Are Independent Directors Watchdogs for Good Corporate Governance?

8/12/2019 Are Independent Directors Watchdogs for Good Corporate Governance?

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Are Independent Directors

watchdogs for good Corporate

Governance?

Submitted by:

Arjun Yadav (2013PGPM009)


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Index

1. Introduction... 3

2. Basic Concepts.. 42.1 Corporate Governance. 4

2.1.1 Principles of Corporate Governance.. 4

2.1.2 Need of Corporate Governance. 5

2.2 Board Size.. 6

2.3 Independent Directors.. 6

2.3.1 Definition of Independence 7

2.4 Role of Independent Directors in Corporate Governance 8

2.4.1 Challenges faced by Independent Directors in Corporate Governance. 8

3. Implementation of the Existing System. 9

3.1 Provisions in the Current Law. 9

3.2 Selection of Independent directors 10

4. Alternative systems prevailing in other countries. 12

4.1 Corporate Governance in the U.S 12

4.2 Corporate Governance in the U.K 15

4.3 Corporate Governance in Germany 17

5. Data Analysis and Interpretation 18

5.1 Ensuring the Independence of Judgment.. 18

5.2 Corporate Governance Failures 18

5.2.1 Enron.. 18

5.2.2 Satyam 20

5.2.3 WorldCom 22

6. Conclusion .. 25

6.1 Need of Independent Directors25

7. Bibliography . 26


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1. Introduction

At the core of corporate governance lies the board of directors. A joint-stock company is owned

by the shareholders, who appoint a board of directors to supervise and direct the management

of the company and ensure that the board does all that is necessary by legal and ethical means

to make the business grow to maximize long-term corporate value.

The most important point to be noted is that the board members are appointed by the

shareholders and other key stakeholders, and are accountable to them. In other words, the

directors are fiduciaries of shareholders, not of the management. This doesnt implythat the

board must have an adversarial relationship with the CEO and top management. In fact, most

successful boards have remarkable collegiality and, more often than not, agree to most

managerial initiatives. However, in instances where the objectives of management differ from

those of the wide body of shareholders, the non-executive directors on the board must be able

to speak up in the interest of the ultimate owners and discharge their fiduciary oversight

functions. This is the reason why independence has become such a critical issue in

determining the composition of any board.

With global competition getting more intense than ever, it would be very useful for boards to

have independent directors who can comment and contribute independently on a companys

business strategies, as well as on its strengths, weaknesses, opportunities and threats.


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2. Basic Concepts

2.1 Corporate Governance

Corporate governance can simply be described as a process by which directors control and

direct the management of a company to achieve the best returns for its owners.

2.1.1 Principles of Corporate Governance

The ICAEW in its latest paper suggests five underlying principles:

Leadership: A company should be headed by an effective board. The Board should alignits interests to that of the company in order to meet its business purpose in both the

short and long term.

Capability: The Board should have an appropriate mix of skills, experience andindependence to allow its members to effectively undertake their duties and

responsibilities.

Accountability: The Board should communicate to the companys shareholders andother stakeholders, at regular intervals, a fair, balanced and understandable assessment

of how the company is achieving its business purpose and meeting its other

responsibilities.

Sustainability: The Board should guide the business to create value and allocate it fairlyand sustainably to reinvestment and distributions to stakeholders, including


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shareholders, directors, employees and customers.

Integrity: The Board should lead the company to conduct its business in a fair andtransparent manner that can withstand scrutiny by stakeholders.

2.1.2 Need of Corporate Governance

Over the last decade there has been a realized importance of corporate governance among the

corporations and stakeholders. Some key factors that led up to this are:

The subject of corporate governance got in the limelight after a string of collapses ofhigh profile companies like Enron, WorldCom and Satyam. The government realized that

these companies are large and have public funds invested in them in huge amounts.

Capital markets are now getting closely integrated. Now there are virtually noconstraints on either foreign equity funds investing in India or in Indian companies

listing in the US or elsewhere. This is a boon for a lot of companies, it also brings in some

vulnerabilities.

