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Emerging Role of Independent Directors in the Board Room

From

N.ILAMARAN

Email Id : Maranind9@gmail.com

Mobile No :9741699055

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Contents Page No

1) Synopsis of Emerging Role of ID’s in Board Room 3

2) Project Objective and Goal to Achieve the Objective 7

3) Structure of Dissertation Project 8

4) Regulatory Compliance and Governance of ID’s 9

5) Role and Functions of Independent Directors 10

6) Duties of Independent Directors 11

7) Role of Lead ID and Liability of ID 12

8) Board Room Dynamics and Communication 13

9) ID’s Art of Board Room Communication 14

10) Independent Director and Communication Process 15

11) Independent Directors in Conducting Press Conference 16

12) Role of ID’s on ERM Framework 17

13) Responsibility of ID’s in Risk Management 18

14) Corporate Social Responsibility (CSR) 19

15) Emerging Role of ID’s-Building Tomorrow’s Boards 20

16) Financial, Legal Framework of Business 21

17) Role of ID’s with respect to Financial Analysis 22

18) Case Studies – Role of ID’s 23-26

1) Satyam Computer Services Ltd

2) I-Gate Hiring of Tainted CEO

3) Sahara Pawar-OFCD case

4) Fly Good Times –King Fisher Airlines

19) Maximizing Effectiveness of Boards through

Accountability and Leadership 27

20) Corporate Accountability 28

21) Key Takeaways for self in Emerging Role of ID’s 29-30

22) References 31

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Synopsis

In the Changing Business Environment the new paradigm of Corporate

Governance is evolving.

The Board of Directors is one of the most important governance mechanisms in

Modern Corporations. In principle, the Board is responsible for approving major

Strategic and Financial Decisions. It has access to privileged and timely

information about the firm, meets regularly to discuss this information and has a

fiduciary duty towards the Shareholders it represents.

The Role of the Board is to advise and monitor management and for that purpose,

the Board is typically staffed with distinguished individuals who have the required

skills and relevant experience and expertise to fulfill this role. The Degree to

which a Board can fulfill its function also depends on the quality of information

provided by the Management.

Board independence i.e. the proportion of directors who are classified as

“Independent Non-Executive Directors” has been increasing globally but the

levels of independence are much higher in the U.S (74%) than in the EU (34%)

Countries appear to matter for Board independence. Board regulations and

Business practices varies substantially across countries in the globe which could

explain the importance of country effects for Board independence. Firm size and

Firm performance are positively related to Board independence.

Several initiatives worldwide have been taken to drive Board Performance.

Regulatory changes have affected the composition, role and responsibilities of the

Boards Worldwide and stronger framework for Director’s fiduciary

Responsibilities have resulted. Consequently, Boards are trying to find a balance

between increased security and regulatory reforms imposed from outside and

efforts made by the Boards themselves

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Different Studies across the world so far has been conducted to find whether

independent directors actually contribute to firm performance or not and the

result is heterogeneous .Board independence is critical to an emerging market

that is subject to external shocks and may lack sufficient liquidity as well as

indigenous industrial infrastructure. The presence of outside directors improves

the quality corporate decision making even when they are not in majority.

The Primary Role of Independent directors is to protect the interest of non-

controlling or Minority shareholders as per the Regulatory framework proposed

by Companies Act 2013 section 149 and Section 49 of SEBI Act.

The independent directors are expected to discharge the duty of an arbitrator in

the interest of the company as a whole in situations of conflict between

Management and Shareholder’s interest. They should report concerns about

unethical practice, actual or suspected fraud or violation of company’s code of

ethics policy. Further, it is expected that the independent directors should

maintain professional integrity and business secrets.

Independent Directors should not hesitate to audit the strategy presented before

the Board for approval and ask uncomfortable question. This helps the promoter

to receive objective feedback on the strategy. Independent directors should focus

on the adequacy and effectiveness of the internal control and risk management

systems. Board must critically review the strategy implementation and operating

performance .Independent directors should not develop animosity towards the

promoter or the CEO. They should act as Friend, Philosopher and guide to Board

Independent directors cannot monitor the daily executive management. At best,

they can provide checks and balances and enrich Boardroom deliberations.

Therefore, each independent director should understand the Business well and

should have adequate knowledge to appreciate management issues. Independent

directors should not be held responsible for the misdeeds of the company

provided they have applied due diligence in carrying out their responsibilities.

There is a huge gap between what is expected from Independent directors and

what they can do in practice. Independent directors in enlightened companies

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improve enterprise performance by providing innovative solutions to the issues

that pull down the performance of the company. They through the audit

committee strengthen audit functions and risk management systems. They

usually stop decisions that directly hurt the interest of non-controlling

shareholders. And perhaps, that is what shareholders expect from Independent

Directors.

