Independent directors are directors of incorporated companies who do not have a monetary or material pecuniary relationship with the company. The role of independent directors has evolved with changing regulations to being a sounding board for compliance and a governance watchdog. Independent directors are often criticized for their closeness with the management, even though they may not have moved away from the known and established definition according to regulations. For instance, a promoter’s personal or a company’s social investment in a charity run by the independent director may appear to exhibit alternative influence while not deviating from the regulatory requirements of independence.
Amidst debates of whether independent directors are truly independent, it is essential to look at their responsibilities and what is expected from them in the current environment. Being a non-executive director, an independent director may have limited information visibility. However, he/she is expected to have oversight of innumerable aspects including strategy, financial reporting, governance, risk management, regulatory compliance and growth prospects, among others.
With the recent incidents of regulatory violations – emission scandals, data breaches, leaks and misrepresented facts – expectations from independent directors seem to be increasing considerably. Some of the following factors may raise questions about an independent director’s expansive role as they further complicate external oversight:
Key factors to consider while looking at the expanded responsibilities of independent directors are as follows:
The compliance penalties, legal costs, personal liabilities and reputational impact faced by independent directors today were uncommon in the past, making the role riskier than ever before. A model that can help independent directors evaluate and manage these risk aspects is in its early stages of development. Given the current regulatory landscape and the evolving role of the independent director, the factors mentioned earlier will soon converge into a collective responsibility of the board, senior management and external assurance service provider. Currently, independent directors are not equipped to take on all of these responsibilities and it is essential to keep the limitations around such a role in mind.
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Sundar Narayanan is a fraud examiner by qualification and profession. He currently leads the Forensic Services division in SKP Group in India. He has extensive experience in employee fraud, senior management fraud and anti-corruption compliance reviews. Sundar has made several presentations and conducted training for clients on fraud investigation and anti-corruption compliance, including presenting two papers at the Wharton School on anti-corruption. He frequently writes on anti-bribery and corruption and investigation techniques.