Global agencies such as Standard & Poor have already begun to rate companiesaccording to corporate governance standards. Domestic rating agencies like CRISIL and

ICRA have also got into this act. It is, therefore, both meaningful and strategically

important for corporations to focus on corporate governance definition and raise the

bar.

This made the role of independent directors more important than ever. Keeping that in mind,

The Companies Act, 2013 has made some provisions which deal with the term independent

director.


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2.2 Board Size

The number of members in the board is the board size. The relationship between the size of

board and it effectiveness follows an inverted U curve. As the number of board members are

added initially, more ideas and knowledge flows and its effectiveness is enhanced till a

threshold point after which the size becomes a problem. Problems of coordination and conflict

arise and the effectiveness starts to decrease.

Relationship between effectiveness and board size

2.3 Independent Directors

An independent director of a company is a non-executive director who:

Apart from receiving directors remuneration, does not have any material pecuniaryrelationships or transactions with the company, its promoters, its senior management or

its holding company, its subsidiaries and associated companies.


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Is not related to promoters or management at the board level, or one level below theboard (spouse and dependent, parents, children or siblings).

Has not been an executive of the company in the last three years.

Is not a partner or an executive of the statutory auditing firm and the internal audit firmthat is associated with the company, and has not been a partner or an executive of any

such firm for the last three years. This will also apply to legal firm(s) and consulting

firm(s) that have a material association with the entity.

Is not a significant supplier, vendor or customer of the company. Is not a substantial shareholder of the company, i.e. owning 2 per cent or more of the

block of voting shares.

Has not been a director, independent or otherwise, of the company for more than threeterms of three years each (not exceeding nine years in any case).

2.3.1 Definition of Independence

To rephrase Bertolt Brecht, independence is a bit like communism: very easy to understand,

very hard to achieve. An independent director is one who should be able to exercise his or her

reasoned judgment without being unduly influenced by pressures either from management or

any dominant shareholder or stakeholder. An independent director, also known as an outside

director, is a member of the board of directors who doesnt own stake in the company. An

independent director cannot have any material relationship with the company and its related

persons, except sitting fees. As of 2004, a majority of the minimum seven directors of public

companies having a share capital in excess of Rs 5 Crore should be independent.

The word Independent Director was first used in Clause 49 under the heading Corporate

Governance. Since then there have been many changes under the Companies Act including

sections that talk about the requirement of Independent Director. The only difference between

a non-executive and a non-executive independent director is the latter is forbidden to have any


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pecuniary relationship with the company apart from receiving a sitting fee which has been

raised to Rs. 20,000/-.

2.4 Role of Independent Directors in Corporate Governance

Provide input and support to the Lead Independent Director on: Selection of committee chairs and membership on Board committees. Establishment of the agendas for the Nominating and Corporate Governance

Committee meetings.

Compensation philosophy for the Board and candidates for Board membership. Be accountable to and provide leadership for all issues of corporate governance which

should come to the attention of the Board and the Nominating and Corporate

Governance Committee.

2.4.1 Challenges faced by Independent Directors in Corporate Governance

Asymmetry of Information:The management of the company including promoters hasfar more information and knowledge regarding the affairs of a company and more

resources at their disposal compared to independent directors. This poses as a challenge

to understand what the best is for the company.

Vested Interests of Promoters: The management also has more financial stake indecisions and, therefore, has a major tendency to protect their interests. This makes it

very difficult for the voice of an outside director to be heard fairly.


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3. Implementation of the Existing System

In India there is a problem about the training of directors. A professional might be able to give

excellent corporate advice and guide a company in ways that maximise long-term shareholder

value but he or she might not be aware of the nitty-gritty of the rights, responsibilities, duties

and liabilities of a legally recognised fiduciary. Barring corporate lawyers, chartered accountants

and company secretaries, these technical aspects are not obvious to some of the best qualified

directors. Fully understanding such issues requires specialised training.

