Independent Directors as the "Watchdogs" Of The Company?

In 2009, when the revelations of the biggest scandal in corporate of India’s history happened with the Satyam Computer Services and the doings of Nimesh Kampani related to his service as an independent director led to erosion of confidence in the corporate world. There was a question on the role of the independent directors of a company. Primarily there can be two roles seen, one to act as a watchdog and monitor promoters and management on behalf of the public shareholders or to aid the promoters and management in maximising the overall growth and promotion of the firm. When a director is seen in the role of “watchdog” for public shareholders, it takes care essentially of the minority shareholders and safeguarding their interests. The need to play such a role is significant to ensure good Corporate Governance and enhancing the corporate or company image in the business world. 

Image credits-The Daily Star

When any sorts of wrong doing are done in the company, the director has the right to make the same public, this type of monitoring gives a confidence to the shareholders that the company is running smoothly for beneficial interests. With increasing influence of corporations in social, political and economic life, and an approach to focus on wealth maximisation of shareholders, monitoring role becomes important. Moreover, the tasks of acting as a watchdog brings further developments. Firstly, the wealth maximisation of shareholders can be known through increase in share prices of the company which is an indication of how well the company is doing. Secondly, it helps in an overall betterment of other companies too and hence enhances their value. 

To make the role as a watchdog functional, independent director should be free from any external influences. To keep their autonomy intact, they should not have any relationship of any sorts with the company. So as per the provided sections, independent director can only be a certain category of persons. Every independent director shall give a declaration that he meets the criteria of independence as provided in the Section 149(6) of the Companies Act, 2013 in the first board meeting in which he participates as a director or at the first board meeting in every financial year or at the first meeting held after whenever there is any change which may affect his status as an independent director. As per section 149 of the Companies Act, i.e. every listed company should have at least 1/3rd of its directors as independent directors and every public company, with either paid up share capital of more than 10 crores or turnover of more than 100 crores or having aggregate credit of more than 50 crores should have at least 2 independent directors. Whereas private companies, joint ventures, wholly owned subsidiary, dormant companies and MSME (micro, small and medium) enterprises are exempted from this mandate. A tenure of Independent Director is of 5 years and after that a special resolution must be passed for reappointment but after that a gap of 3 years is required for again becoming the independent director. 

The act mandates all the independent directors to meet at least once in a year without the attendance of other directors to review the performance of non-independent directors, chairperson and the board as whole. Further to assess the quality, quantity and timeliness of information that is flowed between the company’s management and the board that is essential for effective performance. There is further a schedule, schedule IV by which all the independent directors have to abide which stipulates guidelines of professional conduct, role, functions, duties and mechanism for performance evaluation of independent directors. However, despite all of these roles and statutory provisions it is quite difficult for the independent directors to act as watchdogs because they do not participate in the day to day business of the company nor in decision making. They also depend largely on the promoters for their appointment and continuance as an independent director. They should be given certain more powers which enables them to question the board on their actions and take necessary measures as and when required. They must act ethically, professionally and they should maintain the basic system of check and balance in the company for the benefit of the non-promoter investors, minority shareholders and the market regulators.