Independent Directors and Corporate Governance: A Comparative Study of Indian and UK Provisions

IntroductionCorporate governance gained prominence in the aftermath of turbulence created in corporate management ethos by a slew of serious scandals and frauds that shattered investor confidence in corporate management and reporting. Gradually the concept permeated all aspects of corporate decision making. The governments and corporate managements participated in initiating necessary remedial measures aimed at regaining the bruised confidence of investors and other stakeholders of corporate decisions.The three nugget principles embodied in good corporate governance relate to transparency, accountability and fairness. Corporate governance is now perceived to be a good strategy that leads to long-term sustenance of business. Most regulations focused importantly on the role of independent directors in fostering good and responsible corporate governance. They can be powerful instruments of corporate governance and can bring objectivity and independent judgment in decision making. The corporate governance codes in various countries are endeavored to make necessary provisions for the role of independent directors in corporate boards in furtherance of this cause. Indian corporate laws have historically drawn inspiration from British Laws in their content and interpretation. The present paper is a comparative study of provisions relating to independent directors drawn from relevant codes in India and UK.Literature ReviewAn Independent director is a non executive director on the board of directors of a company who does not have any material or pecuniary relationship with company or related persons, except sitting fees. Independent directors do not own shares in the company (Wikipedia, 2016). In the aftermath of a slew of corporate frauds and misgovernance witnessed world over, various committees, codes and legal structure advocated the institution of independent directors as an important measure towards fostering better corporate governance. Independent directors have emerged as the cornerstones of the worldwide corporate governance movement. Their increased presence in the boardroom has been hailed as an effective deterrent to fraud and mismanagement, inefficient use of resources, inequality and unaccountability of decisions (Mittal, 2011). They have long been viewed as a solution to many corporate governance problems (Clarke, 2007). An Australian paper, on the basis of reliance placed on their concept of independent directors, commented that there was an over emphasis placed on some rather limited psychological evidence that independence in the boardroom produces more critical thinking and informed discussion thus leading to higher quality decision-making (Wheeler, 2012). The paper further highlighted that Independence constructed on the basis of structural tests will not produce automatically the type of behaviors that the proponents of independence and diversity think it will. If such behaviors result, then they are occurring most probably through chance rather than as a result of corporate governance mechanisms advocating independence (Wheeler, 2012).The main justification from a public-policy perspective lies in the notion that independent directors will be less conflicted than management in representing shareholder interests in general, because they will not be concerned with preservation of their own jobs as would employee directors (Clarke, 2007).The common prescription of independent directors being vouched as instruments of good corporate governance has, however, been challenged in another paper, where authors have argued that the shift towards more 'independent' directors is a fundamentally bad move, which undermines the rights and powers of minority shareholders and entrenches a second-rate corporate governance model-the separation of ownership and control-in our company law. In contrast, they have proposed that all directors must have a significant interest in the company they serve so that the directors' self-interests and the best interests of the company become inextricably intertwined (McConvill and Bagaric, 2004). …