A lot of debate has been going on the subject of Independent Directors in the past few years.

While some say that an independent judgment is vital for efficient governance of an

organization, others have shown open criticism towards it.

3.1 Provisions in the Current Law

The new Companies Act, 2013 has several additional provisions regarding independent

directors:

Section 134(3)(d)deals with a statement on declaration of status of independentdirectors which will be attached with Directors Report of the Company.

Section 135(1)deals with constitution of Corporate Social Responsibility Committee inwhich one member should be an independent director.

Section 149deals with appointment and qualifications of independent directors.

Section 150deals with manner of selection of Independent directors and maintenanceof data bank of independent director.


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Section 152deals with total strength of directors in which independent director will notincluded in that total number of directors of the company.

Section 161says that no person shall be appointed as an alternate director for anindependent director unless he is qualified to be an independent director under the

provision of this Act.

Section 173(3)talks about Board Meeting at shorter notice in which at least oneIndependent director should be present.

Section 177talks about Audit Committee of the Company in which minimum number ofIndependent Directors will be three.

Section 197covers the different type of fee given to Independent Directors.

Schedule IVdeal with Code for Independent Directors

3.2 Selection of Independent directors

A difficult task is to select independent directors in the board of a company. There are

numerous criteria that govern the selection procedure:

In the private sector, one has to be well known and trusted by the promoters to beinvited to join a board as an independent director.

In public sector companies, where government is the promoter, these appointments arenot made by the chairman but by the minister in charge of the PSU.

Another criterion for selection of independent directors is their skills which vary acrosscorporations as well as with time. However, international experience suggests that all


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boards benefit from a few specialized skills. One of these is financial expertise. This

implies that they should have sufficient skills and experience to carefully read income

statements, cash flow statements, balance sheets, notes on accounts, and be able to

convene meaningful Audit Committee proceedings.


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4. Alternative systems prevailing in other countries

Companies in different countries operate in different social, legal and economic environments.

As a result, each country has developed its own corporate governance system to serve its

business operations in the best way possible. As the globalization of business speeds up, it is

unknown whether there exists a unanimous corporate governance system for all countries. The

following section compares the corporate governance factors in the United States of America,

United Kingdomand Germany. The three countries were selected because they adopt different

corporate governance models. Their corporate governance component factors can be classified

into three groups: those related to top management organization, the board as whole and

individual board members.

The reason for choosing German share companies and US listed corporations is that they each

adopt very different board models. While the Germans follow the one-tier model assigns the

combined monitoring and executive functions duties to one board. On the other hand, U.S

follows the two-tier model which that allows companies to assign these functions to two

independent boards: the supervisory and the management boards. These two board models

are typical corporate governance structures for most listed corporations in the world. In France,

companies are allowed to choose between any of the two models. Switzerland share

companies are not limited to any of the above two models and are free to choose any model of

their choice.

4.1 Corporate Governance in the U.S

The shareholder-centered model used in America combines features from both the shareholder

and stakeholder models, defined by a less clear separation between dispersed ownership and

managerial control. It includes dispersed ownership, strong legal protection for shareholders


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and indifference to other stakeholders. This hybrid model allows stakeholders to have more

influence over the operation of the company.

Companies listed on the NYSE must comply with the Listed Company Manual, which requires

listed companies to have a majority of independent directors.

The tests for independence are as follows:

No director qualifies as independent without the affirmation of the board of directorswhich determines that the director has no material relationship with the listed company

(directly or as a partner, shareholder or officer of an organization that has a relationship

with the company). Companies must disclose the nature of directorship and inform the

basis of that determination.

The director is, or has been within the last three years, an employee of the listedcompany, or an immediate family member is, or has been within the last three years, an

executive officer of the listed company.

The director has received, or has an immediate family member who has received, duringany twelve-month period within the last three years, more than $100,000 in direct

compensation from the listed company, other than director and committee fees and

pension or other forms of deferred compensation for prior service.