The ID’s can play the crucial role of bringing objectivity to the decisions made by

the board of directors by playing a supervisory role. While they need not take part

in the company’s day- to -day affairs or decision making, they should ask the right

questions at the right time regarding the board’s decisions. Raising the

appropriate red flags at the right time would help them in avoiding the

occurrences of unwanted situations and their consequences to a greater extent at

a later stage.

Globally with the evolving regulatory landscape, which makes them responsible

for the prevention and detection of fraud, directors have begun exercising

adequate oversight on the management of the risk of fraud .Non-Compliance with

these regulations or guidelines can have serious repercussions for Directors

including the reputational loss and personal liabilities.

For directors of organizations with operations spread across multiple countries,

the risk of non-compliance increases significantly as such organizations need also

to comply with global legislations such as Foreign Corrupt Practices Act (USA) and

the UK Bribery Act 2010

The role of ID’s in fraud prevention and detection has come under the direct

scanner of regulators, members and other stakeholders due to the recent

exposure of high profile instances of fraud in India. In the last few months we can

clearly see ID’s taking direct interest in reviewing the fraud risk management

framework put in place by their organizations to mitigate the risk of fraud.

The corporate Governance structure hinges on the ID’s who are supposed to bring

objectivity to the oversight functioning of the Board and improve its

effectiveness. However, the problem is that an ID cannot play an effective role in

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isolation despite their commitment to ethical practices. They cannot stop a

decision that is detrimental to the Board, but if the board acts collectively, the

company’s market perception can be held intact.

Independent directors may not be in a position to stop fraud at the highest level,

but with a high level of commitment and due diligence, they may be well placed

to identify signals which trigger the downfall of the company and violation of

regulatory compliance and erode the value of stakeholders.

In summary, Independent Director should self-introspect with following queries;

Do we set and communicate the right “Tone at the Top”?

Do we effectively assess our corruption risk with Policies and Processes?

What incentives do we provide for compliance and penalties for non-

compliance?

How do we monitor and audit to detect improper contact?

How do we review the effectiveness of our compliance program?

Independent Directors have to ensure the strategic guidance of the company, the

effective monitoring of the Board and the Board’s accountability to all the

stakeholders.

Regulatory Compliance, Corporate Governance, Prevention of Fraud and

Malpractices are to be priority areas addressed by Independent directors to act as

whistle blower in case of any abnormalities observed so that the company will

deliver its fiduciary duty to all the stakeholders with dignity and respect

Government of India and SEBI expects the emerging role of Independent directors

in the Board Room to be highly integrated ethics oriented professionals with

unbiased approach and keeping the interest of all the stakeholders to act

diligently in challenging times without compromising the principles and adhering

to the norms of Regulations to prevent Economic offences in the Society and also

to ensure Corporate Social Responsibility.

Emerging Role of Independent Directors in the Board Room

“Educate!! Empower!! Enlight!! “

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Project Objective

The Dissertation on “Emerging Role of Independent Directors in the Board Room”

aims to bring the conceptual clarity on emerging Board Trends and the duties and

responsibilities of Independent directors with Board Room dynamics and

communication and ensuring corporate social responsibility without

compromising the value of all the stakeholders and also mitigate the risk with

proper financial management.

Goal to Achieve the Objective :

Independent directors have to play the role in the Board Room with

experience and expertise by thoroughly understanding the business of the

company and gain in-depth knowledge of the industry by equipping

financial and legal skills

Play the role of a colleague as well as a “Cop” .No laxity in monitoring role

Educate the Board to realize their fiduciary obligations to the shareholders

and moral obligations to operate the company in a legal and ethically

responsible manner

Empower the Board to take informed and balanced decision making

Enlight the Board to look at the strategy with Long term perspective

Emerging Role of independent directors in the Board Room will enrich the

performance of the company by enhancing the value of all the stakeholders

without compromising Regulatory compliance, Corporate Governance by

innovatively devising and implementing strategies with systems and processes

The independent director also plays the role of a strategic advisor. Being an

independent expert, s/He can perceive the situation without prejudice and can

contribute unadulterated expertise and also to scrutinize the performance of the

Management. Thus, ID acts as the “Super Watchdog “for all the stakeholders by

ensuring transparency and accountability to the Board

Independent Director has to act as Innovative Developer to the Company by

constructively challenging the Board for more effective decision making

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Structure of Dissertation Project

Emerging Role of Independent Directors in the Board Room is introspected with

the following methodology

Regulatory Compliance and Governance

Board Room Dynamics and Communication

Enterprise Risk Management

Corporate Social Responsibility

Financial, Legal Framework of Business

Case Studies –Analysis and Role of ID’s to prevent Economic offences

Maximizing Effectiveness of Boards through Accountability & Leadership

Each of the above topics are discussed in depth to have a clear understanding of

the Emerging role of Independent directors in today’s corporate boards to ensure

the objectives of the company are met without compromising the ethical values.

