Academic journal article IUP Journal of Corporate Governance

Independent Directors in India and USA: A Comparative Study of Provisions

Academic journal article IUP Journal of Corporate Governance

Independent Directors in India and USA: A Comparative Study of Provisions

Article excerpt


An independent director is a non-executive director of a board of directors who does not have a material or pecuniary relationship with company or related persons, except sitting fees. The concept of such a director emerged as an important remedy to various ills of corporate frauds and acts of mismanagement. "They are perceived to be powerful instruments of corporate governance and can bring objectivity and independent judgment in decision making" (Kishore, 2017). The Cadbury Committee in UK and many others in different jurisdictions had advocated appointment of independent director to promote better corporate governance and boost shareholders' confidence. Most of the countries have adopted the concept of independent director in their law or regulations dealing with corporate governance. Provisions on independent directors have also been included in various stock exchanges' listing documents. The nuances of provisions dealing with this aspect vary across countries, but focus is generally to introduce non-conflicting members on a prime decision-making body like board of directors. Besides, board positions, independent directors also find places on board committees like audit committee, compensation committee, nomination committee, and grievances committee to play their role as independent purveyors of shareholders' interest and overall interest of company as a whole. The present paper examines different aspects of independent directors in two important jurisdictions of India and USA in a comparative way.

Literature Review

Independent directors, as the name suggests, are directors on board of a company who are independent individuals, not having any other relationship or transaction with the company (Dhanapal, 2013). The institution of independent director emerged as a corporate governance reform in the period that followed some well-known and serious corporate scandals in USA, UK and some other developed countries. Since the time of Enron, the structure of USA boards has undergone a number of reforms introduced through Sarbanes Oxley Law (Jackson, 2010). According to this law, independent director is someone who may not "accept any consulting, advisory, or other compensatory fee from the issuer; or be a person affiliated with the issuer or any subsidiary thereof" (SOX Act, 2002). It was considered as a remedy of agency problem as "the rise of the independent director in the USA is entrenched in the search for an optimal board composition that can resolve the agency problem between managers and shareholders" (Varottil, 2010).

The role played by independent directors in corporate decisions has invited varied comments. Mittal (2011) advocated the good role envisaged from independent directors stating that their presence in board room would prove to be a deterrent to fraud and mismanagement and unaccountability of decisions. Recognizing their role in effective decision making in corporate boards, laws and regulations, including stock exchange rules, most countries have framed provisions for appointment of independent directors on boards of companies. In UK, half the directors have to be independent (UK Code, 2014). India and USA also have similar provisions. Another author has expressed the view that "The USA corporate conventional wisdom argues that independent directors will benefit companies in some aspects, but it is believed that they will face some inherent limitations while carrying out the monitoring tasks. The most serious issue is how to ensure an independent director has true independence from management" (Chou, 2013).

However, independence itself is stated to be a subjective trait and "It refers to the avoidance of being unduly influenced by a vested interest and to being free from any constraints that would prevent a correct course of action being taken. It is an ability to 'stand apart' from inappropriate influences and to be free of managerial capture, to be able to make the correct and uncontaminated decision on a given issue" (Batth et al. …

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