- 1 -

Abbreviations

1. NED Non-Executive Directors

2. SEBI Securities Exchange Board of India

3. MD Managing Director

4. ED Executive Director

5. WTD Whole-Time Director

6. ID Independent Director

7. CII Confederation of Indian Industry

8. AGM Annual General Meeting

9. CEO Chief Executive Officer

10. ASSOCHAM Associated Chambers of Commerce and Industry

of India

11. ASIC Australian Securities & Investment Commission

12. SAIL Steel Authority of India Limited

- 2 -

Bibliography

1. Google.com – as the search engine.

2. thehindubusinessline.in

3. wikipedia.org

4. indiacorplaw.blogspot.com

5. businessdictionary.com

6. businessroute.co.uk

7. legalservicesindia.com

8. business.rediff.com

9. companypartners.com

10. business.timesonline.co.uk

11. Company websites

- Unilever.com

- Infosys.com

- Tatamotors.com

- Adityabirla.com

- 3 -

INDEX

S. No. Heading Page No.

1. ‘Non-Executive Director’- Meaning 4

2. Who are the Non-Executive Directors? 7

3. Role of the Non-Executive Directors 8

4. Why are they needed? 11

5. The HIGGS Report: A Base 14

6. The Indian Context 17

7. What provisions do we presently have regarding NEDs? 19

8. Does the Independent Director and the Non-Executive Director mean the same?

22

9. Can the Independent NEDs really direct the Company? 24

10. Duties and Responsibilities of the Non-Executive Directors 26

11. Can a Non-Executive Independent Director be allowed to undertake assignments with the company on the basis of professional capabilities?

30

12. How much do NEDs cost to a company? 32

13. Is the position of a Non-Executive Director all about the ‘Perks’? 34

14. Latest in News 37

15. KUMAR MANGALAM BIRLA 38

16. RATAN NAVAL TATA 39

17. SUNIL BHARTI MITTAL 40

18. K.V. Kamath 41

19. N. R. NARAYANA MURTHY 42

20. The Rt Hon Sir Malcolm Rifkind 42

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‘Non-Executive Director’- Meaning

A non-executive director (NED) is a member of the board of directors of a company

who does not form part of the executive management team.

That is, to say, NEDs don’t get involved in the day-to-day running of the business.

As such nothing is mentioned in the laws of India governing the Companies i.e. the

Companies Act, or the SEBI regulated laws or any other allied laws defining the

term ‘Non-Executive Directors’, but, the term has been referred by way of the

definition of a ‘Director’ (which is broad and defined under Section 2(13) of the

Companies Act, 1956) and also by way of the term ‘Managing Director’ (which is

the antonym of NED and is defined under Section 2(26) of the Act).

To define the abovementioned terms:

• "Director" includes any person occupying the position of director, by

whatever name called.1

• "Managing Director" means a director who, by virtue of an agreement with

the company or of a resolution passed by the company in general meeting or

by its Board of directors or, by virtue of its memorandum or articles of

association, is entrusted with substantial powers of management which would

not otherwise be exercisable by him, and includes a director occupying the

position of a managing director, by whatever name called.2

1 Section 2(13) of the Companies Act, 1956. 2 Section 2(26) of the Companies Act, 1956 as follows:- "Managing Director" means a director who, by virtue of an agreement with the company or of a resolution passed by the company in general meeting or by its Board of directors or, by virtue of its memorandum or articles of association, is entrusted with [substantial powers of management] which would not otherwise be exercisable by him, and includes a director occupying the position of a managing director, by whatever name called: [Provided that the power to do administrative acts of a routine nature when so authorized by the Board such as the power to affix the common seal of the company to any document or to draw and endorse any cheque on account of the company in any bank or to draw and endorse any negotiable instrument or to sign any certificate of share or to direct registration of transfer of any share, shall not be deemed to be included within substantial powers of management: Provided further that a managing director of a company shall exercise his powers subject to the superintendence, control and direction of its Board of directors;]

- 5 -

Thus, a Director can be given any title as regards to the post he holds in the

management of the company. There is no objection to the adoption by companies of

the American nomenclature of President and Vice-President for designating their

managerial personnel.

As regarding the ‘Managing Director’ (MD), the post of ‘Executive Director (ED) is

a common post in many organizations. But, again the Indian Companies Act does

not define the phrase. And, according to the general dictionary meaning as provided

by the www.thefreedictionary.com, he is "a person responsible for the administration of

a business".

Therefore, an ED can be said have to performed the operational and strategic

business functions such as

- managing people

- looking after assets

- hiring and firing

- entering into contracts

EDs are usually employed by the company and paid a salary, so are protected by

employment laws. An Executive Director of a Whole Time Director (WTD) is

virtually an MD, according to a Department clarification. He cannot be an employee

of another company or elsewhere, or be engaged in any other business pursuit,

though he may be an ordinary director of one or more other companies also,

as Ramaiya explains under Section 267.

Now, these having defined we can clearly see that how these EDs, WTDs and MDs

perform and are involved in the day-to-day operations and management.

And, as we have already seen that NEDs are the members of the board of

directors of a company who do not form part of the executive management team.

- 6 -

Though, NED not having been defined in any of the Acts, it has also been referred

by another term relating to its ‘independence in the management’, the ‘Independent

Director’. This term has been very clearly defined under the Clause 49 of the Listing

Agreement.

The first line of the definition of ‘Independent Directors’ mentions “the expression

‘independent director’ (ID) shall mean Non-Executive Director of the company

who...”.

Thus, to know the status of an ED it is better to understand it in the way one would

understand the status of an ID.

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Who are the Non-Executive Directors?

As explained, a Non-Executive Director (NED) is a member of the board of

directors of a company who does not form part of the executive management team.

A non-executive director of a firm is who is not a working or an executive director

and, therefore, does not participate in the day-to-day management of the firm.

A non executive directorship is an appointment to the board of a company on a part

time basis.

The work of a non executive director generally involves attending some board

meetings and company functions, with the aim of providing experienced, intelligent

advice to the company board, the chairman or management.

