5Qs for Every Corporate Professional: CimplyFive’s 5Qs to Evaluate an Independent Directors Effectiveness

Independent Directors play a vital role in the current corporate governance setup, by being the conscience keepers of the company. Disconnected from monetary gains, they are expected to do what is right and not be swayed by personal material benefits. Further, with an assured tenure as independent director they cannot be penalized for standing up for the interest of minority shareholders against the interests of promoters or executive management and doing what is right. While their position in law is crystal clear, how can Independent Directors assure themselves that they have fulfilled their role as the ‘conscience-keeper’ for their company and how can others judge this? Answer these five questions to assess the situation for yourself.

  1. Do they devote adequate time for their role as Independent Director?

Independent Directors do not have beneficial interests in the company. However, they hold a fiduciary responsibility, representing the interests of minority shareholders and other stakeholders. As fiduciary ‘owners’ the diligence they exhibit in routine decision making is a critical indicator of how they discharge their responsibilities. This in turn translates to devoting adequate time to prepare for and attend meetings, by reading all the papers circulated and speaking up where required to ensure decisions are made after considering the interest of all the stakeholders.

  1. Do they speak up in the meetings and voice their opinion representing the interests of minority shareholders and other stakeholders in a constructive manner for effective decision making?

The presence of independent directors by itself does not ensure effective decisions making in the corporate board room. Promoters and executive management play a lead role by presenting their proposals for consideration. Independent directors may need to supplement the information required representing the minority shareholders and/or other stakeholders’ views in a constructive manner, keeping the interest of the company as a distinct entity, foremost.

  1. Do they play their role as the ‘Other party’ in evaluating Related Party Transactions to ensure fairness of consideration paid or received?

The challenge of related party transactions is that the decision maker in the company is also the beneficiary of a transaction in which the company is the counterparty. While ensuring fairness of such transactions, it is essential that the Independent Directors play a constructive role in representing the interest of the company by ‘negotiating’ the best deal for the company.

  1. Do they engage experts to evaluate where required, and take informed decisions on highly subjective matters?

The idea that promoters and executive management have the best interest of the company can be presumed by independent directors and there is no need to question this in the absence of any contrary evidence. But, when faced with decisions that are highly subjective and questionable, it is appropriate, if not necessary for independent directors to validate these decisions for themselves and where they do not have the expertise, they should consult or engage experts to validate the same.

  1. Do they consciously ensure that the information shared by the company is balanced by presenting both the positives and the drawbacks to ensure fair decision making?

Communication to stakeholders including shareholders is a key element of Board’s responsibility. Independent Directors have a major role in ensuring that the information provided to stakeholders is balanced including both the positive or upsides and the concerns or challenges likely to be faced, for them to take an informed decision in dealing with the company.

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