The director or an immediate family member is a current partner of a firm that is thecompanys internal or external auditor.

The director is a current employee of such a firm.

The director has an immediate family member who is a current employee of such a firm.


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The director or an immediate family member was within the last three years (but is nolonger) a partner or employee of such a firm and personally worked on the listed

companys audit committee within that time.

The director or an immediate family member is, or has been within the past three years,employed as an executive officer of another company where any of the listed

companys recent executive officers at the same time serves or served on that

companys compensation committee.

The director is a current employee, or an immediate family member is a currentexecutive officer, of a company that has made payments to, or received amounts from,the listed company.

The companies comparatively have the smallest board size but not necessarily the most

effective one. The boards have the most number of meetings as they have to monitor both

monitoring and executive functions.

Most companies of the US have already had some form of independent board leadership for a

while now and this practice has continued to grow. Small-cap companies experienced thegreatest growth in independent board leadership, and show a preference for independent

board chairs. Mid- and large-cap companies tend to favor lead directors as they have more at

stake and tend to be more conservative. The following tables present data from 2007 and 2012

to give a comparative analysis of the growth.


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Source: Ernst & Young Corporate Governance Report May 2013

4.2 Corporate Governance in the U.K

The UK has developed a market-based approach that enables the board to retain flexibility in

the way in which it organizes itself and exercises its responsibilities, while ensuring that it is

properly accountable to its shareholders.


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This is done primarily through the UK Corporate Governance Code which is maintained by the

FRC. The Code operates on the basis of comply or explain. It identifies good governance

practices relating to, for example, the board and its committees and risk management and

internal control, but companies can choose to adopt a different approach if that is more

appropriate to their circumstances. Where they do so, however, they are required to explain

the reason to their shareholders who must decide whether they are content with the approach

that has been taken.

This comply or explain approach enablesjudgments about, for example, the composition and

performance of the board to be made on a case by case basis. It is supported by companies,

investors and regulators in the UK, and has increasingly been adopted as a model in other

markets.

For the system to work effectively shareholders need to have appropriate and relevant

information to enable them to make a judgment on the governance practices of the companies

in which they invest. They also need the rights to enable them to influence the behaviour of the

board when they are not content, and the willingness to use them. Comply or explain

therefore needs to be underpinned by an appropriate regulatory framework.

Under UK law, shareholders have comparatively extensive voting rights, including the rights to

appoint and dismiss individual directors and, in certain circumstances, to call a general meeting

of the company. Certain requirements relating to general meetings, including the provision of

information to shareholders and arrangements for voting on resolutions, are also set out in law,

as are some requirements for information to be disclosed in the annual report and accounts.

These include requirements for a Business Review (in which the board sets out its assessment

of the companys future prospects) and a report on directors remuneration, on which

shareholders have an advisory vote.

There are also additional regulatory requirements for some specific sectors, such as financial

services.


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This framework is reinforced by the rules that must be followed by companies listed on the

London Stock Exchange. The rules provide further rights to shareholders (for example, by

requiring that major transactions are put to a vote), and require certain information to be

disclosed to the market. For companies with a Premium Listing, this includes the requirement

to provide a comply or explain statement in the annual report explaining how the company

has applied the UK Corporate Governance Code.

4.3 Corporate Governance in Germany

Corporate Governance in Germany is characterized by a number of unique features, chief

among them being the requirement under the German Stock Corporation Law (AktG) that

boards of directors are divided into two tiers: a management board (called the Vorstand) which

is solely responsible for the management of the company, and a supervisory board (called the

Aufsichtsrat), which is charged with overseeing the activity of the management board. German

boards of directors are also unique in that, under the German 'Co-determination Law',

supervisory board members of large companies (> 500 employees) are elected both by

shareholders and by company employees: the employees elect one third or half of the board

(depending on the size of the company). Neither shareholders nor employees elect members to

the management board; instead, these members are appointed by the supervisory board. The

German Corporate Governance Code (Codex) works on a 'comply or explain'-basis and aims at

making the German Corporate Governance system more transparent and understandable.

