What are the responsibility of an Independent Director in a Company?

 

Introduction

Independent director refers to a director who is not connected or related to the company in anyway and acts only to protect the interest of the members who cannot look after their interests themselves. One of his main responsibilities is to improve corporate governance and their standards. In this blog, we will discuss the responsibilities and duties of an independent director but first, we will know who is a director as per the Companies Act, 2013.

Who is a director?

Section 2 (13) of the Companies Act, 1956 defines a director as “any person by whatever name exercising the office of a director”. Articles of Association cover their appointment, duties, retirement rights and remuneration. In other words, a director is a person who represents a company and he or she supervises, directs and controls the business and its employees.

Who is an Independent Director?

He is a non-executive director whose decision does not affect the company’s relationship with any people. An independent director as per the Companies Act, 2013 is a director who is not a managing director, a full-time director or a nominee director and who satisfies the criteria listed below:

A person can become an independent director-

• who, in the opinion of the Board, is a person of integrity and has relevant skills and experience;
• who is or was not a promoter of the company or its holding, Indian subsidiary or associate company;
• who is not related to the promoters or directors in the company, its holding, subsidiary or associate company.

What is the responsibility of an Independent Director in a Company?

He can serve as a mentor, coach and consultant for the company. Responsibility includes enhancing business credibility and governance standards by acting as a watchdog and helping in risk management. He should actively participate in various committees of the company which are formed to provide better administration. The responsibilities of an Independent Director are as follows:

• He should help in providing an unbiased view of board discussions, especially when it comes to decisions such as strategy, operations, risk management, resources, key appointments and code of ethics.
• His responsibility is to evaluate the performance of the Board and Management from an unbiased perspective.
• He has to check the performance of the management by reviewing the goals agreed in the meeting and monitoring the reporting of the performance.
• It is their responsibility to handle pressure from owners.
• He has to protect the interests of all the shareholders involved, especially the minority shareholders.
• He has to strike a balance when there is a conflict of interest between the shareholders.
• One of the main responsibilities of an independent director is to determine appropriate remuneration for executive directors, key managerial personnel and senior management.
• It is his responsibility to appoint and remove the executive directors, key managerial personnel and senior management.
• When the interests of management and shareholders conflict, the sole responsibility of the independent director is to mediate and arbitrate the situation in the best interest of the company.

What are the duties of an independent director in a company?

The duties of an Independent Director are as follows.

• He shall provide a proper explanation for material purchased under the company name and, if necessary, seek and follow professional advice and opinion.
• He has to attend all the meetings of the Board of Directors and the meetings of the Board Committee.
• An independent director has a duty not to disclose any confidential information such as trade secrets, technology, advertising strategies, sales promotion plans or any sensitive information unless it is approved by the board of directors or any law.

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Summary

From the above discussion, we can conclude that appointment of independent director is essential in any company. Because it is responsible for safeguarding, protecting and guaranteeing the interest of the shareholders or members of the company. If such a director is appointed by the board from within the company, there are chances of biased decisions or martial opinions as such director will have pecuniary interest and other kinds of interest in the company. A person appointed from outside the company will have an unbiased opinion and help the company improve corporate credibility and governance standards.