Independent Directors and Governance

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Agenda

Introduction

Definition of independent director

Selection of independent directors

The dual roles that independent directors play

Accountabilities of independent directors

Corporate governance

Risk management

Independent director – Requirements to accomplish the role

Independent directors in audit committees

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Introduction

This presentation covers only independent directors of public listed companies

whether it is family controlled or widely held through institutions and shareholders

of a wide spectrum

Major happenings on independent directors

340+ independent directors have quit in 2009 after the Satyam episode

Role of independent directors questioned after global financial collapse

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Definition(s) of Independent DirectorFour committees appointed in the past to formulate guidelines for corporate governance have broadly agreed on the definition of independent director. The definition summed up simply says that he or she must be a non- executive director does not derive financial benefit from any transaction with the company and its

affiliates as a vendor, customer, client etc is not related to the promoters or key management does not own more than 2% or more of the block of the voting shares; and should not have been a past employee of the company

Clause 132 of the The Companies Amendment Bill 2008 has summarised this into a legal form as in clause 49 of the listing agreement

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Clause 132 of the Companies Amendment Bill, 2008- A new section Clause 132 of the Companies Amendment Bill, 2008- A new section introducedintroduced"Independent director", in relation to a company, means a non-executive director of the company, other than a nominee director,- (a) who, in the opinion of the Board, is a person of integrity and possesses , relevant expertise and experience; (b) who, neither himself nor any of his relatives-

(i) has or had any pecuniary relationship or transaction with the company, its holding, subsidiary or associate company, or its promoters, or directors amounting to ten per cent. or more of its gross turnover or total income during the two immediately preceding financial years or during the current financial year;

(ii) holds or has held any senior management position, position of a key managerial personnel or is or had been employee of the company in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed;

(iii) is or has been an employee or a partner, in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed, of-

(A) a firm of auditors or company secretaries in practice or cost auditors of the company or its holding, subsidiary or associate company;

( B) any legal or a consulting firm that has or had any transaction with the company, its holding, subsidiary or associate company amounting to ten per cent. or more of the gross turnover of such firm;

(CONTINUED…)

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Clause 132 of the Companies Amendment Bill, 2008Clause 132 of the Companies Amendment Bill, 2008

(iv) holds together with his relatives two per cent. or more of the total voting power of the company; or

(v) is a Chief Executive or director, by whatever name called, of any non- profit organisation that receives twenty-five per cent. or more of its income from the company, any of its promoters, directors or its holding, subsidiary or associate company or that holds two per cent. or more of the total voting power of the company;

or

(c) who possesses such other qualifications as may be prescribed

Explanation.-For the purposes of this section, "nominee director" means a director nominated by any institution in pursuance of the provisions of any law for the time being in force, or of any agreement, or appointed by any Government, to represent its shareholders

An independent director shall not be entitled to any remuneration, other than sitting fee, reimbursement of expenses for participation in the Board and other meetings, profit-related commission and stock options as may be approved by the members.

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Selection of independent directorsChosen by the company from a list of persons with professional competence, integrity and

with adequate experience and expertise. Nomination committee of the Boards can perform

this function more effectively.

The object of such a selection is to bring on board persons with an objective view and

thereby promote healthy debate In the Board on various issues, strategic or ongoing

management or policy issues.

The Board of Directors recommend to shareholders such appointees

Independent directors also: facilitate resisting pressures and conflicts

mentor and act as sounding boards to full – time directors

bring their professional expertise in forming independent perspectives

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Roles played by independent DirectorsGuardian

They protect the minority which either did not have the right to vote nor exercised it

Stakeholders look upon them as guardians

Activities in this role would include risk management, corporate governance and so

on…

Dynamic Role

They are part of a Board that has to think of the future and grow

Expansion, diversification, joint ventures, overseas ventures, meeting global

competition are part of today’s issues facing the Board

Activities in this role would include strategy formulation, mergers, JVs and so on…

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Accountabilities of independent directorsApprove, monitor and review regularly the strategy and finances of the company, and the

structure and relationships of the Board

Maintain a good all- round understanding of the company’s business and activities, and

contribute as appropriate on any major issues which arise

Monitor and review the performance of the company and the chief executive

Review the calibre and performance of the executive directors

Participate effectively as required in discharging the functions of relevant board committees

Take the lead in resolving potential conflicts of interest as and when they arise, and if

appropriate act as the conscience of the board

Identify the need for and initiate changes, in whatever area, when appropriate

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Independent directors – Requirements to accomplish the roleIndependent directors – Requirements to accomplish the role

Knowledge Legal and regulatory framework Financial reporting Corporate governance Board practice – inside and outside meetings Accountabilities of the role Possible crisis situations (e.g.takeovers)

Skills Gaining adequate understanding of an unfamiliar business Obtaining relevant information in a comprehensible form Defining the key issues on which to focus Developing a broad strategic vision of what the company requires

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Corporate GovernanceCorporate GovernanceCorporate governance is the framework by which companies are managed and controlled.Agenda for independent directors for effective governanceThe independent directors need a framework that effectively addresses the following issues: Risk management and mitigation measures Budgets – annual and operating and capex including diversifiaction Quarterly results and variance analysis Significant transactions of a non-recurring nature such as brand acquisition, intellectual property

etc Cash management Recruitment / attrition of below Board level employees and their effect on the company Default if any of financial obligations All statutory compliances and defaults including any non-payment of dues to State and Central

Govt Human resource management initiatives

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Risk Management & MitigationRisk Management & Mitigation

Current scenario of wide funding options and risks that arise out of planning

exponential growth

ERM framework is critical in guiding the decisions of the independent director

Get management to prepare a detailed risk bulletins and ensure that risk

mitigation is planned and executed

Risk mitigation is to be followed up at every meeting

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Independent directors role in audit committeesIndependent directors role in audit committees

Management discussion and analysis of financial condition and results of operations

Statement of significant related party transactions (as defined by the

audit committee) submitted by management

Management letters / letter of internal control issued by the statutory

auditor

Internal audit reports relating to internal control weaknesses; and

The appointment, removal and terms of remuneration of the Chief

Internal auditor shall be subject to review by the Audit Committee

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Independent directors in audit committeesIndependent directors in audit committees

This is the second and most commonly perceived role of independent directors as members or Chairman of Audit committee

Clause 49 is wide in coverage - systems, internal controls, internal audit, accounting and presentation of financial statements and a host of other issues concerning financials

Many committees and SEBI has outlined audit committees and their framework The audit committee shall have a minimum of three directors and with 2/3rds of them

being independent directors. All members are expected to be financially literate. However the Chairman of the Audit Committee needs to be an independent Director