Non executive directors can offer advice from the perspective of somebody not

absorbed in the day to day details of business - based on the view of an outsider

looking in and on the non executive director's own personal skills, business

experience and industry contacts. He or she is usually involved

in planning and policy making, and is sometimes included to lend prestige to the

firm due to his or her standing in the community.

Non-executive directors are expected to monitor and challenge the performance of

the executive directors and the management, and to take a determined stand in

the interests of the firm and its stakeholders.

In some organizations, their role is to sit on the Audit Committee, Pension Trustee

Body, Directors Remuneration Committee and any other Committees that require

an independent body of thought, separate and not answerable to the Chief Executive,

Managing Director or Chairman.

The details of each position vary, but non executive directorships hold benefits for

both individuals and companies.

- 8 -

Role of the Non-Executive Directors

In today's society, people seem to be losing their general faith when it comes to the

activities that are being carried out by many senior business figures and politicians.

Accordingly, the role of the non-executive director is becoming increasingly

important when it comes to modern corporate governance.

The modern 'non-executive' director is a position which is appointment based both

on professional and objective criteria, and this is a position that can easily add real

live value to any organization type.

The importance of such a post was already felt during the time when the

Confederation of Indian Industry (CII) had taken up the initiative on Corporate

Governance. One of the important recommendations by the CII in its Corporate

Governance Code related to the role of the NEDs.

The recommendation IV stated that for Non-Executive Directors to play a material

role in corporate decision making and maximizing long term shareholder value, they

need to

• become active participants in boards, not passive advisors;

• have clearly defined responsibilities within the board such as the Audit

Committee; and

• know how to read a balance sheet, profit and loss account, cash flow

statements and financial ratios and have some knowledge of various company

laws. This, of course, excludes those who are invited to join boards as experts

in other fields such as science and technology.

Besides, according to the Higgs Report, commissioned by the British

Government and published in 2003, Non-executive directors have responsibilities in

the following areas:

• Strategy: Non-executive directors should constructively challenge and

contribute to the development of strategy.

- 9 -

• Performance: Non-executive directors should scrutinize the performance

of management in meeting agreed goals and objectives and monitoring,

and where necessary removing, senior management and in succession

planning.

• Risk: Non-executive directors should satisfy themselves that financial

information is accurate and that financial controls and systems of risk

management are robust and defensible.

• People: Non-executive directors are responsible for determining

appropriate levels of remuneration of executive directors and have a prime

role in appointing, and where necessary removing, senior management

and in succession planning.

Having defined the meaning of the term NED, along with who they are, and also by

looking at the extracts of the committee reports formed for the particular purpose,

above it will probably be easier now to know what their roles are.

The role of NEDs should be:

1. To contribute to and constructively challenge the development of the

company strategy.

2. To scrutinize the management performance.

3. To satisfy them that the financial information is accurate and ensure that

robust risk management is in place.

4. To meet at least once a year without the Chairman or the Executive directors

(EDs/MDs/WTDs)- and there should be a statement in the annual report

stating whether such meetings have taken place.

5. To be prepared to attend AGMs and discuss issues relating to their roles

(especially Chairmen of their committees).

6. To have a greater exposure to major shareholders.

- 10 -

7. To maintain company resources and completing, monitoring and removal of

tasks relating to those resources.

8. To be responsible for the monitoring and maintaining any or all appointments

relating to the business or the Board of Directors.

9. To be responsible for maintaining a standard of good conduct within the

organization. This involves monitoring management staff and making

necessary changes to promote the highest level of good conduct within the

organization.

- 11 -

Why are they needed?

The following passage of Viscount Haldane, Lord Chancellor1, highlights how the

non-executive directors' contribution can be instrumental in complementing the

executive's competence:

“My Lords, a corporation is an abstraction. It has no mind of its own any

more than it had a body of its own; its active and directing will must

consequently be sought in the person of somebody who for some purposes

may be called an agent, but who is really the directing mind and will of the

corporation, the very ego and centre of the personality of the corporation.

That person may be under the direction of the shareholders in general

meeting; that person may be the board of directors itself, or it may be, and in

some companies it is so, that that person has an authority to co-ordinate with

the board of directors given to him under the articles of association, and is

appointed by the general meeting of the company, and can only be removed

by the general meeting of the company.”

We know that the Board of Directors of a company must have an optimum

combination of executive and non-executive directors with not less than fifty percent

of the board of directors comprising of non-executive directors.2 While at the same

time, the law has not defined precisely who NEDs are.

The law treats them (both kinds) simply as ‘Directors’3 and both carry equal

responsibilities. However, they have different roles to play.

The non-executive independent directors are generally given the chairmanship of

important committees like Audit committee, Nomination committee and

remuneration committee.

1 in Lennard's Carrying Company Ltd v. Asiatic Petroleum Co. Ltd (1915) AC 705) 2 Clause 49 of the Listing Agreement. 3 Section 2(13) of the Companies Act, 1956.

- 12 -

They are closer to action. They can question the executives directly. They observe

from a distance how well executives are performing their duties.

Generally speaking, the non-executive director is not going to be involved in the day-

to-day operations of the business. Instead, the non-executive director's duties lay in

monitoring executive activity, and contributing when necessary to strategy

development.

The largest differences in how productive your non-executive director is lies in what

type of business you are running.

èFor example, in large and formal type organizations that have a much

more strict set of standards when it comes to corporate governance, the

chairman of the board role as well as the CEO or chief executive officer role

are typically separated. The chief executive officer and the executive directors

are in charge of running the day-to-day aspects of a organization, and are also

responsible for putting into action any strategies or policies that are agreed

upon by the board of directors.

At any and all board meetings held by the firm, the executive directors are

responsible for reporting on exactly how well the organization is being run, as

well as recommending any future actions for investment and strategic

direction.

The non-executive directors, then, are responsible for reviewing this

information that has been provided to them, in order to ensure that the entire

organization or business is being run in such a way that all of the shareholders

are being benefited, and that the executive directors running the company are

not doing anything that may be considered to be a breach of the amount of

trust that was placed in them.

