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Independent DirectorsLecture 11
By : Kanchan Damithendra
Concept of Independent Director
Independent director means a director who is notconnected or associated with the company in anymanner and works only to safeguard the interest ofmembers who individually cannot look after theirinterest.
Who is
Independent Director???
Independent Director
Absence of Pecuniary
Relationship
Absence of Material Relationship
One who has Independency of Judgment
Independent Director
Interdependent DirectorVs.
Code of Best practice on Corporate Governance• Issued jointly by The Securities and Exchange Commission of Sri Lanka
& The Institute of Chartered Accountants of Sri Lanka
(Year 2008 )
It is preferable for the Board to have a balance of Executive and Non-Executive
Directors such that no individual or small group of individuals can dominate the
Board’s decision-taking.
A.5.1
The Board should include Non-Executive Directors of sufficient calibre and
number for their views to carry significant weight in the Board’s decisions. The
Board should include at least two Non-Executive Directors or such number of Non-
Executive Directors equivalent to one third of total number of directors, which ever
is higher. In the event the Chairman and CEO is the same person, Non-Executive
Directors should comprise a majority of the Board
A.5.3
For a Director to be deemed ‘independent’ such Director should be independent of
management and free of any business or other relationship that could materially
interfere with or could reasonably be perceived to materially interfere with the
exercise of their unfettered and independent judgment
BOARD BALANCEPrinciple A.5
Conditions
A Director would not be independent if he/she:
• has been employed by the Company during the period of two years immediately preceding appointment
as
director;
•currently has/had during the period of two years immediately preceding appointment as director, a
Material Business Relationship with the Company, whether directly or indirectly has a close family
member who is a director, chief executive officer (and/or an equivalent position) in the Company;
• has a Significant Shareholding in the Company;
•has served on the Board of the Company continuously for a period exceeding nine years from the date of
the first appointment;…………………
DEFINITIONS RELATING TO INDEPENDENCE CRITERIA
Close Family Member
- shall mean and include the director’s spouse, parents, grandparents, children, brothers, sisters, grandchildren
and any person who is financially dependent on such director.
Financially Dependent Individuals
- include any person who received more than half of their support for the most recent fiscal year from a
director and/or his or her spouse.
Material Business Relationship
- includes any relationship that results in income/non-cash benefits equivalent to 10% of the director’s annual
income.
Business Connection
- shall mean a relationship resulting in transaction value equivalent to 10% of the turnover of that company or
business.
Significant Shareholdings
- can be defined as a shareholding carrying not less than 10% of the voting rights of a company.
Position of Independent Director
Executive Director
Owner DirectorIndependent
Director
Board of Directors
Interest of Company
Interest of Shareholder
Interest of Stakeholders
Balancing of Interests
Primary Duty
Enhanced Responsibility
Independency of Director
Concept & Reality
Concept
• Legal• Disinterested director• Unbiased decisions• Balancing of conflicting interests• Protection of shareholders’ interests• Protection of stakeholders’ interests • Protection of whistleblower’s interests
• Managerial • Bring expertise in the Board composition• Infusion of new ideas• Develop a system in the Board Culture
Reality – Appointment of Independent Director
Compliance in Spirit Compliance in Letter
Knowledge about the Company’s business
Precedence to knowledge over names
Capability to dissent
Not concerned with the Company’s business
Precedence to name over knowledge
Yes- Man
Reality – Working of Independent Director
Compliance in Spirit Compliance in Letter
Provides independent assessment of business decisions.
Provides expert comments on the subject
Acts as per the whims of management.
Silent observer at the Board meetings.
Compliance in Spirit Compliance in Letter
Informed decisions
Ensures unbiased decisions
Decision on selective information.
Independent status takes a backseat.
Reality – Working of Independent Director
Independent Director
Critical Issues
Insufficient knowledge regarding the business
Reliance on Executive Director/CEO for information
Selective information sharing
Lack of understanding
Informed Decisions – Not possible
No legal requirement for qualification of Independent
Director except for the member of Audit Committee
who shall be financial expert.
Quality & ingredients are subjective phenomenon.
No independent appointment.
Capability & Capacity
Major Shareholders
Executive Directors
Independent Director
In 60% companies, Board consists of shareholders holding more than 50% stake.
Unbalanced Risk & Reward Equation
≠
Compensation
Too less will deter experts from undertaking responsibility
Too high will loose independence .
Independent Director
Rights & Duties
Rights & Authorities
• Right to attend and vote in every Board Meeting.
• Right to be appointed on various committees.
• Right to demand information on every business
matter.
• Right to seek clarifications/justifications
• Right to dissent.
Duties & Responsibilities
Primary Duties Enhanced Responsibilities• Act in the best interests of the company
• Safeguard the interests of the stakeholders
• Attend Board Meetings and participate in
decisions
• Avoid conflict situations
• Not seek personal gains
• Maintain confidentiality
• Fiduciary duty
• Discharge duties required in specific
committees of the Board
● To compel directors to act in
accordance with the strict terms of
their mandate
● To compel them to exercise care and
skill in carrying out their various
functions
● To compel them to use their wide
discretionary powers in good faith and
proper purpose, &
● Finally, to compel them to act loyally
in advancing the interest of their
company.
Independent Director
Corporate Issues & Regulator perspective
Corporate Issues
• Preference of Stakeholders’ interest above the interest of Company.
• Forces disclosure of confidential information.
• Interferes in Management Decisions.
• Acts as Bloodhound dog
Regulator Perspective
• Independence director has primary duty towards the Company and
enhanced responsibility towards stakeholders.
• Reduce conflict of interests of management.
• Ensures protection of wider interest of Company and stakeholders.
• Ensures transparency of information.
• Provides independent Assessment while evaluating business decisions
as an independent Business Advisor.
• Acts as a watchdog.
THANK YOU!