Boards need to understand each other in terms of values, beliefs and purpose

Independent directors are best seen as “Empathetic” to management rather than

“Sympathetic”, they need to be quite challenging in their analysis and evaluation

of proposals put to the board. The success of the Board is largely a function of the

quality and diversity of experience and skills of the Independent Directors.

Independent Directors add value and bring balance on the board in terms of skills

and experience. They have a wider set of experience to bear on issues and

decisions in the company.

The responsibilities of Independent directors have intensified in recent years, and

need to devote sufficient time to perform their duties effectively in order to

balance the conflicting interest of the stakeholders.

In the end, every Independent director must remember and follow a quote by

Steve Jobs

“Don’t let the noise of others’ opinions drown out your own inner voice”

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Regulatory Compliance and Governance

The provisions relating to the appointment and duties of the Independent

directors are contained in chapter XI of the Companies act 2013 effective

from 1.4.2014 and SEBI amended clause 49 of the listing agreement

effective from 1.10.2014.

Guidelines for Professional conduct of Independent Directors

Uphold ethical standards of integrity and probity

Act Objectively and constructively while exercising his/her duties

Exercise his/her responsibilities in a bona fide manner in the interest

of the company

Devote sufficient time and attention to his/her professional

obligations for informed and balanced decision making

Shall not allow any extraneous considerations that will vitiate his/her

exercise of objective independent judgment in the paramount

interest of the company as a whole, while concurring in or dissenting

from the collective judgment of the Board in its decision making

Not abuse his/her position to the detriment of the company or its

shareholders or for the purpose of gaining direct or indirect personal

advantage or advantage for any associated person

Refrain from any action that would lead to loss of his/her

independence

Where circumstances arise which make an independent director lose

his/her independence , the independent director must immediately

inform the Board accordingly

Assist the company in implementing the best corporate Governance

practices

Independent directors must realize their fiduciary obligations to the shareholders

and moral obligations to operate the company in a legal and ethically responsible

manner. They should support those investments and decisions that serve the best

interests of the company, its employees, the shareholders, all stakeholders, and

the community and for the protection of environment.

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Role and Functions of Independent Directors

Help in bringing an Independent judgment to bear on the Boards

deliberations ,especially ,on issues of strategy ,performance, risk

management, resources ,key appointments and standards of conduct

Bring an objective view in the evaluation of the performance of the Board

and management

Scrutinize the performance of management in meeting agreed goals and

objectives; monitor the reporting of performance.

Satisfy himself/herself on the integrity of financial information and the

financial controls , the systems for risk management are robust and

defensible

Safeguard the interests of all stakeholders ,particularly , the minority

stakeholders

Balance the conflicting interest of all the stakeholders

Determine appropriate levels of remuneration of executive directors ,key

managerial personnel and senior management; Have a prime role in

appointing and where necessary ,recommend removal of executive

directors, key managerial personnel and senior management

Moderate and arbitrate in the interest of the company as a whole,in the

situations of conflict between management and shareholder’s interest.

In addition to the above, Independent Directors have to formulate and monitor

the performance of the following committees

Audit Committee

Nomination and Remuneration Committee

Strategy Planning Committee

Risk Management Committee

CSR Committee

In all the above activities, Independent directors give rich inputs which help in

taking decisions, be frank and forthright in expressing their views

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Duties of Independent Directors

Undertake appropriate induction and regularly update and refresh their

skills ,knowledge and familiarity with the company

Seek appropriate clarification or amplification of information and where

necessary ,take and follow appropriate professional advice and opinion of

outside experts at the expense of the company

Strive to attend all meetings of the Board of Directors and of the Board

Committee of which he/she is a member

Participate constructively and actively in the committees of the board ,in

which they are chairpersons or member

Strive to attend the general meetings of the company

Where they have concerns about the running of the company or a

proposed action ,ensure that these are addressed by the Board and to the

extent that they are not resolved insist that their concerns are recorded in

the minutes of the Board meeting

Keep themselves well informed about the company and the external

environment in which it operates

Not to unfairly obstruct the functioning of an otherwise proper Board or

committee of the Board

Pay sufficient attention and ensure that adequate deliberations are held

before approving related party transactions and assure themselves that the

same are in the interest of the company

Ascertain and ensure that the company has an adequate and functional

vigil mechanism and to ensure that the interests of a person who uses such

mechanism are not prejudicially affected on account of such use

Report concerns about unethical behavior, actual or suspected fraud or

violation of the company’s code of conduct or ethics policy

Acting within his/her authority ,assist in protecting the legitimate interests

of the company, shareholders and its employees

Not disclose confidential information ,including commercial secrets

technologies ,advertising and sales promotion plans ,unpublished price

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sensitive information ,unless such disclosure is expressly approved by the

