An Independent Director (ID) is appointed on the Board of a company to bring independent opinion and objectivity to the process of decision-making. She/he is also expected to help improve the Corporate Governance standards of the company. While there is a lot of focus on the compensation that some IDs receive, the position comes with a number of legal obligations, in addition to the possibility of reputation loss if things go wrong in the company.
A person, before accepting the position of an ID, should conduct a proper due diligence of the company. This process should be objective, to ensure that she/ he is comfortable with the expectations of the company. Before joining any Board, an ID should also ensure that she/he does not have any conflict of interest, actual or potential.
The starting point of the due diligence process should be by gathering the information about the company, as available in the public domain. This includes inter alia
- Background of the company and the industry/ sector in which it operates.
- Reputation of the company in general, and that of the promoter, if any. If it is a non-promoter company, reputation of top management and Chair of the Board.
- Board composition – From the quality of existing Directors, she/he can assess the company, and its governance culture. If any of the Directors is known to her/him, then she/he can speak with that Director.
- Information available in Annual Reports, such as the financials, as well as any legal cases with major implications, including, but not limited to, financial implications.
- Any adverse news coverage in the recent past
She/he can also request for interactions with the Promoter/Chairperson (or any other senior Board member), and the Managing Director/ CEO. Interactions often give a lot of information, and provide clarity, which documents in public domain may not provide.
Post accepting the position, the ID should get a letter of appointment, which clearly states the expectations from her/him. She/he could also ask for copies of agenda/minutes of a previous meeting, copy of D&O insurance policy, or any other document that she/he requires.
Post joining the Board, the ID must insist on a structured induction programme. This should include a visit to the office, and factory, if any. The programme should also include interactions with KMPs, including the Company Secretary, and Senior Management Personnel.
Once the ID is appointed, she/he should ensure that she/he reads the agenda papers before the meeting in order to participate effectively in the meeting. The insights should be independent, and she/he must be objective in decision-making. She/he must also examine the draft minutes to see whether the discussions and decisions have been accurately captured.
The recognition that she/he is on the Board to add value, should inform the conduct and behaviour of an ID, new or old.