èOn the other hand, in small and medium sized business firms, the chief

executive officer or CEO is typically the owner and the founder of the

- 13 -

business or organization, which means that the non-executive director's role

more closely resembles that of an experienced business advisor rather than

that of a mediating party.

Even when it comes to a situation like this, there are still many substantial

legal responsibilities that the non-executive director must deal with, in

addition to liabilities to check facts so that the non-executive director can

determine whether or not all corporate laws are being complied with on the

behalf of the business entity.

In general, a small or medium sized enterprise can probably benefit much greater

from the use of a non-executive director than a larger organization would be able to.

Small organizations and businesses typically cannot afford a large number of

different full time directors who are experienced in all of the tasks and duties that a

normal director would be asked or expected to perform. The owner or the chief

executive officer in charge is usually responsible for making a large number of

decisions, including those that relate to strategy down and individual action plans.

There is only a limited opportunity for delegation, which can oftentimes leave the

CEO in an extremely lonely position as they would be required to make all of the

decisions without ever having anyone there who they can discuss alternative ideas

with.

This is the type of situation where hiring a non-executive director would easily add

unexpected real value to the business model, as this non-executive director could

become a sounding board for many ideas, providing great benefits in the process

through their expertise, their experience and the pool of contacts that they bring to

the table.

- 14 -

The HIGGS Report: A Base

The report by Derek Higgs which delved deep into the role and effectiveness of non-

executive directors was published on 20 January 2003.

The report laid stress on the demanding and influential role of non-executive

directors (NEDs). The report is a comprehensive one which can definitely serve as a

guide to the corporate in our country.

è Composition of the Board:

The Combined Code of good Governance and code of best practices(The

Code) requires that the board should have a balance of Executive and Non-

Executive Directors (including independent NEDs) - aiming to ensure that no

individual or group can dominate the board's decision making. Taking the

board as a whole, the NEDs (whether independent or otherwise) must

comprise not less than one-third of the board, and a majority of the NEDs

should be 'independent'.

However, the Higgs report requires that at least half of the board, excluding

the Chairman, should be independent (NEDs).

This recommendation will herald a shift in the overall power of the board in

favor of independent NEDs, and away from executive management.

è The Chairman:

The Code already recognizes that the roles of chairman and chief executive

involve two distinct tasks - running the board (chairman) and taking executive

responsibility for running the company's business (CEO). The Code currently

accepts that these tasks may be combined in one person, although such a step

does require public justification.

The report also requires that a chief executive should not go on to become

chairman of the same company; and on appointment, the chairman should be

seen to be independent (although it recognizes that, following appointment,

- 15 -

the chairman will cease to be independent due to his greater involvement with

the executive team).

The recommendation that a chief executive should not go on to become

chairman of the same company will be unwelcome to many companies, and

has attracted more criticism than other aspects of the Report.

è Senior Independent Non-Executive Directors:

The Code recommends that there should be a recognized senior independent

NED (irrespective of whether the roles of chairman and CEO are combined)

who must be identified in the annual report.

The Report envisages an expanded role.

The Code considers the senior independent director as the person, other than

the chairman, 'to whom concerns can be conveyed'.

The Report proposed that the senior independent director should be available

to shareholders if they have concerns that have not been resolved through the

normal channels, or for which contact through the normal channels is

inappropriate.

In addition, the senior independent director should develop a balanced

understanding of the concerns of shareholders by attending sufficient of the

regular meetings between management and the major shareholders.

è Tenure and Commitment:

Stricter recommendations were introduced relating to the re-election of

NEDs.

Under the Code, NEDs are required to be appointed for a specific term and

then be subject to re-election thereafter at intervals of no more than three

years. There is currently no maximum term (although various shareholder

bodies already envisage that a NED's 'independence' will be lost after 10

years' service).

- 16 -

The Report limits the term that can be served by an NED. It recommends that

an NED should normally be expected to serve two three-year terms unless

exceptional circumstances make a longer term appropriate. Any extension

beyond six years must be justified. Further, any NED serving nine years or

more must be re-elected annually. Once a NED is appointed, the NED must

inform the chairman before any new appointments are accepted; the board

must also be informed.

è Remuneration:

The Report endorsed the recommendations of the Code that levels of board

remuneration should be sufficient to attract and retain directors but should

not be more than is necessary.

The Report provides more detailed recommendations in relation to the

remuneration of NEDs by stating that NED fees should be built up from:

- annual fee;

- meeting attendance fees; and

- additional fees for chairmanship of committees; and

NEDs should have the opportunity to take part of their remuneration in

shares but they should not be granted options.

- 17 -

The Indian context

On account of the interest generated by the Cadbury Committee Report, the CII, the

ASSOCHAM and the SEBI constituted the Committees to recommend initiative in

Corporate Governance.

CII took a special initiative on Corporate Governance, the first institution initiative

in Indian Industry.

The objective was to develop and promote a code for Corporate Governance to be

adopted and followed by the Indian companies.

Following the CII’s initiative, the SEBI set up a Committee under the Chairmanship

of Kumar Mangalam Birla to promote and raise standards of corporate governance.

This report was the first formal and comprehensive attempt to evolve a Code of

Corporate Governance, in the context of prevailing conditions of governance in

Indian companies.

The recommendations of the Kumar Mangalam Birla Committee led to the inclusion

of Clause 49 in the Listing Agreement.

The recommendations which concerned the NEDs were:

1. The Board should have an optimum combination of Executive and Non-

Executive Directors with not less than 50 percent of the Board consisting

of NEDs.

2. In case of Non-Executive Chairman1, at least one-third of the Board

should consist of Independent Directors; and in the case of an Executive

Chairman2, at least half of the Board should consist of Independent

Directors.

3. Non-Executive Chairman should be entitled to maintain Chairman’s

office at the expense of the Company and also allowed reimbursement of

expenses incurred in performance of his duties.

1 i.e. where Chairman is a Non-Executive Director. 2 i.e. where Chairman is an Excutive Director.