The companies have the largest board size. They have a higher probability to suffer from the

adverse affects of too large a board but a research study conducted by Leimkhler suggested

that the notion supervisory boards are in general inefficient as a consequence of their large size

isnt validated. German companies have the fewest board meetings. Since they follow a one-

tier model, they do not require meetings to be held as frequently as companies in the US.


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5. Data Analysis and Interpretation

5.1 Ensuring the Independence of Judgement

Defining independence is not sufficient to ensure independence of judgement. The choice of

directors and the skills that they bring to the board helps in ensuring independence of

judgement. Some factors that play an important are:

The conduct of board meetings.

The quality with which financial, strategic and operational information is supplied to theboard by the management.

Managements appreciationfor independent evaluation and criticism of performanceand strategies.

The actual role of the various committees of the board.

Willing of a company to pay for the experience and skill sets of professional,independent directors.

5.2 Corporate Governance Failures

5.2.1 Enron

Billions of dollars of market value erased. Thousands of jobs lost. Savings wiped out. A demise

as spectacular as Enrons has failure written all over it. And in somequarters, that failure is at


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least partially attributed to the complex derivatives transactions that Enron entered into

transactions that some believe may have been used to conceal or obscure the companys true

financial condition, to hide losses, and to bolster earnings. Yet a close analysis of the Enron

situation yields a different story, one that is unfortunately not likely to sell many newspapers or

provide much fodder on the floors of Congress. Put simply, the market worked.

This storywhich ISDA articulates in the following reportcenters on the powerful and

protective market forces that ultimately compelled the truth about Enrons financialcondition

and financial transactions to be exposed, and that enabled the derivatives business to function

smoothly in the event of Enrons collapse. As documented in thisreport (and using supporting

material as noted throughout the paper):

The Enron failure demonstrated a failure of corporate governance, in which internalcontrol mechanisms were short-circuited by conflicts of interest that enriched certain

managers at the expense of the shareholders. Although derivatives made appearances

in the course of the governance failures, they played no essential role.

Enrons actions appear to have been undertaken to mislead the market by creating theappearance of greater creditworthiness and financial stability than was in fact the case.

The market in the end exercised the ultimate sanction over the firm.

Even after Enron failed, the market for swaps and other derivatives worked as expectedand experienced no apparent disruption. There is no evidence that the market failed to

function in the Enron episode. On the contrary, the market did exactly what it is

supposed to do, which is to use reputation as a means of monitoring market

participants.

There is no evidence that existing regulation is inadequate to solve the problems thatdid occur. Had Enron complied with existing market practices, not to mention existing


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accounting and disclosure requirements, it could not have built the house of cards that

eventually led to its downfall.

Finally, it is likely that additional government regulation, by increasing moral hazard anddecreasing legal certainty, could have the unintended consequence of making future

failures and market instability more likely along with increasing the cost and decreasing

the availability of risk management tools like swaps.

In sum, ISDA articulates in this paper that the market imposes a substantial discipline on swaps

activity. ISDA asserts that these powerful forces of market discipline were in play as Enron

sought to establish itself as a major participant in energy and energy derivatives trading. As it

did so, Enron attempted to evade the discipline of the market and inflate its creditworthiness

through its well-documented failures in corporate governance, accounting and disclosure.

These attempts at deception, and the ultimate fate of Enron, are themselves confirmation of

the relevance and power of the discipline the market imposes on participants in swaps activity.