Board or required by law

Role of Lead Independent Director

Identify the most critical issues for the Board to deal with

Assist the Board in achieving consensus on important issues

Play the role of a facilitator outside the board room especially on

contentious issues

Work with the CEO to prioritize the issues ,set the agenda and enable it

to focus on substantive issues

Ensure that Board conversations do not veer in the direction of certain

unwanted topics/individual preferences

Provide candid feedback to CEO ,CFO post an executive session

Independent Director’s Separate Meeting

Independent Directors shall hold at least one meeting in a year without

attendance of non-independent directors and members of Management

All independent directors will strive to be present at such meeting

The Meeting shall:

Review performance of non-independent directors and the Board as a

whole

Review performance of the Chairman of the company ,taking into

account the views of executive and non-executive directors

Assess the quality, quantity and timeliness of flow of information

between the management and the board, which is necessary for the

board to effectively and reasonably perform their duties.

Board Meeting Frequency and Compliance adherence

Board shall meet at least four times a year with a maximum time gap of

four months between any two meetings

Board shall periodically review compliance reports of all applicable laws

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Liability of Independent Directors

An Independent Director / A non-executive director not being promoter or key

managerial personnel ,shall be held liable ,only in respect of such acts of omission

or commission by a company which had occurred with his knowledge,

attributable through Board processes and with his/her consent ,connivance or

where he had not acted diligently

Board Room Dynamics and Communication

Need for Independent Director to have critical and creative Thinking

Mandatory Compliance Requirement ( Personal liability, Governance

pressure)

Rise in stakeholder’s Expectations

Wave of Corporate Frauds & Scandals

Changing Business landscape-Technology Evolution, mergers and

Acquisitions, Globalization

To play a strategic role –To provide input on strategic calls like business

growth and expansion, product diversification

Keys to Critical and Creative Thinking

Share and implement experience and best practice used by other Boards

Putting oneself as representative of various stakeholders

Enhance ability to draw conclusions /inferences

Deal in Business context

Recognize Assumptions – Ability to separate fact from opinion

Use the art of evaluating the Arguments

Recognize Relationships

Independent Directors can rely on a few well established and proven techniques

to develop critical and creative thinking

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Independent Director’s Art of Board Room Communication

Understanding How to navigate the power play that occurs in most

Boardrooms

Developing influencing skills to build solid interpersonal relationships

Maintain confidentiality while sharing information on best practice ,Market

developments and experience attained by attending Board meetings of

other organizations

Building a strong level of negotiation skills to assist Board’s strategy

The ability to counter resistance effectively thereby adding value to the

organizational objectives

Understand what motivates their fellow Board members

Build strategy that taps into the deeper dynamic of interpersonal

communications within the Board

Independent Director way of handling Whistle Blowing

Timely Review of Process ,system and Controls applicable

Ensure that “Whistle Blower “ is protected

Maintaining anonymity of the “Whistle Blower”

Separate genuine grievances from the malicious or frivolous Complaints

Unbiased and Fair Analysis of Complaints

Detailed Tracking of the Grievances

Monitoring Progress of Complaints

Commandments of Good Communication

Clarify Your ideas before Communicating

Examine the true purpose of Each communication

Be mindful ,while your communicate , of the overtones as well as the basic

content of the message

Take the opportunity , when it arises , to convey something of help or value

to the receiver

Communicate, not only to be understood, but also to understand

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Independent Directors and Communication Process

As per the latest amendments in clause 49 and the new companies’ act 2013, the

role of an independent director can be segregated in two broad areas

Interface and guardian of various stakeholders in the organization

Safeguarding the interest of all stakeholders, particularly the

minority holders

Harmonizing the Conflicting interest of all the stakeholders

Analyzing the performance of Management

Mediating in situations like conflict between Management and the

Shareholder’s interest

The role they play in a company , for the company ,broadly includes

improving corporate credibility, Governance Standards and the risk

management of the Company

Hence, Accurate and Timely Communication and participation in key

communication process, by independent directors is inevitable

BOARD AND

MANAGEMENT

INDEPENDENT DIRECTOR

VARIOUS

STAKEHOLDERS

COMMUNICTION

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Independent Directors- Conducting Press Conferences

