The concept is not mentioned in the Companies Act. However, certain administrative functions have been delegated by the Companies Act to SEBI. Hence, as per circular issued by SEBI, clause 49 of listing agreement deals with ID’s(Independent Directors).
IDs play an important role in challenging and contributing to the development of strategy of the company and to review the performance of the management in meeting agreed goals and objectives. They bring wider experience and a fresh perspective to the Board, while also playing an important role in ensuring financial controls are proper and setting appropriate levels of remuneration for executive directors.
The Companies Bill, 2009, introduces new roles for IDs by clearly defining their functions as well as distinguishing between the role of IDs and Executive Directors.
Hence, if there is no mechanism to hold them responsible for not ensuring the same, none of the directors would be interested in the running of the company. These rules would also ensure that the IDs don’t just collect money and sit back. They would be forced into a more proactive role, which would actually justify investor confidence in the company.
It can be argued that, if the above said mechanisms were already in place, a debacle like Satyam may in all probability not have occurred.
Why these Rules could become counterproductive
Also, the proposal to deny remuneration to Directors would definitely affect their willingness to be part of the Board, especially since there is also a scheme of penalties and liabilities that are being introduced by the new Bill with the objective of making IDs more responsible for the running of the company. Excessive laws which have the result of levying heavy fines on independent directors for not strictly overseeing affairs of a company would result in the impossibility of getting highly qualified professionals and persons of repute on board a company.
Another proposal is to put a cap of six years on the tenure of an ID. This is essentially to prevent IDs from getting close to the Executive Directors of the company, as this would impair their judgment.
However, it could prove to be counter productive, as the effectiveness of independent directors depends, to a large extent, depends on the confidence of the executive management on independent directors, particularly, in a family-run enterprise. The Indian corporate sector is dominated by family-run businesses. Therefore, a short tenure (six years) of independent directors will be a constraint in developing a relationship of trust between independent directors and the executive management.
Another issue would be when meetings are called at short notice. It would require an independent non – executive director or at least ratification of any decisions by any one ID. This could be difficult to execute, especially when they are not remunerated.
Theoretical ways to ensure responsibility of IDs to company without such strict laws