- 18 -

4. That a qualified and independent Audit Committee should be set up by

the Board of the company which should have minimum three members,

all being the NEDs.

5. Remuneration Committee should comprise of at least three directors, all

of whom should be NEDs.

6. A Board committee should be formed under the chairmanship of an NED

to specifically look into the redressing of shareholder complaints like:

- transfer of shares;

- non-receipt of balance sheet;

- non-receipt of declared dividends; etc.

- 19 -

What provisions do we presently have regarding NEDs?

As mentioned above, the Kumar Mangalam Birla Committee Report led to the

inclusion of Clause 49 in the Listing Agreement.

This Clause is applicable to:

a) all entities seeking listing for the first time, at the time of listing.

b) all listed entities having a paid up share capital of Rs 3 crores and above or net

worth of Rs 25 crores or more at any time in the history of the company.

The said Clause is still in force and it is imperative to know what it talks about.

Sub-Clause I talks about the Governance provisions relating to the Board of

Directors.

Sub-Clause I(A) deals with the Composition of the Board of Directors of the

company.

Sub-Clause I(A)(i) reads as:

“The board of directors of the company shall have an optimum combination

of executive and non-executive directors with not less than fifty percent of the

board of directors comprising of non-executive directors.

The number of independent directors would depend on whether the

Chairman is executive or non-executive. In case of a non-executive chairman,

at least one-third of board should comprise of independent directors and in

case of an executive chairman, at least half of board should comprise of

independent directors.”

Sub-Clause I(B) deals with the Non-Executive Directors’ compensation and

disclosures.

- 20 -

Sub-Clause I(B) reads as:

(i) All compensation paid to non-executive directors shall be fixed

by the Board of Directors and shall be approved by

shareholders in general meeting. Limits shall be set for the

maximum number of stock options that can be granted to non-

executive directors in any financial year and in aggregate. The

stock options granted to the non-executive directors shall vest

after a period of at least one year from the date such non-

executive directors have retired from the Board of the

Company.

(ii) The considerations as regards compensation paid to an

independent director shall be the same as those applied to a

non-executive director.

(iii) The company shall publish its compensation philosophy and

statement of entitled compensation in respect of non-executive

directors in its annual report. Alternatively, this may be put up

on the company’s website and reference drawn thereto in the

annual report. Company shall disclose on an annual basis,

details of shares held by non-executive directors, including on

an “if-converted” basis.

(iv) Non-executive directors shall be required to disclose their stock

holding (both own or held by / for other persons on a beneficial

basis) in the listed company in which they are proposed to be

appointed as directors, prior to their appointment. These details

should accompany their notice of appointment.

Sub-Clause I(F) deals with the Term of the Office of NEDs.

Sub-Clause I(F)(i) reads as:

“Person shall be eligible for the office of non-executive director so long

as the term of office did not exceed nine years in three terms of three

years each, running continuously.”

- 21 -

Sub-Clause II talks about the Governance provisions relating to the Audit

Committee of the Company.

Sub-Clause II(A) deals with the qualifications and composition of the Audit

Committee. Sub-Clause II(A)(i) reads as:

“The audit committee shall have minimum three members. All the members

of audit committee shall be non-executive directors, with the majority of them

being independent.”

Annexure 1C of the Clause 49 deals with the non-mandatory provisions for a

company which includes provisions which are not necessarily to be followed by the

companies on whom the said Clause 49 applies.

Among such provisions, following are our concerns:

1. Chairman of the Board:

A non-executive Chairman should be entitled to maintain a Chairman’s office

at the company’s expense and also allowed reimbursement of expenses

incurred in performance of his duties.

2. Remuneration Committee:

(ii) To avoid conflicts of interest, the remuneration committee, which

would determine the remuneration packages of the executive

directors should comprise of at least three directors, all of whom

should be non-executive directors, the chairman of committee

being an independent director.

7. Mechanism for evaluating Non-Executive Board members:

The performance evaluation of non-executive directors should be done by a

peer group comprising the entire Board of Directors, excluding the director

being evaluated; and Peer Group evaluation should be the mechanism to

determine whether to extend/ continue the terms of appointment of non-

executive directors.

- 22 -

Does the Independent Director and the Non-Executive

Director mean the same?

On the very onset of this article, we had understood the term Non-Executive

Directors with the reference to the ‘Independent Directors’ as has been defined under

Clause 49 of the Listing Agreement.

And, quite a few times in this article we have also mixed up these two terms (NED &

ID) while referring to various ‘reports’ and ‘legal provisions’.

Does that mean we can interpret both the terms synonymously?

The Explanation (i) to the Sub-Clause I(A)(i) defines an Independent Director with

the starting words “the expression ‘independent director’ shall mean non-executive

director of the company who…”

This means that an Independent Director has necessarily to be an NED but an NED

may not necessarily be an Independent one. The ‘independence’ depends upon the

qualifications has have been provided in the Explanation.1

1 Explanation (i): For the purpose of this clause, the expression ‘independent director’ shall mean non-executive director of the company who:

a) apart from receiving director’s remuneration, does not have any material pecuniary relationships or transactions with the company, its promoters, its senior management or its holding company, its subsidiaries and associated companies;

b) is not related to promoters or management at the board level or at one level below the board;

c) has not been an executive of the company in the immediately preceding three financial years;

d) is not a partner or an executive of the statutory audit firm or the internal audit firm that is associated with the company, and has not been a partner or an executive of any such firm for the last three years. This will also apply to legal firm(s) and consulting firm(s) that have a material association with the entity.

e) is not a supplier, service provider or customer of the company. This should include lessor-lessee type relationships also; and

f) is not a substantial shareholder of the company, i.e. owning two percent or more of the block of voting shares.

