Independent Director: The Unbiased Decision Maker

Independent Director: The Unbiased Decision Maker

Governance is the action or manner in which a state or a country or an organization is governed. Through Governance, policies & decisions are taken which may concern the well being & operational growth of that state, country or the organization. To put it in simple terms, Governance is a way in which things are done by those on whom power to take decisions is vested upon.

In a company, decision making process is enacted through various types of meetings conducted by the Board. It may be done either through mutual consensus, in absence of which a Majority vote is weighed upon. This decision is then documented in the next issue of Board meeting. Wherever the question of taking a decision arises , there is always a chance of having either conflict of interests or having a vested interest in the matter to be resolved. Such decisions may sometimes not be optimal for shareholders or stakeholders interests.

Hence there is always a statutory requirement to include someone in the Board, who is literally an outsider, having no personal interest in the matter to be resolved at such meetings. She/he is generally a person other than an officer or employee of the company or its subsidiaries or any other individual having a relationship that, in the opinion of the company's board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. This ensures not just Governance but Good Governance. Such a person / position in the Board room , is generally termed as an ‘Independent Director’

Another point of view of having an Independent Director on Board is that we have seen Businesses run within a family for over a decades, whereby generations to generations have been acting as Board Members in order to generate wealth in abundance for that family who owns the business since its inception. This in a way is a good control to ensure a financial well being of that particular family, but on the other hand, there always lies a question of having biased actions being taken at the cost of good corporate governance. We may also have skill sets deficiency due to the torch of Directorship being passed to a family member without a check on His/ Her Academic qualifications. That is again a different zone to be thought upon.

It became the need of hour for such Companies, run by families, to move & hunt towards outer circles in order to comply with good corporate governance. It also ensures the needs of the company are different from the needs of a family. Having an Independent Director on such Boards can not only ensure the decision making process as unbiased one , but also on the other hand, assist in scaling up the company’s operational efficiency as such Independent Directors may posses excellent skills with a profound experience & exposure to the industry in which the said company operates .

Companies can also depend upon Independent Directors when it comes to forming tactical strategies at Board Meetings. New Opportunities can spring up anytime through Independent Director’s networks.

From the shareholders interests perspective, Independent Directors are the ones who may raise queries as to where & how the company’s assets & surplus profits are being utilized.

Even External Auditors find a comfort in obtaining findings & evidences of a possible fraud or a wrong done , especially in a business run by a family. Relying upon Independent Directors Report is indeed a safe harbor for such Auditors.

It is to be mentioned here ,that there has to be a criteria to determine ,whether a director is actually an Independent one .Various definitions have been chalked out by various international regulatory & statutory bodies which in a way filters down to few basic criteria such as a person :

1.    Not being connected to company’s advisors/ auditors or senior employees or for that matter not being a friend or a relative of an existing board member;

2.    Has never entered into a material business transaction with the company in recent years

3.    Or has never represented a shareholder holding significant percentage of shares of the company in which s(he) is to be appointed as an Independent director.

4.    Is or has never received anything over & above director’s remuneration.

There are many other such criteria’s to be taken into account before appointing an Independent director. The basic objective is to ensure the level of Independence that person possesses w.r.t the Board & the company as a whole while performing his / her duties as an Independent Director. There is a large divergence in reality to understand & interpret the true meaning of the word ‘ Independent’  Hence in many countries, it has been made a regulatory requirement more,  than just relying on the precise criteria, which may differ from country to country , depending upon the regulations & statute the abide to.

To conclude, it is due to the gloomy performance under the financial crisis , that has led to this position of having an independent director. Many Policies & guidelines have been framed in order to ensure better management control & to protect the rights of shareholders / stakeholders. There is again a reservation as to how to maintain a balance between having an Independent Director & the accountability with which they shall perform their duties. We conclude here by some questions for our readers:

1.    How far can we assure dependence on such Directors [ complying with the regulations] , when it comes to major decision making like having a Venture Capital Investor on Board / sharing of Confidential strategies to such an outsider  ?

2.    What if such Independent Director is not actually Independent? i.e: S(he) himself is a party to some undetected misconduct / fraud ?

3.    Are Family run Businesses ready to give up controls to an outsider, just for the sake of complying with a regulation? What is the Net effective Cost of such an action? Is governance the only parameter to run a company?

There may arises many other uncertainties / view points regarding the need of having an Independent Director. You may share these by mailing us at : csnehaseth@gmail.com .