5.2.2 Satyam

On a quarterly basis, Satyam earnings grew. Mr. Raju admitted that the fraud which he

committed amounted to nearly $276 million. In the process, Satyam grossly violated all rules of

corporate governance (Chakrabarti, 2008). The Satyam scam had been the example for

following poor CG practices. It had failed to show good relation with the shareholders and

employees. As Kahn (2009) stated, CG issue at Satyam arose because of non-fulfillment of

obligation of the company towards the various stakeholders. Of specific interest are the

following: distinguishing the roles of board and management; separation of the roles of the CEOand chairman; appointment to the board; directors and executive compensation; protection of

shareholders rights and their executives. In fact, shareholders never had the opportunity to

give their consent prior to the announcement of the Matyas deal and falsified documents with


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grossly inflated financialreports were delivered to them. Ultimately, shareholders were at a

loss and felt cheated. Surely, questions about managements credibility were raised, in addition

to the nonpayment of advance taxes to the government. Together, these issues raise questions

about Satyams financial health.

Lessons learnt from Satyam

The 2009 Satyam scandal in India highlighted the nefarious potential of an improperly governed

corporate leader. As the fallout continues, and the effects were felt throughout the global

economy, the prevailing hope is that some good can come from the scandal in terms of lessons

learned (Behan, 2009). Here are some lessons learned from the Satyam Scandal:

Investigate All Inaccuracies: The fraud scheme at Satyam started very small, eventuallygrowing into $276 million white-elephant in the room. Indeed, a lot of fraud schemes

initially start out small, with the perpetrator thinking that small changes here and there

would not make a big difference, and is less likely to be detected. This sends a message

to a lot of companies: if your accounts are not balancing, or if something seems

inaccurate (even just a tiny bit), it is worth investigating. Dividing responsibilities across

a team of people makes it easier to detect irregularities or misappropriated funds.

Ruined reputations: Fraud does not just look bad on a company; it looks bad on thewhole industry and a country. Indias biggest corporate scandal in memory threatens

future foreign investment flows into Asias third-largest economy and casts a cloud over

growth in its once-booming outsourcing sector. The news sent Indian equity markets

into a tail-spin, with Bombays main benchmark index tumbling 7.3% and the Indian

rupee fell (IMF, 2010). Now, because of the Satyam scandal, Indian rivals will come

under greater scrutiny by the regulators, investors and customers.


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Corporate Governance needs to be stronger: The Satyam case is just another examplesupporting the need for stronger CG. All public-companies must be careful when

selecting executives and top-level managers. These are the people who set the tone for

the company: if there is corruption at the top, it is bound to trickle-down. Also, separate

the role of CEO and Chairman of the Board. Splitting up the roles, thus, helps avoid

situations like the one at Satyam.

The Satyam Computer Services scandal brought to light the importance of ethics and its

relevance to corporate culture. The fraud committed by the founders of Satyam is a testament

to the fact that the science of conduct is swayed in large by human greed, ambition, and

hunger for power, money, fame and glory. Scandals from Enron to the recent financial crisis

have time and time again proven that there is a need for good conduct based on strong ethics.

Not surprising, such frauds can happen, at any time, all over the world. Satyam fraud spurred

the government of India to tighten CG norms to prevent recurrence of similar frauds in the near

future. The government took prompt actions to protect the interest of the investors and

safeguard the credibility of India and the nations image across the world.

5.2.3 WorldCom

The WorldCom case has become a kind of poster child for corporate governance failures in this

new century. WorldCom, the worlds second largest telecommunications company, filed for

bankruptcy in the federal court in Manhattan in the summer of 2002, after the disclosure of

massive accounting irregularities. I was appointed as Examiner by the bankruptcy court in

August, 2002, filed my first interim report that November, a second interim report in June of

2003 and my final report earlier this year. My remarks tonight will, understandably, referenceonly the results of our completed investigations which have been made public. But even the

public story provides a genuine case study in the failure of corporate governance and suggests a

number of lessons in how to avoid its repetition.


