As independent directors occupy fiduciary position & that of agent vis-à-vis their companies, it is their duty to ensure that their personal interest as agents and their duty to their companies as principal do not conflict...Directors generally, and more so independent directors, occupy the position of agent visà- vis their companies. Therefore, in terms of well laid down principles of the...
As independent directors occupy fiduciary position & that of agent vis-à-vis their companies, it is their duty to ensure that their personal interest as agents and their duty to their companies as principal do not conflict...
Directors generally, and more so independent directors, occupy the position of agent visà- vis their companies. Therefore, in terms of well laid down principles of the law, it is the duty of the director to ensure that his personal interest as an agent and his duty to his company, the principal, does not conflict. In Allen v Hyatt {1914} 30 TLR 444, it was held that directors like agents have to disclose their personal interest, if any, in any transaction of the company.
Moreover, directors including independent directors hold a position of trust. They, like trustees, occupy fiduciary position. Many powers of directors are powers of trust, for instance, issue of further capital {Ref Nanalal Zaver v Bom Life Ass Co, AIR 1949, Bom 56}, general power of management {Ref: Marshall Valve Gear Co v Manning Wardley & Co {1909} 1 Ch 267}, and, others like making calls, forfeiture of shares etc. They are also trustees with reference to their power of applying funds of the company and for misuse, they could be held liable. The Supreme Court had also recognised such fiduciary position in Chevalier I. I. Iyyappan v. Dharmodayan Co., Trichur, AIR 1966 SC 1017.
And these are but a few of the plethora of court judgements in India and abroad, pronounced over decades which have shaped relevant laws. The necessity for independent directors in the context of corporate governance has worldwide acceptance. India too has accepted this concept and hence legislated. New laws in terms of the Companies Act 2013, listing agreement under Securities Contracts {Regulation} Act 1956 & regulations under SEBI Act 1992 bring in the hope that the Indian corporates will be better governed for all-round advancements.
To enable independent directors to effectively carry out their functions, it has become essential that their conduct be regulated statutorily. This will not only bring much needed uniformity but also elements of best practices in their actions.
Section 149 of the Companies Act, 2013 has laid down a Code for Independent Directors in Schedule IV of that Act. Needless to add that, these provisions would apply to both men and women independent directors.
Guidelines Of Professional Conduct
It has been provided that an Independent director shall:-
1. Uphold ethical standards of integrity and probity
It is a laudable objective, but, independent directors individually may appreciate differently ethical standards of integrity and probity; varying based on their backgrounds and other relevant factors of diversity. It is understandable since matters are of perception and also subjective. Thus, what is integrity and probity for one director may not be the same for another, although universal definition of such standards is possible. It will therefore be advisable for top/senior management and functional directors, including promoters and major stakeholders to carefully discuss and propose such standards. It should, after that, be approved by the Board.
One should keep in mind, here, that the touchstone has to be what a reasonable, prudent and ordinary individual will perceive and how he will act, and, what the society in general would commend and expect. The actions should be in the best interest of the company. It should then be upheld with due seriousness and diligence throughout the organization.
2. Act objectively and constructively while exercising his duties
It would be difficult to define in a practical sense about objective and constructive actions of an independent director, but it should be judged from the view of actions of a reasonable, prudent and ordinary individual in the best interest of the company.
3. Exercise his responsibilities in a bona fide manner in the interest of the company
Here, the important aspect is bona fide action which would logically mean that there should be no mala fide or bad intention on the part of the independent director and his exercise of responsibility will need to be in the best interest of the company and for its benefit. No conflict of interest between the director and the company is paramount. There should also be good faith in exercise of such responsibility. It was held in case of Turner Morrison & Co v. Shalimar Tar Products {1980} 50 Comp Case 296 Cal, that good faith requires that all endeavours of directors must be directed to the benefit of the company.
4. Devote sufficient time and attention to his professional obligations for informed and balanced decision-making
It should be appreciated that devoting sufficient time and attention by the independent director for his obligations as director cannot be defined per se. It shall depend upon his other obligations and duties as well as his personal commitments. His informed and balanced decision-making would entail that all relevant data should be made available to him on due time by the senior management and the promoters. Also he should be able to reasonably consider the information and understand the pros and cons of his decisions. The question as to whether his decision is balanced or not is fraught with subjectivity.
5. Not allow any extraneous considerations that will vitiate his exercise of objective independent judgement in the paramount interest of the company as a whole, while concurring in or dissenting from the collective judgement of the Board in its decision-making
Extraneous considerations which can adversely affect the judgement of the independent director while participating in the board process should be fortified as far as possible, by the senior management, promoters and major stakeholders. The director himself should ensure that he is not to be prejudiced due to these considerations. What will such considerations or factors be is very difficult to define but it is sufficient to state that their impact on the judgement of the independent director could be negative and not in the best interest of the company. Ultimately the guiding factor will be upkeep of the supreme interest of the company.
6. Not abuse his 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
Misuse of position by an independent director for personal gains, directly or indirectly, is a very vital factor. There should be no ulterior or mala fide motive to harm the interest of the company or shareholders or take undue benefit from them. The safeguard could be by way of proper disclosures to the Board and through checks and balances in the organization. The term “associated person” is not defined but would cover all individuals, relatives, entities over which the director has direct or indirect interest or control and any advantage to them will benefit the director as well.
7. Refrain from any action that would lead to loss of his independence
Loss of independence would be indicated where the independent director takes any action or step resulting in his getting personally interested in the company to its detriment. Thus, his entering into any pecuniary transaction with it or his relative taking any employment therein or he with his relative holding substantial voting power in the company, and the likes can all affect his independent status. Hence he should abstain from these actions so that functioning of the company will not be adversely affected or compromised. Pertinently, the new Companies Act has elaborately laid down the criteria of independence and such provisions also exist in the listing agreement & SEBI regulations.
8. Where circumstances arise which make an independent director lose his independence, the independent director must immediately inform the Board accordingly
This is in line with the principle that proper disclosures by directors should be made to the Board, from time to time. The Board to take consequential and/or corrective actions as would be appropriate. To ensure that independence is maintained, Section 149 of the new Companies Act provides clearly that whenever there is any change in circumstances which may affect the status of independence of the director, he has to give a declaration to the Board that he meets the criteria of independence.
9. Assist the company in implementing best corporate governance practices
The best corporate governance methodologies under various provisions and otherwise followed in practice should be laid down by the Board with the approval of all its members including independent directors together with senior management and promoters. Further, implementation thereof should get complete support of the entire organization. It is an allencompassing responsibility from highest to groundlevel hierarchies. The independent director has a significant role to play here.
Conclusion
In addition to the Code, the new Companies Act has also laid down roles and functions, duties, manners of appointment /reappointment, resignation or removal, separate meetings and an evaluation mechanism for independent directors. The Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015, which will come into force effective 1st December, 2015, has also laid down provisions in this regard in line with the new Companies Act. Hopefully with these provisions which in many respects are quite subjective in nature, the much-awaited ushering in of good corporate governance would be achieved through the medium of independent directors.
Disclaimer – The views expressed in this article are the personal views of the author and are purely informative in nature.