Independent Directors in India and USA: A Comparative

Study of Provisions:

ABTRACT
Independent Director is a member of Board other than Managing director, who does not have
pecuniary relationship with the company during the current period. He is non- executive
director who helps the company in improving its corporate governance. The paper presented
examines different roles and responsibilities of independent directors in India and USA. It
looks into comparison of independent directors. Provision on independent directors have also
been included in various stock exchanges’ listing documents. The nuances of provision
dealing with this aspect vary across these countries, but focus is generally to introduce non-
conflicting members on prime decision making bodies like board of directors.

KEYWORDS
Corporate Governance, Independent Directors, Committee, Regulations, Organisational
Performance, good corporate governance

INTRODUCTION
Independent Director is a non-executive director of board of directors who does not have any
pecuniary relationship with the company except sitting fees. This concept emerge as
important solution for fraudulent activities in the company. They have right to bring
judgement in decision making related to corporate governance. Provision of independent
directors is mentioned in stock exchanges’ listing documents. These provisions are different
for different countries. These independent directors are also in committees like audit,
compensation, nomination and grievances committees, and their role as an independent
director to preserve the interest of shareholder and overall interest of the company as whole.
Three important principle of corporate governance are accountability, transparency and
fairness. The regulations of corporate governance focus on role of independent directors in
fostering good governance. Indian corporate laws are drawn from British Laws in their
content and interpretation. Although in India the corporate governance is shaky due to lack of
accountability of controlling shareholders. On the contrary the US is sets an example with
shareholder oriented or market based approach to corporate governance.
In 1991, it was found out that two third of the largest US corporations had board with
majority of independent director. By 2001, the proposition of companies having such board
had reached 75%. Over the last two decades, in America, a remarkable growth is seen in the
power of independent directors.

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Literature Review
 Pallak Bhandari (2018), according to her there is significant difference between
corporate governance model in India and US owing to difference between business
environment and cultural.

 Abhishek Gupta (2011), Limitation of Independent Directors arise on account of

two sources; internal source that is personality factor and external source that is
ownership, board composition and structure. There has been corporate failures and
poor board performance even with the presence of independent directors.

 Jackson (2010), The US is often seen as the paradigmatic case of shareholder

oriented to corporate governance. This paper makes an effort to study the similarities
between India and US corporate governance.

 ZengquanLic (2017), according to him independent directors do window offering

little real value when they follow twister of public opinion during corporate scandals.

 McConvill (2004), according to him, directors must have significant interest in the
company, therefore they serve so that directors and company’s interest are
interconnected.

Methodology
The paper talks about the provisions of independent directors on the firm performance.
Therefore secondary approach is used to analyse above case. The sample taken for the study
are the firms situated in India and US, to find out the impact of independent directors in
different countries. The information is taken from different articles, journals, company act
2013 and various newspapers and websites related to corporate governance and law article.

Objectives
 To analyse the provisions of independent directors in US and India
 To study the procedure for appointment and reappointment of independent directors
 To study the effectiveness of independent directors in corporate governance in US and
India.

Independent Directors in India

The corporate governance in India came into picture after the report of Cadbury Committee
in UK. Initially Company law in India lack the provision regarding independent directors as
purveyor of corporate governance. Therefore after the Cadbury committee in 1992, industry
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 association, Confederation of Indian Industry laid the emphasis on greater importance to
shareholders, transparency and accountability and hence recommended the appointment of
independent directors on the board of companies.
This initiative was followed by Kumar Mangalam Birla Committee which suggested
appointment of 1/3rd of half of board strength as non-executive directors. The report also
defined independent directors as non-executive directors having no material relationship with
promoters.
This system continue to hold till 2013, when the new company’s law in India gave status to
independent directors. The new law has incorporated various provisions aimed at promotions
of corporate governance.

Independent Directors in USA

Companies incorporated in US have unitary board and governed by the respective law on
corporations. US have given more importance to corporate governance after the Enron and
WorldCom scandals. While there is no specific provision regarding composition of board of
directors, the regulation of stock exchange have included clause on appointment of
independent directors. Post Enron era an important legislation was passed. Oxley law
fortified the institutions of independent directors with respect of audit function.
India USA
Establishment After Cadbury Committee Post Enron Era
1992
Composition 1/3rd of half of BOD No specific provision
Initiated after Companies Act, 2013 Oxley law

COMPARISION OF PROVISION OF INDEPENDENT DIRECTORS

BETWEEN INDIA AND USA:
The comparative position of provision relating to independent directors has been discussed on
following basis.
1. TEST FOR DETERMINATION OF INDEPENDENT DIRECTORS:
The criteria for determination of independent directors is an important instrument of
corporate governance. It signifies absence of any pecuniary relationship that influence the
independent judgement in taking decision for the company. Therefore, the Indian law has
now afforded elaborate criterion for independent directors in section 149 (4) of companies
act, 2013.
The following categories have been excluded from independent directors:
 He should not be the promoter of company/its holding company/ subsidiary company.
 He should not be related to the promoters or directors of the company.
 He should not have pecuniary relationship with the company in the past 2 years.
 He should not have been a key managerial personnel or employee of the company in
last 3 years.
 He should not be holding 2% or more of the total voting power of the company.

