• UGI USER
  • Sep 05, 2023
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Q. The edifice of good corporate governance is dependent on the efficacy and effectiveness of independent directors. Discuss.

Approach:

  • Introduce by highlighting the meaning of good corporate governance.
  • Explain the role of efficacy and effectiveness of independent directors in achieving good corporate governance.
  • Mention the challenges faced in this regard.
  • Conclude accordingly by giving a way forward.

 Answer:

  • Corporate governance is the system of rules, practices, and processes by which a firm is directed and controlled. Good corporate governance is a step further and it means that the processes of disclosure and transparency are followed so as to provide regulators and shareholders as well as the general public with precise and accurate information about the financial, operational and other aspects of the company.

It has been understood that the role of efficacy and effectiveness of independent directors is a prerequisite for achieving good corporate governance, as:

  • They are considered as mentors of management and are responsible for adequacy and effectiveness of internal control and risk management systems.
  • They protect the interest of minority shareholders, and should act as a watchdog in identifying improvement areas.
  • Independence allows a director to be objective and evaluate performance and well-being of the company without any conflict of interest or undue influence of interested parties.
  • A Board with a majority of Independent Directors can bring expertise and objectivity which assures owners that the company is being run legally, ethically, and effectively in the best interests of its shareholders.
  • Independent directors enable other important stakeholders to feel that they have support in raising contrary points of view.
  • Otherwise, it may be difficult for a single independent director to raise an issue that may be sensitive to shareholders.
  • Independent directors are expected to be independent from the management and act as trustees of shareholders.
  • This implies that they are obligated to be fully aware of and question the conduct of organizations on relevant issues.
  • The presence of independent directors in the board improves the quality of its deliberations, thereby ensuring good governance practices in the company.

Way Forward

Basically, the whole edifice of good corporate governance is dependent on the efficacy and effectiveness of independent directors. Though the Code for Independent Directors specified in Companies Act, 2013 underlines the role, functions and duties of Independent Directors, concerns are being raised over their real independence and effectively discharging their duties, role and responsibilities especially after instances like Satyam Computers scam etc.