A Press Conference is a voluntary presentation of information to the media. In a

press conference, Company decides what information to be presented, how it is

presented, and who presents it. It is an opportunity to get your story on TV, Radio

or in the paper

Independent Directors in the due course of discharge of their duties, have to use

methods to communicate to all stakeholders in the company. Conducting Press

Conferences is one of them. A press Conference is mostly held for dissemination

of communication about major events or announcements about the company

Independent directors represent practice of Good Governance. Presence of

Independent Director in the press conference bring forth confidence for the

investors and the Shareholders

When To Hold A Press Conference

When Communication involves all the stakeholders internal and external

When You have significant announcement to make

When you have to reach to large number in a short time

To show the strength of your company to the external world

To get widespread media coverage

Whatever organizational goals are, Company needs to have something

newsworthy to announce, reveal or talk about at your press conference

How to Hold a Press Conference

Define the Key Messages

Fix up a Schedule

Pick up the site/Venue and communicate in advance to all the stakeholders

Involve Media Partners

At the end of the Conference, Ensure Press Release statements are made

available to all the attended members

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Enterprise Risk Management –Role of Independent Director on ERM Framework

Every Enterprise necessarily faces risks in their day-to-day operations .These risks

may be known or unknown and could often affect the earnings and may

sometimes completely erode the capital and bankrupt the company itself.

Enterprise Risk Management (ERM) is the process of managing the activities of an

organization in order to assess, Monitor, Control and mitigates the effects of risk

on an Organization’s capital and earnings.

ERM provides a framework for risk management, which typically involves

identifying particular events or circumstances relevant to the organization’s

objectives (risks and opportunities), assessing them in terms of likelihood and

magnitude of impact, determining a response strategy and monitoring progress

By identifying and proactively addressing risks and opportunities, Business

enterprises protect and create value for their stakeholders, including Owners,

employees, customers ,regulators and Society overall.

ERM helps ensure effective reporting and compliance with laws and regulations

and helps avoid damage to the company’s reputation and associated

consequences. In summary, ERM helps an entity get to where it wants to go and

avoid pitfalls and surprises along the way.

ENTERPRISE RISK MANAGEMENT FRAMEWORK

RISK

IDENTIFICATION

RISK

ASSESMENT

RISK

QUANTIFICATION

RISK

MITIGATION

RISK

MONTORING

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Responsibility of Independent Directors in Risk Management

Independent Directors have a fiduciary duty to ensure that they discharge

their obligations to the company and the Board to the best of their ability.

Protect the company from risks and fraudulent activities

Comply with requirements of various regulations of the company

Independent Directors may be held liable in respect of any negligence

,default, breach of duty or breach of trust in relation to the company

Independent directors have to request the company to take insurance

policy to indemnify them against any liability for which they may be guilty

in relation to the company

Such insurance is not treated as part of the remunerations payable and also

allow the Director to arrange for defense in case of legal proceedings

Satisfy themselves on the integrity of financial information and financial

controls

Ensure that the Boards of organizations address their concerns about the

operations of their companies or actions proposed by them and also insist

that their concerns are recorded in the minutes of Board Meetings

Ascertain and ensure that companies have in place adequate and functional

vigil mechanisms and Monitor Risk Management committee

Report Concerns about unethical behavior, actual or suspected fraud or

violation of the codes of conduct or ethics policies of their companies.

Independent Director’s Guiding Principles

Reputation of the Company

Capability to meet the requirements and expectations

Demonstration of Independence

Whether the company has adequate controls and can be relied upon

Ability to resist pressure

Knowledge on current developments

Aware and abide by corporate code of conduct

Seek Expert help wherever required and whenever required

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Corporate Social Responsibility (CSR)

CSR is generally understood as being the way through which a company

achieves a balance of economic, environmental, and social imperatives

while at the same time addressing the expectations of shareholders and

stakeholders. This includes activities like promotion of education,

promotion of gender equality and empowerment of women, eradication of

hunger or poverty, Contribution of Prime Minister’s Relief fund

CSR as per the Companies Act 2013

As per Companies Act 2013, CSR has been Mandated

Section 135 of Act requires every company having a net worth of 500

crore or more or turnover of 1000 crore or more or a net profit of 5

crore or more during any financial year to constitute CSR committee

CSR committee will recommend CSR Policy for the amount of

expenditure to be incurred on various activities and monitor the

implementation of the policy

The Board of the company has to ensure that it spends ,in every

financial year ,at least 2% of the average net profits of the company

made during the three immediately preceding financial years.

Role of Independent Directors –CSR compliance Checklist

Does the company have a separate department /cell for CSR?

Does the company produce an annual sustainability /CSR Report?

How does the vision and mission of the company integrate with CSR?

How does the company propose to meet future economic,

environmental and social Changes and Challenges?

Who are the key stakeholders -

Employees,Customers,Suppliers,government,Community)

Have any special measures been taken to improve gender

representation in the organization, particularly among the

professional and technical staff?

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Emerging Role of Independent Directors -Building Tomorrow’s Boards

Business has changed as never before. Technology and

Globalization has changed the way we work.