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At the outset, I suspect you might logically ask, What is a bankruptcy examiner? What does a

bankruptcy examiner do? Put simply, I was appointed by Judge Arthur Gonzales in the

Bankruptcy Court in the Southern District of New York in Manhattan to carry out an

independent investigation into what happened in the WorldCom matter. My job was to

assure the judge that procedures and persons involved in any past wrongdoing were not carried

forward into the reorganized entity. We were also asked to identify potential causes of action

that the company might have against third persons responsible for losses to the company and

to make recommendations to aid in avoiding repetition elsewhere of the acts that caused the

downfall of WorldCom. We worked closely with the U.S. Department of Justice and state

prosecutors, although we had no criminal jurisdiction. We also worked with the SEC and other

regulators, although we had no regulatory responsibility. And we worked with representatives

of the creditors of the company and the Corporate Monitor appointed in connection with the

SEC proceedings to fully develop the facts. Our completed reports are now in the hands of the

public and the new management of WorldCom for their guidance.

What happened in the WorldCom case? Most of the deviations from proper corporate behavior

of which we took note resulted from the failure of Board of Directors to recognize, and to deal

effectively with, abuses reflecting what our reports identified as a culture of greed within the

corporations top management. Others resulted from an abject failure of responsible persons

within the company to fulfill their fiduciary obligations to shareholders. A third contributing

factor was a lack of transparency between senior management and the Companys board of

directors. In the final analysis, what we saw was a complete breakdown of the system of

corporate governance. The checks and balances designed to prevent wrongdoing and

irregularities simply failed to operate.

The actual fraud within WorldCom consisted of a number of so called topside adjustments to

accounting entries to prop up declining earnings. Mostly these consisted of improper draw-

downs of reserves accumulated from its acquisition program and other sources and improper

capitalization of costs which should have been expensed. It was, in short, a classic case of

cooking the books While WorldCom has not completed the restatement of its financials, the


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judge handling the SEC proceedings in New York reported that the company overstated its

income by approximately $11 billion, overstated its balance sheet by approximately $75 billion

and, as a result, caused losses in shareholder value of as much as $250 billion, a significant

amount of the latter, of course, in employee 401(k) retirement funds.


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6. Conclusion

Though there seems to be shortage of adequate independent directors, there are enough

capable people to play key fiduciary roles in boards of Group A, B1 and B2 companies which

together account for almost 95 per cent of market capitalization. Good independent directors

are not ubiquitous enough because they are not sought enough by companies, and because

they are not adequately compensated for their time. If the compensation problem is taken care

of, then it is feasible to attract better talent on boards, despite a more stringent definition of

independence.

6.1 Need of Independent Directors

The idea of Independent directors to act as watchdogs for corporate governancestems from the fact that they are independent from the management giving them the

ability to provide a fresh outlook into the decision making of a company. The role of

independent director, in part, is to act as a watchdog on the promoters and the

management of the company and protect the interests of minority shareholders.

Other closely held businesses may want independent directors who can offer financial,technical, and/or strategic advice to the operational officers of the company. The

independent directors here act as advisors to Executive Directors and the management.

Though the independent directors play an important role in corporate governance of a

company, they cannot be held completely liable for any sort of malignancy in a companys

overall governance.


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7. Bibliography

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Approach-to-Corporate-Governance.aspx

http://www.ey.com/IN/en/Services/Assurance/Fraud-Investigation---Dispute-

Services/Corporate-governance--role-of-independent-directors

http://www.mca.gov.in/Ministry/pdf/CompaniesAct2013.pdf

http://www.oecd.org/daf/ca/oecdprinciplesofcorporategovernance.htm

http://articles.economictimes.indiatimes.com/2013-12-19/news/45377580_1_independent-

directors-satyam-fraud-corporate-governance

http://company.ingersollrand.com/ircorp/en/discover-us/our-company/corporate-

governance/corporate-governance-guidelines.html

https://www.smu.edu.sg/perspectives/2013/01/30/corporate-governance-role-independent-

directors

http://digitalcommons.law.msu.edu/cgi/viewcontent.cgi?article=1027&context=ilr

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compliance/cg_principles_recommendations_with_2010_amendments.pdf
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Are Independent Directors Watchdogs for Good Corporate Governance?

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