17bal122

INDEPENDENT DIRECTORS ARE WATCHDOGS OF A COMPANY

(Submitted by: Kareena Bakhtyarpuri – 17bal122)

“To set aside one’s prejudices, one’s present needs, and one’s own self-interest in making a
decision as a director for a company is an intellectual exercise that takes constant practice.”

~Mervyn King 

An independent director, also called outside director is a member of board of directors who has
no material or pecuniary interest with the company or the persons related to the company. As per
Clause 49 of the listing agreements, an independent director is –

"For the purpose of this clause the expression 'independent directors' means directors
who apart from receiving director's remuneration, do not have any other material
pecuniary relationship or transactions with the company, its promoters, its management
or its subsidiaries, which in judgment of the board may affect independence of judgment
of the directors."

An independent director is generally known to for helping the companies in improving it

corporate credibility and maintaining governance standards. Also, independent directors are
taken to be trustworthy as they do not share any kind of relationship with the companies
which may tend to affect the independence of his judgment. Broadly the role of an
independent director includes guiding the company, being their watchdogs, and playing a
significant role in the affairs of risk management. As the global competition is rising at a fast
pace, it is important to have an independent director in the board who can contribute
independently on the company’s business strategies, its strengths, weaknesses and upcoming
opportunities. The need for independent directors across the world in the corporate sector is
increasing owing to the corporate scams and frauds.

Roles performed by Independent Directors in various committees:

As per §135 of Companies Act, Every company having net worth of rupees five hundred
crore or more, or turnover of rupees one thousand crore or more or a net profit of rupees five
crore or more during the immediately preceding financial year shall constitute a CSR
 17bal122

Committee. The role of the independent director in this committee is to provide

recommendations regarding CSR policy, CSR activities, CSR expenditure and to monitor the
Policy from time to time.

Further, §149(4) provides the class of companies where it is necessary to have at least two
independent directors. Then as per §173 when such companies call Board meeting, the role
of independent director is to give independent judgments to the Board, prevent the Board
from taking decisions that may harm the interest of shareholders, prevent unethical behavior
and ensuring no violation of policies.

As mentioned above, owing to rising scams it is important to have independent director and
the role of such director is to keep a close check on the functioning of the company so that
people associated do not suffer for the mishaps of the company, report if the members of the
company are found indulging in fraudulent practices, providing assistance in protecting the
interest of shareholders and the most important duty to keep confidential information to
himself and refrain from disclosing such information to any other person out of the company.

Hence, if independent directors perform such functions judiciously, they can ensure
transparency and better corporate governance in the company. Also, it is pertinent to note
that an independent director thus acts a bridge between the company and the interested
shareholders as he ensures that their interests are not sacrificed and the company adopts the
most suitable policies according to its capabilities.

Further, where a major chunk of companies in India are family-owned where enormous
amount of public funds are at stake, need for independent directors becomes all the more
necessary. Thus, as the role of independent director is so important, there have been recent
proposals to conduct an exam for selection of independent directors which will ensure that
he/she is fit enough to hold such an important position in the corporate functioning. This
proposal was taken into consideration after disastrous consequences at Infrastructure Leasing
& Financial Services (IL&FS). Thus, looking at the above mentioned provisions and the
responsibilities that lies on the independent directors, it can be fairly concluded that
independent directors are rightly called as ‘watchdog’ for the companies.
 17bal122

However, there are two contradictory views on the position of the independent directors for
some companies, independent directors seem to be partners in management of company who
are focused on protecting the interest of shareholders, but on the other hand there are
companies which do not find this position useful and find it a mere burden due to ‘regulatory
compliances.’ Majorly family run companies usually tends to take the second perspective as
due to their mindset they are not much open to the suggestions of the outsider i.e.
independent director who is not the member of their family.

Thus, according to me, independent directors are watchdogs of the companies who ensure
better corporate governance.