The greatest change however is in public expectations of the

business. The obsession with bottom line profit and shareholder

value looks tired and no longer provides the stimuli for

leadership,motivation,innovation or brand equity

Stakeholders are questioning the very purpose of the organization

Building brands and not profits has become the focal point of the

corporate agenda

Tomorrow’s Boards will not take CSR as a Box ticketing Exercise

driven by External pressures or a PR Exercise. It has to be

embedded in Business practices

CSR will act as Insurance against Bad news. In Tomorrow’s

Business, Bad news will hit companies much harder than today.

Boards will be composed of Directors who using words of

Mahatma Gandhi, will live as if they are going to die tomorrow

and learn as if they were going to live forever.

Revolution of Boards from Structure -Based to Performance Based

Boards is the need of the hour in today’s Business World

Board of Directors presently need to know many aspects of the

Business realities which were earlier left to the specialists in the

operating organization with whom they had no contact and

therefore hardly any understanding.

In the closed model of the Economy, where the markets were

protected, they were hardly any compulsions to be accountable

and transparent.

In the Open model of the Economy, there are visible pressures on

corporate performance. Such pressure emanate from the diverse

range of stakeholders, Institutional Investors, Collaborators,

shareholders, Customers and Competitors.

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Financial ,Legal Framework of Business

Independent Directors to be familiar with the Following Financial Statements

Profit & Loss Account

Balance Sheet

Cash Flow Statement

Compliance of Financial norms:

Compliance of Company Law Provisions

Correctness of Accounts

Compliance with Accounting standards

Timely approval by the Shareholders

Ratio Analysis is a financial tool used to measure the relative health or sickness of

a Business. Financial Analyst measures the following Business Parameters

Liquidity

Profitability

Leverage

Efficiency in sweating of Assets

Useful conclusions drawn from Ratio Analysis in respect of

Industry Comparison (of Two Firms)

Trend Analysis (of Different periods of the same Firm)

When Financial Ratios are compared over a period of time, it is called Trend

Analysis

Investors, Lenders, Tax Authorities and Stock Market Analysts use the Financial

analysis ratios to understand the effectiveness of the firm to value their

stakeholders.

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The role of an Independent Director with respect to financial Analysis

Integrated Budgeting and Business Plan Validation

Defining MIS Report Framework

Review of Financial Reports for analyzing financial health of a company

External and Internal Audits and Control

Review of Information by Audit Committee

Report on Corporate Governance and Compliance

Legal Framework of Finance to be certified by CEO/CFO

CEO/CFO shall certify the Board that

Reviewed Financial statements and Cash Flow statement for the Year

Instances of Significant fraud of which they have become aware and

the involvement therein ,if any, of the management or an employee

having a significant role in the company’s internal control system

over financial reporting

The Independent Director is expected to get the expertise on

financial aspects of the Business as Finance is one of the most

significant areas where the possibility of Frauds can take place and

affects the shareholder’s interest like Sathyam and King Fisher

Airlines

The Directors are expected to hire external agency at the cost of the

company to better equip themselves to understand the financial

reporting before accepting the Board decision in order to safeguard

the professional interest and also the company’s image in Society.

The organization is also expected to share all the data transparently

in order to understand the basis of informed decisions so that the

purpose of Company act 2013 and SEBI regulations will yield positive

outcome on the Shareholder’s interest and protection

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Case Studies –Analysis and Role of ID’s to prevent Economic offences

Case I Satyam Computer Services Ltd

Satyam Computer Services Ltd caused loss to the investors to the tune of

Rs.14162 Crore

Inflating the revenue of the Company through false sales invoices and

showing corresponding gains by forging the Bank Statements with the

connivance of the Statutory and internal auditors of the company

perpetrated the fraud

The annual Financial statements of the company with inflated revenue

were published for several years and this lead to higher price of the scrip in

the market

In the process, Innocent investors were lured to invest in the company

Attempts were made to conceal the fraud by acquiring the companies of

Kith and Kin

Managing Director and Founder Mr.Ramalinga Raju jailed for 7 years and

fined 5 Crores in Satyam Scam

Role of Independent Director to prevent the Satyam scam

Review of Financial statements every year with Audit committee

Checking the Authenticity of Bank statements

Fair discussion with Founder and Audit Team PWC to transparently discuss

the issue and highlight the malpractices to the Board and record in MOM

Questioning the rationale behind acquiring a real-estate company which is

totally contra to the Software company

The timely steps as above would have helped to avoid the damage as

Satyam had a global presence and fourth largest major in software industry.

Promoters are always ambitious and aggressive to grow their Business but

the role of Independent Directors is to highlight the respect for the laws of

the land and allow them to perform with strict regulatory compliance. Such

an act would have protected the interest of minority shareholders as well

as Employees of the organization and Country’s pride in Global World

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Case II – i Gate Hiring of Tainted CEO

Mr.Murthy has been fired from Infosys as Senior manager on

Sexual harassment case subsequently.

He started his own start up Quintant Services which he

subsequently sold to igate and became the Boss.