- 23 -

The meaning of the ‘independence’ can be understood in the following way:-

Independence can be determined when the board determines that the director

is independent in character and judgment and there are no relationships or

circumstances which could affect or appear to affect the director's judgment. An

NED will not be independent in the following cases where he:

• is a former employee of the company or group - the NED will only be treated

as independent five years after the employment has ended;

• has a material business relationship with the company either directly, or as a

partner, shareholder, director or senior employee of a body that has such a

material relationship - the NED will also cease to be independent if he has

had such a relationship within the last three years;

• receives or has received additional remuneration from the company beyond

the director's fee;

• participates in the company's share option scheme or a performance-related

pay scheme;

• is a member of the company's pension scheme;

• has close family ties with any of the company's directors, senior employees or

advisors;

• holds cross-directorships or has significant links with other directors via

involvement in other companies or bodies;

• Has served on the board for more than 10 years; or represents a significant

shareholder.

All these factors have been clearly incorporated in the definition provided for the

‘Independent Director’.

If an NED does not fulfill any of the criteria as given he will not be an ‘Independent

Director’.

- 24 -

Can the Independent NEDs really direct the Company?

Barring a few exceptions, in India the appointment of independent or non-executive

directors has become a matter of mere legal compliance. Most of the companies still

function in the same old fashion and the non -executive directors has hardly any say

in the management of a company.

In most of the companies, hardly any relevant information is passed on to the

directors and the meetings of the Board discuss minor and routine matters.

The Board meetings are normally held once in three months and that too for 2 to 3

hours only.

It is obvious that promoters would prefer to appoint their cronies and faithful persons

on their board to have minimum interference of the outside directors.

The independent directors could effectively and substantively contribute if they are

empowered to meet at regularly convened executive sessions without participation of

management or employee directors so that they could openly and freely discuss the

affairs of the company.

The Cadbury Report has observed that 'every public company should be headed by

an effective board which can lead and control the business.'

The following propositions highlight the importance of independent and non-

executive directors on the board of a company:

1. The non -executive directors, when carefully chosen, can complement the

Board's overall strength with their knowledge of best practice outside the

company.

2. Their role should not be to do the job of the executive but to act as candid

counselors to guide the company in benchmarking standards and its level

of ambition.

3. This is a function not of numbers but caliber.

- 25 -

4. The non-executive directors must concentrate on a few companies rather

being involved with up to fifteen companies which the Companies1 act

permits.

5. Non-executive directors can bring a broader view to the company. They

bring external and wider perspective and independence to the decision

making.

6. To render effective services the NEDs should be allowed to seek

independent professional advice at the cost of the company.

7. The résumé of the NEDs should be made available to the shareholders

along with the proposal of their appointment or re-appointment.

8. NEDs should be given immunity from the responsibility for compliance

with procedural matters.

9. The remuneration of the NEDs should be commensurate with the time

they devote and experience they possess.

10. Non-Executive Directors who are not qualified professionals (e.g.

Chartered Accountants, Companies Secretaries etc.), should undergo

proper training before they assume directorships.

1 Companies Act, 1956

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Duties and responsibilities of Non-Executive Directors

A Director should first understand his relationship with the company and the

shareholders as this relationship is what shapes his roll and responsibilities vis-à-vis

the company and the shareholders.

Unfortunately, there is no statutory provision to define this relationship. It is the

judiciary which has over a period of time defined the relationship.

As early as in 1866, the Chancery Division1 held that a company though a legal

entity, cannot act by itself. It can act only through its directors and as such the

relation of a director with the company is that of principal and agent and therefore

general principles of law of agency would govern the relationship between the

company and the directors.

The relationship was further defined by Chancery Division in 18782 that directors,

having been entrusted with the affairs of the company, are trustees of the company

and therefore they are in a fiduciary relationship with the company.

These judicial pronouncements have been universally accepted and applied all over

and now the position of directors' vis-à-vis the company is that they are not only

agents but also trustees.

This relationship would mean that the directors should always act in the interest of

the principal that is the company and in discharge of their fiduciary responsibilities,

they cannot benefit at the cost of the company.

Executive and Non Executive Directors have the same responsibilities in law.

The role of a non executive director has a positive contribution to making and

ensuring that the board fulfils its main objectives. He can exercise an impartial

influence and bring to bear experience gained from other fields; executive directors

would therefore be well advised to consider the appointment of such directors to

serve alongside them.

1 In Ferguson vs Wilson 2 In Forest of Deal Coal Mining Company case

- 27 -

As such, NEDs are not required to give continuous attention to company affairs.

However, they should familiarize themselves with the company’s affairs including its

financial position and should attend meetings of the board whenever they are

reasonably able to do so.

Besides, where a director, whether executive or non executive, has a particular skill

for example he is a qualified accountant, he should exhibit the skill or ability

reasonably expected from a person in that profession.

There have been many discussions on Corporate Governance. In some

earlier discussions questions have been raised about the role of Independent NEDs in

maintaining appropriate standards of governance. In this context, a recent Australian

judgment indicates the nature of duties which a non-executive director may be

required to discharge.

The case1 involved a situation where the Australian market regulator, ASIC2, alleged

certain malpractices in the form of misinformation being given to the market

regulator by the board of the defendant company. ASIC alleged “that a

Draft ASX Announcement was approved at the 15 February 2001 Meeting of the JHIL board

of directors and that it contained a number of statements to the effect that the Foundation

would have sufficient funds to meet all legitimate Asbestos Claims, that it was fully funded and

provided certainty for people with legitimate Asbestos Claims. ASIC alleged that those

statements were false or misleading and that the directors were in breach of (their duties)…”

Among the many issues raised were those concerning the duty of care imposed on

executive and non-executive directors; as well as those pertaining to the extent to

which non-executive directors could rely while exercising their duties on the

information given to them from others.

1 Australian Securities and Investment Commission v. MacDonald 2 Australian Securities and Investment Commission

- 28 -

The Court noted at the outset that the position in relation to non-executive directors

was unclear. NEDs were undoubtedly subject to similar fiduciary duties as executive

directors such as the duty to act in good faith and for proper purposes, duties of no

conflict etc. Nonetheless, there was considerable uncertainty in determining how

these duties applied to NEDs.

