In today's business sphere, sustainability is no longer an option, but a requisite. Investors now understand the direct correlation between a corporation's Environmental, Social, and Governance (ESG) performance and its long-term profitability. This shift has turned "sustainable investment" into a general synonym for "investing." Most CEOs agree that ESG concerns should guide corporate strategy, yet corporate boards remain a steadfast holdout in this sustainability movement. Emphasizing on maximizing short-term value often holds back directors from securing their company's future.
However, the concept of "corporate purpose" is providing boards the impetus they need to pivot their focus to ESG issues and manage their companies for long-term success. The role of independent directors is gaining increasing scrutiny due to an emphasis on improved corporate governance and the burgeoning demand for ESG best practices worldwide. The demand for independent directors is rising, as their voice often provides the first objective evaluation of an ESG crisis within a company. The role of independent directors in India continues to evolve. The criteria for selecting and appointing independent directors to the Board of Directors are ever-changing.
Understanding the Role of an Independent Director
An independent director is defined under Section 149, sub-section 6 of the Companies Act, 2013. Simply put, an independent director is a non-executive board member who does not have a material connection to the organization, nor is involved in the day-to-day management of the company.
Who is an Independent Director?
According to the Companies Act, 2013, an independent director must possess relevant experience and demonstrate personal integrity. They should not be a promoter of the company, its subsidiary, or associate company and should not have had any pecuniary relationship with these entities during the two most recent financial years or the current financial year. Furthermore, the director must not hold 2% or more of the company's total voting power.
Companies Requiring an Independent Director
Per Section 139, sub-section 4, every listed public company must ensure that one-third of the total number of directors are independent directors. The Central Government holds the power to prescribe a minimum number of independent directors for any class of public companies.
Appointing Independent Directors
The process, as per Section 150 (2), involves the company appointing an independent director during a general meeting. This appointment is then formalized through an appointment letter setting out the terms and conditions of the appointment.
Role in Corporate Social Responsibility (CSR)
Section 135, sub-section 1 stipulates that a Corporate Social Responsibility Committee of the Board must consist of three or more directors, with at least one being an independent director.
Advantages of Appointing Independent Directors
Independent directors play a crucial role in maintaining robust corporate governance. A board consisting predominantly of independent directors is better equipped to oversee operations. This addition often leads to diverse counsel and knowledge, thanks to executives from different backgrounds. They can make decisions without being overly influenced by the management group due to their lack of material connections with the company.
Guidelines and Professional Conduct
The roles, responsibilities, and professional conduct guidelines for an independent director are covered under Schedule IV of the Companies Act, 2013. But the responsibilities of an independent director extend beyond formal documents. They play a pivotal role in succession planning, balancing conflicting stakeholder interests, and mentoring full-time board members.
For a comprehensive understanding of the multifaceted role, the expectations, sound decision-making, and much more, the Director’s Institute offers e-learning courses like corporate governance, independent director certification, and ESG certification in India. These courses allow you to not only learn and develop skills but also network with other professionals and board members in the community.
An independent director's role is instrumental in the transition towards sustainable corporate governance. By incorporating their objective perspective and expertise, businesses can align their strategies with ESG principles, thereby ensuring long-term success and sustainable growth. As such, their roles are not just evolving; they are increasingly becoming critical for ensuring sustainable business practices.
Our Directors’ Institute- World Council of Directors can help you accelerate your board journey by training you on your roles and responsibilities to be carried out in an efficient manner helping you to make a significant contribution to the board and raise corporate governance standards within the organization.
Our ESG Expert certification will help you to amplify your understanding of corporate governance in a detailed manner paving the way for you to become a globally recognized ESG leader.