Again, He landed into violation policy of not reporting the

relationship with a subordinate employee as per his

employment contract and He had to step down for the

violation of the policy.

Role of Independent Director in Igate Board

As a IGATE Independent Director on Board, The profile of all

the board members are to be examined

ID has to question the Board about the induction of

Mr.Murthy with a previously black mark in his career

This questioning at the initial stage would have prevented

hiring him at the first stage and later on re firing from igate

Zero tolerance towards Character assassination profile to be

adopted by Companies

Globalization demands ethical behavior from each and every

member of the organization and Character to be given

preference over competence in Hiring any executive

With Changing Scenario of Woman Director on Board, Gender

diversity, Professionalism coupled with behavioral discipline is

extremely important in today’s corporate world

The responsibility of Independent Director has to protect the

image of the company in all aspects for good corporate

Governance

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Case III – Sahara Pariwar –OFCD case

SEBI had filed case on Sahara group on various illegalities committed in

raising Rs.24000 crore from more than 3 crore retail investors

In 2008,Sahara Group (two unlisted Sahara group entities) Sahara India

Real Estate Corp (SHRECL) and Sahara Housing Investment Corp (SHICL)

through the private Placement Route for raising Optionally Fully convertible

Debentures from three crore investors all of whom are associated with

Sahara Group, approached two different ROCs

In 2009,when Sahara Prime city, one of the group companies approached

SEBI to go Public , the regulator suddenly asked SIRECL and SHICL to refund

all the OFCD Money to the investors .That is the starting point of Battle

Role of Independent Director in Sahara Board

Before Raising the Fund through OFCD, regulatory clarity and confirmation

to be ascertained from Sahara Group

Independent Director has to question why two different ROC’s are

approached for raising the OFCD

For unlisted company, who is the constitutional authority for giving

permission to raise funds from large investor base through OFCD whether

SEBI/ROC/MCA? clarity to be obtained before initiating the procedure

The rules required permission from SEBI for any issuance of securities to 50

or more investors, why it was not adhered to the regulatory compliance

before issuing OFCD?

The purpose and clarity of Fund raising has been well articulated or not?

Why SEBI received complaints stating the OFCD was raised on illegal

means?

Why SEBI asked to refund the Money to all investors?

The above type of probing by the independent director will help the company to

prevent major failure in regulatory governance at a later stage

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The objective of any fund raising activity has to be genuine and in the event of

failure, on the promoter, the relevant instrument has to be honored to the

investors as per the Regulatory Directions.

Case IV Fly Good Times –King Fisher Airlines

Started operations in 2005 King fisher Airlines had gone into troubles one

after another

To overcome 5/20 Rule, KFA bought low cost carrier in 2007

Management failure over LCC confusion and operation

Reduced the flights, Pilots and subsequently failed in all Regulatory

compliance of Service Tax and Payment of Salaries to Employees

The management failure was due to mounting debt of Rs.6000 crore and

operational loss of Rs.500 Crore in 2010

KFA’s accounts are frozen by Income Tax Authorities and got into legal

dispute with Airbus manufacturers

DGCA issues show-cause notice to Kingfisher to cancel the flying permit in

2012

License Renewal not done by DGCA due to non-receipt of revival plan by

KFA in 2013

Consortium of Banks demanded the repayment of loans with interest

Mr.Vijay Mallya was issued red corner notice by Govt of India

Role of Independent Director in King Fisher Airlines

Financial statements are not reviewed properly

Management Decisions are taken unilaterally without any discussion

Arrogance and Authority of Promoter was a real hindrance

Regulatory compliance was totally violated

Dynamics of Business is not managed properly

Acquisition of LCC to overcome 5/20 rule, ordering of A380 Aircraft without

landing permission from Govt are the major management failures

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As Independent Director, has to transparently highlight the above points and act

as a Watchdog to protect the interest of Banks which has provided Rs.6000 Crores

Maximizing Effectiveness of Boards through Accountability & Leadership

Corporate Leadership occurs when a company focuses ultimate success

from the strong leaders that run its daily operations

Balancing the need for increasing shareholder value while simultaneously

providing a work environment that truly engages the passion and

commitment of its employees

The greatest two single corporate leadership issues are lack of trust and

poor communication-Specifically communication regarding corporate

values, vision, mission and critical success factors.

