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Technical Guide on the Provisions of Independent Directors with Corporate Governance Perspective: ICAI

Technical Guide on the Provisions of Independent Directors with Corporate Governance Perspective

Chapter I Background and Introduction – Independent Directors

Corporate governance is a system by which the corporates are governed with an embedded confirmation for enhancement of stakeholders’ value, adherence to the best corporate practices, ethics, concern for the environment, and a commitment to social responsibility as a good corporate citizen.

Growing international integration of markets has given momentum to corporate governance. Corporate performance is now judged and measured not merely in terms of quantitative achievements but also in terms of its qualitative governance.

Corporate governance is fast rising as a conceptual tool to control and facilitate corporate operations across the world and needless to add that corporate governance represents the value framework, ethical framework, and moral framework under which business decisions are made. The three key aspects of corporate governance include inter-alia, accountability, transparency, and equality of treatment for all the stakeholders.

Good Corporate Governance is the manifestation, beliefs, values, and actions to ensure maximum value creation to the stakeholders. Value creation is a term broader than wealth creation. The objective of corporate governance is to enhance shareholder value keeping in view the interest of other stakeholders.

In a corporate entity, the stakeholders are broadly classified as the shareholders, customers, employees, suppliers, regulators, and the public at large. The stakeholders are those groups whose interests are affected by a Company’s action or inaction. The Shareholders expect fair returns on their investment, the customers expect good quality products and services at competitive rates, the employees expect better compensation package and welfare measures to see that working in a company matters most to them, the suppliers expect regular payment for the supply of goods/resources, the regulators insist timely payment of taxes and compliance with the laws, the public at large do demand corporate concern and care towards the natural resources available on the planet and eco-friendly conversion of natural resources into productive resources by the corporate.

Thus, the governance of the corporate can be termed as good if it results in stronger shareholder rights, higher share value, convincing profits, increased sales growth, motivated human resources, transparency in disclosures, compliance of the law in letter and spirit, and of course, fulfilling social accountability.

1.1 Board of Directors

Since the pivotal role in the system of corporate governance is performed by the Board of directors, they are primarily accountable and responsible for the governance of their companies. The direction and management of the corporate entity are in the hands of the Board of Directors collectively and directors individually while acting for the corporate entity.

The board is the apex body entrusted with the task of strategic planning, policy formulation, and implementation of the same through the professionally managed team headed by the Managing Director and/or Chief Executive officer of the company. The corporate entity’s growth and prosperity, to a large extent, depends upon how the corporate entity is governed by the Board of Directors.

The rise in the corporate scandal worldwide increased expectations of the stakeholders from the Board of directors, a tight regulatory framework on the corporate entity, and growing expectations for corporate social responsibility, have cumulatively emphasized more thrust on the ethics or Code of conduct for the Board of Directors collectively as well as the individual directors.

The board of directors are required to understand the varied expectations of the stakeholders and are duty-bound to ensure that the expectations of the stakeholders are met year to year through sustainable growth by the corporate. Good governance, in fact, lies with proper balancing of power of the owners which demands value maximization, and the power of management which demands maximum compensation for the efforts put in by them. It is imperative to ensure that the governing system must be on sound footing with a commitment not only by the Board collectively but also by individual board members.

1.2 Independent Directors

The need for having a strong framework of corporate governance in the functioning of the company insisted upon the requirement for having independent directors on the Board.

The composition of the Board of Directors with the proper proportion of executive and independent non-executive directors is of great importance for a sound and smooth governance system in a corporate entity.

A well balanced, professionally empowered, and effective Board composition would strengthen the governance system in the competitive era. The quality of the governance system is also linked directly to the competence, independence, and individual commitment of the directors.

The concept of independent directors came into existence by the Treadway Report (USA) in the year 1987 which highlighted the need for a proper control environment and independent audit committee.

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Technical Guide on the Provisions of Independent Directors with Corporate Governance Perspective: ICAI

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