Quoting from a leading Australian textbook, it was noted:

“For a Non-Executive Director case law has supplied no objective standard of the reasonably

competent company director analogous to the reasonably competent member of a particular

profession or trade, such as architect, solicitor, physician or builder, against whom the conduct

of a director can be measured when determining whether there has been a breach of the duty of

care, diligence and skill. Part of the reason is the absence of any shared body of detailed expert

knowledge of what is involved in the directing of companies. The diversity of companies and

varieties of business endeavour are such as to allow uniformity of standards only on very general

matters.”

The Court however went on to hold that all directors, including non-executive ones,

should have known that there was a possibility that the statements in the

Announcement were false and/or misleading.

Significantly, the Court decided that non-executive directors could not simply rely on

the information provided by the management or by the executive directors. “This was

a key statement in relation to a highly significant restructure of the James Hardie group.

Management having brought the matter to the board, none of them was entitled to abdicate

responsibility by delegating his or her duty to a fellow director.”

Thus, the Court seems to have imposed a duty of care on NEDs which cannot be

satisfied simply by relying on information provided to them by others. What exactly

is the content of this duty is a question not conclusively answered.

- 29 -

Nonetheless, the ASIC has described the decision as “a landmark decision in Australian

corporate governance”; and it appears that Non-Executive Directors will not be held to

have satisfied their duties by arguing that they relied in good faith on certain

information provided to them. Particularly when the information concerns an

important management decision, there appears to be a duty on non-executive

directors to confirm the veracity of the information independently.

In even more recent judgment the Inner House of the Court of Session of

Scotland has again commented on the role of non-executive directors.1

Commonwealth Oil’s case can be useful in clarifying the content of the duty – the Court

held that the contents of duty were the same, whether the director was an executive

director or not. Undoubtedly, the executive director may have specific executive

functions in specific areas of business which have been delegated to him to perform.

But this fact does not alter his status: “he is a director of the company as a whole, and his

duties to the company are to manage the general affairs of the company and are not confined to

the responsibilities arising from his executive function. A director's fiduciary duty of loyalty is

owed to the company as a whole; and the duty to avoid a conflict of interest must be related to

the interests of the company as a whole… the fact that he was a Non-Executive Director does

not mean that he did not owe to the company the same fiduciary duties as its executive directors

owed to it.”

1 In Commonwealth Oil and Gas Co. Ltd. v. Baxter and Eurasia

- 30 -

Can a Non-Executive Independent Director be allowed to

undertake assignments with the company on the basis of his

professional capabilities?

While in a discussion at an interactive session in the India Economic Summit 2002

organised by the Confederation of Indian Industry (CII) and World Economic

Forum (WEF) the two major issues were posed:

1. Can a non-executive independent director be allowed to undertake

assignments with the company on the basis of his professional capabilities?

2. Does such a practice conform to good corporate governance and behaviour?

The Indian Inc. seemed to be divided on these issues.

It was argued by Mr. Azim H. Premji, Chairman, Wipro Ltd that a company can

certainly use the services of a Non-Executive Director, especially if the person is

competent and perceived to be a "good resource" that an organization should tap.

"We were facing similar issues in our organization as we wanted to use the services

of some of key non-executive directors who knew the company very well. The

competence factor and knowledge of the company tilted our decision in favour of the

non-executive director instead of an outside consultant," Mr. Premji said.

He also pointed out that it was sometimes very difficult to get competent

independent directors.

The Chairman of Bajaj Auto Ltd, Mr. Rahul Bajaj, keeping the competence factor

notwithstanding, disagreed with Mr. Premji on the matter. He argued that using the

services of an independent director for assignments beyond the board would result in

"conflict of interest" situations.

- 31 -

"I would not have a business relationship with a non-executive director as it would

lead to a conflict of interest situation. Bajaj Auto has never used the services of a

non-executive director for activities outside the board," Mr. Bajaj said.

The Eicher group Chairman, Mr. S. Sandilya, had told Business Line1 that the

"conflict of interest" factor had discouraged them from having any business

relationship with a Non-Executive Director.

"In fact, we even have a cooling off period of two years before we decide to have

business relationship with employees who have left us. There is no question of using

the services of an independent director outside the board, however competent the

person may be," Mr. Sandilya said.

Mr. Shekhar Bajaj, Chairman and Managing Director, Bajaj Electricals Ltd, said that

"conflict of interest" was the main reason that prevented the company from using the

services of some "competent" non-executive directors.

"If one were to look at the Enron case, Arthur Andersen were the auditors and

consultants. Their independence as an auditor was compromised because of

consulting assignments. The same argument can apply to directors also," Mr.

Shekhar Bajaj told Business Line.

1 Business Line or The Hindu Business Line is an Indian business newspaper published by Kasturi & Sons, the publishers of the newspaper ‘The Hindu’.

- 32 -

How much do NEDs cost to a Company?

Now, we all know that Non-Executive Directors bring knowledge, expertise,

understanding, experience and new contacts and resources to the table when they are

recruited to work for your firm. None of these things could ever even begin to be

viewed as a flaw or a failure, as they are characteristics that will continue to be

valuable to companies throughout the years.

And, since there is such a vast difference in the usefulness and duties for a non-

executive director in a large corporation setting, and hiring one for a small or start up

business, it is important to determine exactly what recruiting a non-executive director

will actually mean for your company. Will your NED be your advisor, or would you

prefer that they do most of the work on their own? Will you work closely with them,

or is the NED a position that you cannot see yourself working with? Once you have

determined what kind of relationship you want to have with a Non-Executive

Director, you can hire one who will blow you away, and your business will see a

great increase not only in organization, but also in communication and possibly even

strategy for profit.

There are many legal responsibilities and legal liabilities that absolutely must be

taken into consideration, and it is because of these that an NED will typically expect

a reasonable fee in return for their services.

The cost is still typically much lower than what you would experience by hiring a

normal consultant or even an interim director. NEDs are also much more cost

effective because these directors tend to attempt forming long-term relationships with

the owners of the company and the organization itself, which means that once you

have found a NED that works well with the needs of your company, they may stick

around for a good long time, continuing to be useful, helpful and extremely

necessary over time.