Best Practices in Leadership Effectiveness

Build a collective vision, mission and set of values that help people focus

on their contributions and bring out their best

Establish a fearless communication environment that encourages accurate

and honest feedback and self-disclosure

Make information readily available

Establish Trust, Respect and peer-based behavior as the norm

Be inclusive and patient ,show concern for each person

Demonstrate resourcefulness and the willingness to learn

Create an environment that stimulates extraordinary performance

Elements of a Good Board Meeting

A clear, concise and focused Board agenda ,covering the right matters

Papers delivered in time containing relevant ,timely and accessible

intelligence in a style and format that enables appropriate analysis

Prepared participants and an effective meeting Chair

Relevant, Robust and Respectful Debate

Minutes that accurately record information and decisions that are finalized

promptly

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Diversity in the Board

Diverse membership on the board not only has a positive effect on Board

Governance ,but also leads to increased diversity in the organization

Diverse Teams deliberate better and make better choices

Diversity within the management team is fundamental for the return on

investment

The companies Act 2013 mandates the presence of at least one woman

director on the Board .This will pave the way in encouraging gender

diversity

Corporate Accountability

Accountability is the visible demonstration with evidence as to how

consistently ,closely and sincerely does a company follow the value systems

it lays out for itself

The accountability of the Board is to ensure that the right values are

debated, decided, documented, demonstrated and delivered by the

company in its dealings with every stakeholder

Corporate accountability typically implies that corporate behavior is

influenced by pressure exerted by social and governmental agencies

beyond the company itself

Companies Act 2013 has endowed responsibility and introduced high

standards for directors so that they are accountable to the shareholders for

their action and personally liable for any damage caused by them. But the

effectiveness of these provisions will depend on how strictly they are

enforced

After Enron Scam in US in 2002, Sarbanes-Oxley Act (SOX) was introduced

to protect the interest of the shareholders .Similarly after satyam case in

2009, Companies Act 2013 was introduced to prevent fraudulent acts of

corporates and protect all the stakeholders

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Key Takeaways for self as Emerging Role of Independent Director

Most of the time, Company offences are occurring due to the

aggression, ambition of the promoters to act without regulatory

compliance

Board and Audit Firms, institutional investors turn blind eye to the

promoter’s act rather than acting as regulator .Even though the

Board is equipped with necessary knowledge, they don’t want to

antagonize the promoter

Banks are also supporting for Promoter’s interests to meet their

targets. Banks also have to act as Watchdogs for the loans extended

to the companies with respect to their performance

Regulatory rules are ambiguities leading to debates at Courts at a

later stage by legal experts. MCA and ROC and SEBI have to bring a

clarity in all the rules and regulations in absolute clarity

Family owned companies and listed companies transform themselves

in a transparent and professional Board to bring Diversity and value

addition especially at times of Globalization of Corporate world

Emerging Role of Independent directors will be effective in case of all

support systems work in alignment rather than working in isolation

Independent Directors bring innovation in their approach to

maximize shareholder’s interest without compromising Regulatory

compliance

Independent Directors also ensure the organization’s objectives are

met with pride and dignity

Regulatory Governance and compliance, Corporate Social

Responsibility with good image of the organization is a prerequisite

for exceeding in Business Standard in national and international

corporate Business world

Govt of India has to be time sensitive and Business friendly and at the

same time without compromising the legality and understand the

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issues of the Business in a right perspective and allow the Companies

to grow so that employment objective also met with responsibility

Independent directors also visit US and UK and other best practice

global countries to understand their role and bring the value system

to all the stakeholders.

Govt also has to play a mechanism to induct independent directors

on company boards to act as Watchdogs to protect the image of the

country and interest of the stakeholders.

Unless Govt supports in time every time for all the permissions and

approvals, Companies also cannot effectively discharge their

obligations to the Society

Colorful data and presentations with graph alone will not help for the

organization to excel in their performance unless the Management

Board works with good spirit to protect the interest of all the

stakeholders

The complete success of the Companies act 2013 has to be jointly

achieved by Govt and Company as equal responsible partners to

meet the social obligations.

Discipline of Execution coupled with Transparency in process and

time sensitivity , corruption free environment, unbiased approach of

Regulator, Responsibility of Directors to ensure the interest of

companies, Customer Service and corporate social responsibility will

pave the way for corporate governance .

Last but not the least,

“Good Corporate Governance comes from Effective Regulatory Support”

“Transparency from Regulator and Company is a pre requisite”

“Regulator installs systems to award Good performance of Companies”

“Financial Institutions play a supportive role to conduct the Business”

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References

1) UK Corporate Governance Code -2012 Financial Reporting Council

2) Corporate boards in Europe –Gender Diversity-Danial Ferriera

3) Swedish Institute for Financial Research

4) Commission of the European Communities

5) Role of Independent Directors – CA Karthik,B Radia

6) Role of Independent Directors –KPMG and ASSOCHAM

7) Non-Executive Directors in Europe

8) Corporate Governance –Mr.Arpinder Singh

9) Corporate Governance and Board composition

A comparison of GCC Board with UK, EUROPEAN and US Boards

10) Corporate Governance –London Stock Exchange

11) Social dependence of ID’s in Europe’s large companies

12) Independent Directors in the Board-Mr.Abhishek Gupta