A Company being a separate legal entity has to live and achieve the objects as enshrined in the object clause of its Memorandum of Association through some agency. The Board of Directors of a Company work as such agency. Board of Directors of a Company are the supreme executive authority who control the affairs of a Company. The Companies Act defines a Director as any individual occupying the position of a Director by whatever name called.

There are mainly two types of Company Directors:

1. Executive Directors or Whole Time Directors with their designation as Managing directors and Technical Directors.
2. Non Executive Directors or Part time directors who are professional and do not depend upon the Company but serve on the Board of Directors of a number of Companies.

Apart from the above, there are different types of Directors depending upon the role played by them. This category includes a Managing Director, Whole Time Director, Technical Director, Executive Director etc.

All listed Companies need to comply with the Listing Agreement which mandates that the number of independent directors should be atleast 1/3^rd of the strength of the Board where Chairman is a Non Executive Director or ½ where Chairman is an executive Director.

Independent Directors:

The Term ‘Independent Director’ has been defined in Clause 49 of the Listing Agreement of SEBI. Clause 49 of the Listing Agreement deals with Corporate Governance Practices.

Independent Director shall mean non-executive Director of the Company who

1. apart from receiving director’s remuneration does not have any pecuniary relationships or transactions with the Company, its promoters ,its senior management or its holding Company, its subsidiaries and associates which may affect the independence of the Director.
2. Is not related to the promoters or persons occupying the management positions at the board level or at one level below the Board;
3. Has not been an executive of the Company in the immediately preceding 3 financial years;
4. Is not a partner or an executive or was not a partner or an executive during the preceding three years of any of the following:

The statutory audit firm or the internal audit firm that is associated with the Company and

The legal firms and consulting firms that have a material association with the Company.

5. Is not a supplier, service provider or customer or lessor-lessee of the Company which may affect independence of the Director.
6. Is not a substantial shareholder of the Company ie owning 2% or more of the block of voting shares.
7. Is not less than 21 years of age.

In other words, the independent directors must not only be independent according to the legislative and stock exchange listing standards but also independent in thoughts and action (ie) qualitatively independent. Such qualitative independence will ensure that the Directors think and act independently without regard to management’s influence.

The concept of independent director has been defined by the Securities and Exchange Board of India through its Listing Agreement to ensure that the affairs of the Company are carried out with the objectives of enhancing shareholders value. In simple terms, independent Directors play an important role in effective Corporate Governance of a Company, which is essentially about

Leadership for efficiency

Leadership with responsibility

Leadership which is transparent and which is accountable.

The issue of Corporate Governance and Independent Directors are closely inter linked (ie) the presence of independent directors on the Board of Companies in adequate numbers would help in improving Corporate Governance.

Role and Responsibilities of an Independent Director:

The role of an Independent Director exists in providing strategic Guidance to the Company by making an objective judgement, independent of the management. The Directors of a Company in general are the individuals who direct, control, manage or superintend the affairs of a Company collectively. They can exercise all the powers of a Company, except those which are prescribed by the Act to be specifically exercised by the Company in the General Meeting.

In general, the responsibility of an Independent Director lies in direction and Control, which involves

• Formulation and review of Company’s policies. Eg: Risk Management policies, HR policies etc.
• Monitoring the performance.
• Ensuring Legal compliances by timely and transparent reporting.
• Reviewing the performance and to
• Ensure that the objectives of the Company are achieved through proper control systems and procedures.

Apart from the value addition that they may bring to the Board, Independent Directors of a Company are also entrusted with the responsibility of ensuring that the financial interest of the stakeholders are protected. Further, it is also an annual requirement for every director to inform the Company about the Committee position and Directorship that he holds in other Companies.

From the above it is clear that the concept of independent directors is brought into the legislations in order to ensure proper compliance, due diligence, transparency and protect the interest of the various stakeholders. The requirements stipulated by the appropriate authorities are expected to be implemented in letter and spirit so as to reap the benefits that would accrue due to the effective role played by the independent Directors.