- 33 -

To talk about the actual remuneration, this is negotiable and there are quite a few

permutations available. Some are paid by the day, some may have bought or been

given shares in the business that attract dividends and some may have an annual

retainer. The amount will vary depending on whether you are a large public limited

company or a start-up.

Legally, the remuneration payable to non-executive directors is governed by sub-

section 4 of Section 3091, which permits different modes of payment to such

categories of directors. Briefly, remuneration to such director other than managerial

personnel is limited to 1 per cent of net profit of the company where there is a

manager or a whole-time director or 3 per cent of net profit of the company where

there is no such managerial personnel.

For many NEDs it isn't just about earning money, however, these are people who

have made their mark already and may be looking to encourage and help aspiring

young businesses to achieve. They may be happy with just a small monthly retainer,

or welcome the ability to purchase or earn shares in an exciting opportunity.

1 309. Remuneration of directors.

(4) A director who is neither in the whole- time employment of the company nor a managing director may

be paid remuneration either:

(a) by way of a monthly, quarterly or annual payment with the approval of the Central

Government; or

(b) by way of commission if the company by special resolution authorizes such payment:

Provided that the remuneration paid to such director, or where there is more than one such director, to

all of them together, shall not exceed

(i) one per cent. of the net profits of the company, if the company has a managing or whole- time

director, a managing agent or secretaries and treasurers or a manager;

(ii) three per cent. of the net profits of the company, in any other case:

Provided, further, that the company in general meeting may, with the approval of the Central

Government, authorize the payment of such remuneration at a rate exceeding one per cent or, as the

case may be, three per cent of its net profits.

- 34 -

Is the position of a Non-Executive Director all about the

‘Perks’?

KESHUB MAHINDRA.

This one name we all should and need to remember. For over five decades, Keshub

Mahindra has enabled Mahindra (the Mahindra Group) and its people to rise. He

joined Mahindra & Mahindra in 1947 and became Chairman in 1963. He continues

to be involved with the day-to-day activities of the company today and has literally

been the backbone of the company.

Mr. Keshub is a philanthropist who redefined corporate governance by effectively

channeling funds into the social sector. From building ethical corporate

organizations in India to serving on prestigious boards and committees, Keshub’s

immense contribution to Indian business has established him as an inspirational

business leader and an iconic corporate citizen.

At a dinner in one of South Mumbai's luxury hotels, some time back, everyone

around the table was full of sympathy for Keshub Mahindra.

Those present, well-known figures from the corporate, financial and legal worlds

trotted out a series of arguments: He is in his 80s, and has been such a fine business

figure. He has stood for principle all his life, and turned down a Padma Bhushan

because Bhopal hung over his head.

He was only the Non-Executive Chairman of Union Carbide India; all he got was Rs

250/- as sitting fees; how did he know all the technical stuff about risks and safety

issues? You know what it was like in those days, an international company wanted a

respected local figure to be chairman, and Mr Mahindra was just obliging Carbide... .

There is a counter-view, of course. What was he doing as chairman of the board, if

he didn't know what was going on in the company? Surely, safety is a vital issue in a

chemical plant, and the safety warnings about the Bhopal plant must have reached

- 35 -

the board; if not, the board was clearly negligent about its responsibility to

shareholders as well as to staff and the general public.

And if the warnings had reached the board, which then did nothing, surely that was

something worse than negligence.

To be sure, an NED does not have the direct responsibility that an executive director

has (a distinction that exists when it comes to bounced cheques), but does he have no

responsibility at all?

Mr. Deepak Parekh1, stated that no one will want to be a Non-Executive Director if

he is going to be held responsible for design flaws in a plant, and that he himself was

under pressure from his family to get off various boards, if the price could be going to

jail.

It is also obvious that Mr. Mahindra's real mistake was to accompany Warren

Anderson to Bhopal, where both were arrested. No other Non-Executive Director of

the Indian company has been touched, and Mr. Mahindra too would have been

untouched if he had not decided to visit the site of the disaster.

These arguments have merits and, of course, the Indian corporate world needs more

people like Mr. Mahindra, not less.

It is also true that NEDs are mandatory in listed companies and that it is actually

quite hard to find suitable candidates for board seats -- state-owned companies like

the SAIL2 are unable to do a public issue because they don't have the required

number of NEDs!

Still, the position of director is more than the sinecure3 that all too many retired

executives seek out because of the sitting fees and profit share, sumptuous lunch and

1 Deepak Parekh is the Chairman of Housing Development Finance Corporation, India's leading

housing finance company. 2 Steel Authority of India Limited 3 A sinecure means an office that requires or involves little or no responsibility, labour, or active service.

- 36 -

car and luxury hotel room, not to mention the opportunity to feel important and rub

shoulders with decision-makers.

The position comes with responsibility, especially in matters of safety. But that is the

formal position; the reality, as in the Satyam case, is that most non-executive

directors (including illustrious names) are rubber-stamps.

The irony is that committee after committee charged with recommending corporate

governance norms has placed its faith in the appointment of non-executive directors.

Look around at the corporate sector and this becomes obvious. Non-executive

directors have little to do with it, because all that your garden variety non-executive

directors want to do is have their lunch and eat it too.

- 37 -

Latest in News

Dr. JAMSHED J. IRANI.

This is another name to remember in our profession.

Dr. Jamshed J Irani is a renowned personality in the Iron and Steel Industry. He is a

Director on the Board of Tata Steel. Dr. Irani was the National President of the

Confederation of Indian Industry (CII) for 1992-93. Dr. Irani is a member of the

Scientific Advisory Committee to the Cabinet (SAC-C) Government of India. He

was Chairman of the Expert Committee set up by the Government to draft the new

Companies Act.

Besides, he was a Non-Executive Chairman of Everonn Education Limited from

which post he recently resigned.

Everonn has been a leading presence in the Indian education industry for over two

decades and is listed on both the BSE and NSE.

Dr Jamshed J. Irani has resigned as the Non-Executive Chairman of Everonn

Education Ltd. following the arrest of the company's CEO, Mr P. Kishore, on

Tuesday by the Central Bureau of Investigation for allegedly bribing an Income-Tax

officer.

