Understanding the nature of board independence: A survey

Abstract

Corporate Governance has emerged as a confidence building measure adapted by various companies as a result of prescription by the regulatory authorities across the world. Independent Directors play a pivotal role in the implementation of the governance function. Board of Directors plays a monitoring role and foster discipline in top management. It participates in policy making and some managerial functions as a fulfilment of their duties and obligations. Individual board members provide advice and guidance to the senior executives with respect to the operational and policy decisions. Most importantly, the board acts as a channel providing access to a number of influential contacts that would generate new business or provide access to required resources. In order to ensure effective board functioning there needs to be a certain percentage of the board that is independent of the management of the company. This would ensure that there is no bias and the decisions undertaken by the board are aligned with shareholder interests and not their personal motives. The role of Independent Directors has been under the scanner post the financial crisis and the occurrence of large corporate frauds in India and across the world. This is primarily due to the regulatory lacunae and the variable remuneration policies adapted by the firms. The present study deals with the issues emergence of the role of Independent Directors like the agency costs prevailing in the system. The question of relevance of compensation as an incentive to motivate Independent Directors has been addressed. The tunneling of the groups through board compensation has been put in the context of Independent Directors. Independence as a concept is very vague and ambiguous. The defining criteria are different across regions and regulations. The criteria set by the SEBI in India and the CALPERS in the US have been discussed. Further, analysis of the characteristics of the Independent Directors of some of the companies listed on the NIFTY Index has been undertaken. This is aimed at understanding the nature of the Independent Directors in terms of their age, educational background, attendance in the meetings, proportion in the total board size and the number of interlocks prevailing in the structure.