Independent Directors’ (ID) act as a mentor, coach and guide to a company. With their knowledge, experience and skill, they guide the Board in risk management while also striving to improve corporate credibility and accountability. Through their presence in various corporate committees, amongst other things, they also ensure good corporate conduct and governance practices.
Let’s understand the main roles of an ID in an Indian context:
- Hold ethical standards of integrity and probity
While the management conducts its operations, the independent directors focus on stewardship and oversight. The evolution of corporate scandals in India (Satyam, for instance) and elsewhere in the world have resulted in the mandatory appointment of IDs in the company’s board.
The business disruption caused by the pandemic has further underscored the need to be vigilant and strengthen governance frameworks. An October 2021 Deloitte report titled ‘Corporate fraud and misconduct: Role of independent directors’ finds that 63 percent of IDs surveyed expect the current business environment induced by the pandemic to spur fraud over the next two years. Large-scale remote working and cash flow crunch acting as the main triggers for frauds. Good governance is easily among the top priorities of ID today.
- Objective evaluation of the performance of the board and management
The fact that the directors are independent also implies that unwittingly they have limited information about the company and industry. That’s where the quality of the flow of information becomes critical.
The directors are usually provided with materials to equip them to effectively deal with various agendas. For instance, quarterly financial information could be supplemented with budgets, management forecasts and analyst expectations to give a holistic financial perspective to IDs.
However, in order to truly provide an objective view, such information needs to be supplemented by market intelligence. ID need to undertake their own due diligence, to learn about the company from the public record. It will help in a better way of scrutinizing, monitoring and evaluating management’s performance vis-à-vis its agreed goal and objectives. An informed director is the first step to becoming a useful director who could exercise business judgment and common sense.
- Safeguard the interests of all stakeholders, particularly the minority shareholders
Safeguarding the interest of all stakeholders – promoters, investors, employees and customers – and especially that of minority shareholders and balancing the conflicting interest among them are two key responsibilities of IDs. A true litmus test of the above criteria is how their decisions enhance the sustainability of the company.
We are increasingly living in a VUCA world – Volatility, Uncertainty, Complexity and Ambiguity – thanks to new laws, policies and new kinds of businesses. Having adequate knowledge about the company and the external environment in which it operates could prove to be a game-changer.
- Play a vital role in Risk Management
IDs cannot and ideally should not be involved in actual day-to-day risk management. Instead, through their risk oversight role, they should satisfy themselves that the risk management policies and procedures designed and implemented by the company’s senior executives and risk managers are consistent with the company’s strategy and risk appetite. And that the systems of risk management are robust and defensible.
Moreover, ensure necessary steps are being taken to foster an enterprise-wide culture that supports risk awareness and behaviours that are consistent with the risk management strategy.
It often calls for checking on the integrity of financial information and assessing the quality, quantity and timeliness of the flow of information between the management and the board.
Takeaway
While management’s job is to operate business, the independent directors are the roving ambassadors of the company. They focus on stewardship and oversight with the help of appropriate, useful and timely information that often might not flow from the company.
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