in its Board even without filling the vacancy created by such resignation or removal, as the case may be, the requirement of replacement by a new independent director shall not apply.
At least 50% of the board should comprise of non-executive directors. If the chairman of the board is a non-executive director, then at least one-third of the board should comprise independent directors.
If the chairman is an executive director, then independent directors should make up at least half of the board.
Listed Public Company
Every listed public company shall have:
- At least one-third of a total number of directors as independent directors. Any fraction contained in that one-third shall be rounded off as one.
Role of an Independent Director
- Independent director acts as a guide, coach and mentor to the company.
- His/her role broadly includes improving corporate credibility and governance standards functioning as a watchdog, and playing a vital role in risk management.
- Act objectively and constructively while exercising his/her duties.
- Responsible for ensuring better governance by actively involving in various committees set up by the company.
- Facilitate withstanding and countering pressures from the owners.
- Play an important role in succession planning.
- Scrutinise the performance of the management in meeting with agreed goals and objectives of the company and monitor the reporting of the performance.
- Satisfying themselves that financial controls and systems of risk management are in operation and check on the integrity of financial information
- Safeguard the interests of all stakeholders of the company including minority shareholders.
- Determine appropriate levels of remuneration of executive directors, key managerial personnel and senior management and whenever necessary, in appointing and recommending their removal also.
Duties of Independent Director
- Attend company’s general & board meetings.
- Must have adequate knowledge about the company and the external environment in which it operates.
- Seek appropriate clarification or amplification of information and, where necessary, take and follow appropriate professional advice and opinion of outside experts at the expense of the company
- Must not unfairly obstruct the functioning of an otherwise proper Board or committee of the Board
- Not disclose confidential information, including commercial secrets, technologies, advertising and sales promotion plans, unpublished price sensitive information, unless such disclosure is expressly approved by the Board or required by law
- Ascertain and ensure that the company has an adequate and functional vigil mechanism.
The performance evaluation of independent directors shall be done by the entire Board of Directors, excluding the director being evaluated.
On the basis of the report of performance evaluation, it shall be determined whether to extend or continue the term of appointment of the independent director.
In times of growing mis-governance within the Indian companies, the role of an independent director has become even more important & critical. All shareholders must conduct thorough due diligence of the independent directors before investing. (or maybe let savart help do it ☺)