Independent directors: A boon or bane for corporate governance

The role of independent directors under Section 149 of the Companies Act, 2013, positions them as key players in corporate governance. While regulatory frameworks empower them to uphold accountability and stakeholder interests, they also face heightened risks, liabilities, and scrutiny. This raises a critical question: Are independent directors truly catalysts for ethical governance, or do systemic flaws render them ineffective figureheads?

The critical role of independent directors

Independent directors are tasked with evaluating board performance, highlighting risks, and ensuring transparency in operations. They act as watchdogs, scrutinizing irregularities such as undisclosed stakes, related-party transactions, and governance lapses. Their mandate is to align board decisions with the best interests of stakeholders while fostering ethical practices.

Beyond oversight, independent directors bring specialized expertise to strategic planning, policy formulation, and organizational growth. Their external perspective can challenge insular decision-making, offering innovative solutions and balancing the influence of majority stakeholders. Ideally, they are partners in progress—not mere compliance enforcers.

Systemic challenges in appointment and functioning

Statistics reveal a stark gap between theory and practice. Many independent directors are appointed through internal promotions or passive selections to meet regulatory quotas, rather than merit-based hiring from the Ministry of Corporate Affairs’ (MCA) certified data bank. This cronyism undermines their independence and effectiveness in both public and private sectors.

Boards often reduce independent directors to symbolic roles, sidelining their input in critical decisions. A Times Ascent article highlights how many lack the authority to evaluate or execute their duties meaningfully. When scandals emerge, these directors—treated as “silent partners”—often face disproportionate blame, prompting them to resign at the first sign of trouble.

Risks and liabilities in crisis scenarios

Historically, corporate scams (e.g., Satyam, IL&FS) reveal a pattern: independent directors are among the first scrutinized, despite limited involvement in day-to-day operations. While fraud typically involves collusion among multiple stakeholders, independent directors bear legal and reputational risks due to their fiduciary obligations. This imbalance discourages qualified professionals from taking up these roles.

Case studies: Scandals and the fallout

In cases like the PNB fraud or the Nirav Modi scam, independent directors faced severe backlash despite systemic governance failures. Such incidents underscore the need for clearer liability frameworks and protections to prevent scapegoating.

Reforming the system: Pathways to effective governance

To eliminate bias, appointments should involve independent panels or external agencies, prioritizing merit and expertise from the MCA’s data bank. Mandating term limits and diversity criteria (e.g., gender, professional background) can further strengthen objectivity.

Independent directors need safeguards akin to whistleblower laws to shield them from retaliation when exposing misconduct. Legal reforms should distinguish between genuine oversight failures and deliberate malpractice.

Boards must integrate independent directors into core strategic discussions—from mergers to sustainability goals. Training programs and regular performance reviews can enhance their engagement and impact.

Realising the potential of independent directors

Independent directors can be a boon to corporate governance—if systemic flaws are addressed. By ensuring transparent appointments, empowering their roles, and providing legal safeguards, regulators and organizations can transform them from token figures into proactive guardians of ethical growth. The choice lies in reforming the ecosystem to let their expertise shine, rather than stifling it with outdated practices.

Authored by Ms. Anita Ananthan, Chief Financial Officer – Legal & Compliances at Credence Analytics, a micro-certified MSME software company. Ms. Ananthan is a Certified Independent Director and a distinguished alumna of the London School of Economics (LSE). She is also the founder of ‘Club of Hope’, an NGO dedicated to supporting children and the elderly.

Disclaimer: The views expressed here are personal. The author can be reached at anitakumar@credenceanalytics.com