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In every Company, Board of Directors plays a crucial role in the governance of companies. Board of Directors manages the affairs of the company in such a way that the company operates in the best of interest of the shareholders and stakeholders. Companies see the board of directors’ independence as the cornerstone of accountability. The presence of Independent Directors in the Board room dissuades the ineffective use of resources, fraud, and inequality and the unaccounted ability of decisions, mismanagement. Independent Directors are often seen as the link to maintain the relations between the stakeholders of the company.
The legislature of India identified the irregularities inside the organizations and corporations, which led to the insertion of provisions of the appointment of Independent Directors in the organization. Most of the scams, failures, and fiascos of businesses and companies are caused by the lack of presence of Independent Directors.
Independent directors of a company or an organization basically-
In general, as per the Companies Act, 2013 there have to be a minimum one-third independent director in the public listed company and a minimum of two directors in the unlisted public company. By bringing in the independent directors companies need to make sure that-
With these purposes, independent directors of the company have the authority to take certain actions. Let’s see what are the list of actions, an ID (Independent Director) can take.
If there is an Independent director in a company or an organization, following are the actions that these Independent Directors can take-
We need Independent Directors to avoid fiascos and failures, but there are other reasons as well for appointing these IDs. Below are the reasons, why do we need IDs in the organization in India?
There is already an IL & FS fiasco, one of the examples where failure in corporate governance led to the collapse. Thus, it is really important to craft an effective method for the implementation of the appointment of Independent Directors.
In India, most of the big companies are familial and the majority of the part is controlled by the promoters. If we look at the example, in Wipro 76% part of the company is controlled by the promoters.
The appointment of independent Directors is not in sync with the functioning of the company. It needs a lot of efforts to improve the appointment process and structure of IDs.
We will discuss a few of the points, which can bring improvement in the appointment process of IDs.
To improve the condition of Independent Directors in relation to their appointment, an impartial solution as a confirmation of an independent director must be taken from the non-controlling shareholders.
Appointing the number of IDs for a company will be very beneficial for every organization.
Following are the benefits of appointing the number of Independent Directors in a company-
But still, there is a room for improvement in the appointment and removal of these Independent Directors.
According to our experts, if we could follow the below points, we can improve the role of independent directors-
Despite all of this, there have to be more things in the favor of Independent Directors for the better governance and working of a company.
Currently, Independent Directors are not the interest holders of the company; they have nothing to lose in becoming an ID of the company.
Even after the corporate failures such as IL&FS, Satyam, and Cyrus Mistry; Indian legislature has not done enough to acknowledge the problems faced in the role of Independent Directors. There is still a lack of clarity in their roles and Independent Directors must have the precision for that position. If proper roles defined these IDs, it would result in much better corporate governance.
For more information, please contact Enterslice.
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