Dr Irani, former Managing Director of Tata Steel Ltd, was appointed additional

director and non-executive Chairman of Everonn on December 9, 2010.

- 38 -

KUMAR MANGALAM BIRLA

Kumar Mangalam Birla is the person behind the framing of the Clause 49 of the

Listing Agreement as it exists today. It was in his Chairmanship that the SEBI had

constituted a Committee to promote and raise the standards of Corporate

Governance. The report of this Committee was the first formal and comprehensive

attempt to evolve a Code of Corporate Governance.

Mr. Kumar Mangalam Birla is the Chairman of the US$ 35 billion Aditya Birla

Group, a global conglomerate with operations spanning 33 countries. An iconic

figure, Mr. Birla holds several key positions on various regulatory and professional

boards. He is a Director of the Central Board of Directors of the Reserve Bank of

India and Chairman of the Staff Sub-Committee of the Central Board of the Reserve

Bank of India. He serves on the Prime Minister of India's Advisory Council on Trade

and Industry.

He was the Chairman of the Board of Trade constituted by the Ministry of

Commerce & Industry, and also Chairman of the Ministry of Company Affairs'

Advisory Committee.

He served as the Chairman of Securities and Exchange Board of India's (SEBI)

Committee on Corporate Governance, and as Chairman of SEBI's Committee on

Insider Trading. He has authored the nation's First Report on Corporate

Governance.

Mr. Birla is on the National Council of the Confederation of Indian Industry (CII),

the Apex Advisory Council of the Associated Chambers of Commerce and Industry

of India, New Delhi, and the Advisory Council for the Centre for Corporate

Governance.

- 39 -

RATAN NAVAL TATA

We have so far seen two great names as Non-Executive Directors-

- Keshub Mahindra

- Jamshed J. Irani

The third name we can observe is that of another Steel giant, the Chairman of the

major companies of the Tata Group.

He holds the Chairmanship as a Non-Executive Director (though, not Independent)

in Tata Steel and Tata Motors.

Mr. Ratan N. Tata is presently the Chairman of Tata Sons, the holding company of

the Tata Group and also Chairman of the major Tata companies including Tata

Steel. It is under his leadership that the Company has scaled new heights and

established a presence as one of the leading steel conglomerates in the world.

Mr. Tata was appointed as the Chairman of the Board of Directors of the Company

in April 1993. Mr. Tata was named Chairman of Tata Industries Limited in 1981. In

1991, Mr. Tata was appointed Chairman of Tata Sons, the principal shareholder of

the Company in 1991. He is also currently the Chairman of several other Tata Group

companies, including Tata Motors, Tata Power, Tata Tea, Tata Chemicals and

Indian Hotels.

Mr. Tata is associated with various organizations in India and abroad. The

Government of India honoured Mr. Tata with its second highest civilian award, the

Padma Vibhushan, in 2008. Earlier, in 2000, he had been awarded the Padma

Bhushan.

Mr. Ratan Tata is on the Board of a number of prestigious companies and

Government bodies and holds many other esteemed positions as well.

- 40 -

SUNIL BHARTI MITTAL

Sunil Bharti Mittal is an Indian telecom mogul, philanthropist and the

founder, chairman and Group CEO of Bharti Enterprises.

The US$8.3 billion turnover company runs India's largest GSM-based mobile

phone service and world's fifth largest wireless company with over 190 million

customers across 19 countries in Asia and Africa. He also serves as a Non-Executive

Director on the board of the Unilever Limited

In 2007, he was awarded the Padma Bhushan, India's third highest civilian honor.

He started his first business at the age of 18, working in several industries before

gaining experience in the telecoms sector. He was therefore well positioned to take a

pioneering role when the mobile phone industry reached India and the first network

licenses were auctioned.

Today Bharti Enterprises – which he founded and where he serves as chairman and

Group CEO – is one of India’s leading business groups, with interests not only in

telecoms but also in retail, financial services, real estate and agri-products. Bharti has

joint ventures with several global leaders: Singtel, Wal-Mart and Del Monte.

He is a member of the Prime Minister’s Council on Trade & Industry and serves on

its sub-committee on promoting financial inclusion. In 2007–08, he served as

president of the Confederation of Indian Industry.

A number of his public appointments are in the telecoms industry. He is on the

Telecom Board of the International Telecommunication Union (the UN agency for

ICT), where he is also a commissioner of the Broadband Commission.

Sunil has a strong sense of corporate responsibility and, in 2000, set up the Bharti

Foundation, which provides education to over 30,000 under-privileged children in

rural India through a far-reaching schools programme.

- 41 -

K.V. Kamath

Kundapur Vaman Kamath is the Non-Executive Chairman of the Board of Directors

of Infosys Limited and ICICI Bank.

He has a degree in mechanical engineering and did his management studies at the

Indian Institute of Management, Ahmedabad.

Kamath started his career in 1971 at ICICI, an Indian financial institution that

founded ICICI Bank and merged with it in 2002. In 1988, he moved to the Asian

Development Bank and spent several years in South-East Asia before returning to

ICICI as its Managing Director and CEO in 1996. Under his leadership, the ICICI

Group transformed itself into a diversified, technology-driven financial services

group that has leadership positions across banking, insurance and asset management

in India, and an international presence. He retired as the Managing Director and

CEO in April 2009, and took up his present position as the Non-Executive

Chairman.

Kamath joined the Board of Infosys in May 2009 and took over as Chairman of the

Board in August 2011.

Kamath was conferred with the Padma Bhushan, one of India’s highest civilian

honors, in 2008. He has received widespread recognition internationally and in

India, including being named “Businessman of the Year” by Forbes Asia and

“Business Leader of the Year” by The Economic Times, India in 2007 and CNBC’s

“Asian Business Leader of the Year” in 2001.

Kamath was the President of the Confederation of Indian Industry from 2008 to

2009. He is also an Independent Director on the Board of Directors of Schlumberger

Limited. He has been a co-chair of the World Economic Forum's Annual Meeting in

Davos and is a member of the Board of the Institute of International Finance.