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The rules regarding the appointment of independent directors are as follows:
 Shall possess appropriate skills, knowledge and experience in the field of finance,
law, corporate governance.
 It is mandatory for them to declare every year to the board that they continue to meet
the requirement of laws.
 He should not be less than 21 years.
 he should not be a material supplier, service provider, customer lessor and lessee of
the company.
 He should ensure to refrain from any action causing deterioration in his status as
independent directors.
In US, independent test of directors is prescribed as
 No director is an independent director unless board determines that the director as no
material relationship with the company.
 Material relationship for determination of independence has been defined to include:
commercial, industrial, banking, consulting, and legal.
Exclusions for independent directors in US provision are similar to India:
 He has been employee or executive officer of the listed company in last three years.
 He or family received $ 120000 compensation in 12 months period in the later year.
 He or family member have been current partner or employee of a firm.
 He or family is the current employee of such audit firm working on audit.
Thus we can say that both India and USA have similar test of independence of directors.

2. NUMBER OF INDEPENDENT DIRECTORS:

In India, the public listed companies require to have at least 1/3rd of directors as independent
(Companies Act 2013), Directors should ensure that board is broad based, comprising of
known skills and experience so that functions are discharged effectively. Apart from publicly
listed companies, other companies having paid up capital of Rs. 10 Crores or more or having
turnover of Rs. 100 Crores or more are required to have at least 2 independent directors.
Therefore, smaller public companies that do not fall in the above conditions are exempted
from appointment of independent directors.
In US, majority of directors in listed company must be independent which means that more
than 50% strength must be constituted by independent directors. Effective board of directors
exercise independent judgement in carrying out their responsibility. Thus, having majority of
independent directors will increase the quality of board and lessen the possibility of
damaging conflict of interest.
Though, publicly listed companies listed in India require 1/3rd as independent directors less
than what US provisions stipulates , listing agreement of stock exchange require higher
number in certain circumstances . In case of chairman being non-executive, independent

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directors are 1/3rd. However, if he happens to be promoter or if there are no regular non-
executive chairman, half of the directors must be independent.

3. APPOINTMENT OF INDEPENDENT DIRECTORS:

According to Companies Act, Independent directors are appointed by shareholders of the
company. The notice of the general meeting called for the appointment must contain a
statement justifying the reason for appointment of particular candidate. It also includes
statement about board having made its opinion about the concerned person. Code for
independent directors amplifies the appointment process. It requires that the process has to be
kept independent. The central government has been enjoined for maintenance of data bank of
suitable professionals to facilitate companies appoint qualified and appropriate person who
meet the criteria of independent directors. The professional appointed as independent
directors has to be issued an appointment letter which contains details about the term of
appointment.
In US directors are elected by all shareholders entitled to vote on the basis of class. Only 3
classes have power for this purpose. The classes should be of equal size and tenure and
director’s term should not exceed 3 years. Thus, shareholders in both the countries have
power to appoint independent directors. However Indian provision are has stipulated extra
condition to comply like explanation to shareholders justifying a particular person as suitable
for independent directors.

4. Tenure of independent directors

As per Indian provision section (149), independent directors are appointed for 2 consecutive
periods of 5 years and can be reappointed for another term after giving a break of 3 years.
Special resolution has to be passed by shareholders for reappointment after the first term.
1/3rd of the directors are subject to condition of rotation every year but independent directors
are exempted from this condition.
In US, the term of any director, which also applies to independent directors is decided by the
bye laws of company or its certificate of incorporation. In other words, no provision exist for
tenure of independent directors unlike specific rule made in India.

India US
No. of independent 1/3rd of directors More than 50% of
Directors directors
Tenure 2 consecutive period of 5 Should not exceed 3 years
years
Appointment Specific procedure On the basis of voting
Reappointment After break of 3 years No reappointment

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Effectiveness of Independent Directors in India and US
ROLES India and USA
In Management Analysing the performance of management
Towards shareholders & Safeguarding the interest of all stakeholders, particularly
Stakeholders the minority holders, harmonizing the conflicting interests
of stakeholders, preserving the rights of shareholders,
solving the conflicts, maintain transparency and ensure the
efficiency of whistle-blower policy.
Towards committee members To meet the corporate governance requirements of Various
committees like- nomination, remuneration and audit.
Towards Board All those concerns that are important for the company are
properly addressed by the board of directors.

FINDINGS:
Through the above study we can conclude that even though there are differences in culture of
both the countries, we can find there is similarities in criteria regarding the independent
directors. Limitation of Independent Directors arise on account of two sources; internal
source that is personality factor and external source that is ownership, board composition and
structure. There has been corporate failures and poor board performance even with the
presence of independent directors.

CONCLUSION:
Indian provisions regarding independent directors originate from companies act 2013, and
same in US are provide in stock exchange regulations. While in India, 1/3rd of directors have
to be independent. In US, a majority must fall in this category. Indian law have an elaborate
definition on independent directors listing all categories of exclusion for this purpose and cast
duty on board to judge the independence of individual. There is similar test of independence
in US also and both focus on absence of conflict of interest to determine the independence.
Indian law specifies the tenure of independent directors when it lays that he can be appointed
for two consecutive terms of five years, and cooling period of three years is needed for
reappointment. US does not provide specific rule for tenure and general provision are
applicable to any director is applicable to independent director. Thus both the countries
perceive independent directors as an innovative instrument of good corporate governance and
lays stress on it by incorporating suitable clauses for them.

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References
Bebchuck, L. (2017). Independent directors and controlling shareholders. Harvard Law School Forum
on Corporate governance.

Kishore, K. (2018). independent directors in India and USA: A comparative provision. the IUP Journal
of Corporate governance, 7.