Role of Independent Director in Corporate Governance
Role of independent director in corporate governance
Contents
INTRODUCTION
“Corporate Governance is the system by which companies are directed and controlled.”1
Corporate governance is integral to the existence of a company. It inspires and strengthens investor confidence by ensuring company’s commitment to higher growth and profits. The overall objectives of governance should be to maximize long term value and shareholders’ wealth.
Corporate governance is possible only by refurbishing the governing organ i.e. is board. The Board of Directors are crucial part of corporate structure. They are the guardians of their respective enterprise as also the protectors of the shareholders’ interest. They are the link between suppliers of capital (shareholders) as well as those who manage capital (management) to create value. In law, the board owes a strict fiduciary duty to ensure that the company is run in the long term interest of owners.
Management consultant McKinsey published in 2002 their annual Global Investor Opinion Survey2 suggesting that the companies with high corporate governance standards were worth significantly more to investors than those with loose governance standard- even if the comparison was between companies with identical business and financial profiles. For the purpose of the survey, well- governed companies were defined as those having:
a. A significant amount of “independent director” including financial specialist on the board,
b. A culture of broad disclosure.
c. Strong right and equal treatment for shareholder.
Thus, to perform effectively, it is important for the board to have a substantial degree of independence from management. Predominantly, independence of board lies at the core of corporate governance.
When the goal of management come in conflict with the interest of the shareholders, the independent segment in the Board of Director must be able to stand
Contents
INTRODUCTION
“Corporate Governance is the system by which companies are directed and controlled.”1
Corporate governance is integral to the existence of a company. It inspires and strengthens investor confidence by ensuring company’s commitment to higher growth and profits. The overall objectives of governance should be to maximize long term value and shareholders’ wealth.
Corporate governance is possible only by refurbishing the governing organ i.e. is board. The Board of Directors are crucial part of corporate structure. They are the guardians of their respective enterprise as also the protectors of the shareholders’ interest. They are the link between suppliers of capital (shareholders) as well as those who manage capital (management) to create value. In law, the board owes a strict fiduciary duty to ensure that the company is run in the long term interest of owners.
Management consultant McKinsey published in 2002 their annual Global Investor Opinion Survey2 suggesting that the companies with high corporate governance standards were worth significantly more to investors than those with loose governance standard- even if the comparison was between companies with identical business and financial profiles. For the purpose of the survey, well- governed companies were defined as those having:
a. A significant amount of “independent director” including financial specialist on the board,
b. A culture of broad disclosure.
c. Strong right and equal treatment for shareholder.
Thus, to perform effectively, it is important for the board to have a substantial degree of independence from management. Predominantly, independence of board lies at the core of corporate governance.
When the goal of management come in conflict with the interest of the shareholders, the independent segment in the Board of Director must be able to stand