Relevance of Independence in Corporate Governance - Role of Independent Directors

Published by MBA Skool Team, Published on March 05, 2015

I would like to start by throwing light on the word independence and its importance in corporate governance. The word “Independence” in the Vedic language showers an opportunity provided to an individual or a group to stand up for his/her rights and put forth any kind of pondering points without the fear of resistance. Independence is a very subjective and relative term used in any scenario and talking specifically about corporate governance it forms the backbone of the extravaganza highlighting the actual functioning of the company. People quote always that a law made with certain regulations will play a major impact on the working discipline of any firm, but I say everything goes for a toss if willingness to interpret things in a well versed manner is not present. The same thing applies to corporate governance in every minute way.

Corporate Governance is a kingdom of ethical and moral practices which is present within every company which allows it’s so called soldiers/the game changers/key deciders to play the rules by the book or tweak it as and when required to achieve certain motives. Any law can be manipulated by any person/firm till the factor of independence is not infused into it at every step. Independence and authority to inculcate the right values and imparting necessary actions at stipulated times are the whole agenda behind having such a leap in corporate governance.

Nowadays, the world is changing rapidly with the mantra of success and sustenance also being given a new shape. The days have gone when a new innovation, proper service providers or any out of the box thinking alone can be the surviving energy for a firm. Corporate governance practice and doing the things rights keeping the shareholders and the people involved with the firm has caught up the ladder with leading points on evaluation of any company. This can never be achieved if just rules are present in the books to be followed and implementation of it is twisted as per the needs. Thus , independence to the board , shareholders and associated part of the firm to raise queries and questions at needed times should be welcomed and entertained on a larger scale with at most transparency and virility. Also, the word independence should be allowed on a real basis without making it up like building a “car with no wheels”. The board of directors selected by the firm and the vibrant committees looking into various aspects of the company life must be given undue authority to be up front in putting forth their points and necessary actions to be taken on the prove of the same.

Talking about the key decision makers which is the board of directors, mainly comprises of a mix of senior officials; some from the organization and some not belonging to the same. Our primary focus will be on the independent directors who form a very vibrant and effective part of such a board. These people are recruited from various disciplines having a very clear mindset to suggest views of important decisions to be taken and be unbiased in their opinion as they are not much affiliated with the firm. A very heated debate in recent times is that these officials must not be anyway related to the firm, be it related party or previous employee etc. just to have a neutral person rolling the dice.

The role of these independent directors is to understand the intricacies of the firm and provide unbiased inputs on key decisions.

Even though all these parameters are met to an extent but I feel the independence provided to them is not justified. As they are new to the existing ball game of the firm, the old tricks and tactics have a upper edge on their views. Inner politics, inclinations at all levels play a key card to disrupt and bind any voice heard. This all happens due to the lack in the independence provided on their part and restriction or so called hurdles in them taking a particular stand in their point.”Men may come and men may go, but I go on forever” is a famous proverb which suits well with the independence of these directors and ads to the victory laugh of the monopoly of other directors. I feel this issue is really piling up and leading to the debacle of many companies due to the financial frauds which could have been prevented if the voice of these people was taken into consideration and their transparency level was on similar grounds to other board members.

It is very easy to pin point errors on the part of the lawmaker and the firm to curb these rights. I agree to a large extent that different countries have different corporate governance practices and imbibing a universal strata on them is not viable. But looking back at history if one scrutinizes he/she come up with the fact that role of independent directors and their submissive attitudes and say “yes” nature couples with restricted independence and transparency to them has been a major part in the financial downfalls of say the Saytam scandal, Walmart Crisis, Worldcom debacle and supports very well the saying nothing is “Too Big to Fail” if not poked at times.

So, to conclude I would like to embrace my readers by saying that independence in its true sense can make a huge difference in the outcome expected, especially if the working of the independent directors who are the god fathers of any firm is polished accordingly with proper set of guidelines followed and mentored , this world is going to be a happy place to live life on.

This article has been authored by Vijay Shankar from SIBM Bengaluru






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