Independent directors and good corporate governance
The appointment of independent directors is essential for listed companies in order to ensure good corporate governance. One of the main reasons behind appointing independent directors is to ensure objectivity so that they can evaluate the performance and wellbeing of a company without having any conflict of interest or undue influence.
The revised corporate governance guidelines contained in Notification No. SEC/CMRRCD/2006-158/134/Admin/44 dated August 07, 2012 (the “Notification”) issued by the Bangladesh Securities Exchange Commission (the “Commission”) provided clear guidelines for appointment of independent directors. It requires companies to encourage effective representation of independent directors on their Board of Directors so that the Board, as a group, includes core competencies considered relevant in the context of each company. Furthermore, at least one fifth of the total number of directors in the company's Board must be independent directors.
The essential qualifications of independent directors are listed in Clause 1.3 of the Notification. An independent director shall be a knowledgeable individual with integrity. He or she should be able to ensure compliance with financial, regulatory and corporate laws and must also make meaningful contribution to the business of the company. In order to qualify for the role , one must be a business leader/corporate leader/bureaucrat/university teacher with economics or business studies or law background/professional. There must be at least twelve years of professional experience before an individual can be appointed as an independent director.
It also clarifies the meaning of independent director in brief; as per Clause 1.2(ii) of the Notification, an independent director is an individual who either does not hold any share in the company or holds less than one percent share of the total paid-up shares of the company. He or she must be someone who is not a sponsor of the company and is not connected with the company's sponsor or director or shareholder who holds one percent or more shares of the total paid-up shares of the company on the basis of family relationship. This requirement extends only to family members: the person seeking to be appointed as an independent director must ensure that his or her family members do not hold the above-mentioned shares in the company.
It is important to note that Clause 1.3 of the Notification also restricts individuals who have relationships, whether pecuniary or otherwise, with the company or its subsidiary or associated companies and is not a member, director or officer of any stock exchange. It is important that an independent director is not related with the company or its subsidiary companies and is not a shareholder, director or officer of any member of stock exchange or an intermediary of the capital market.
Furthermore, it must be ensured that an individual who has been taken into consideration for the post of independent director is not a partner or an executive or was not a partner or an executive during the preceding 3 years in the concerned company's statutory audit firm. The Notification necessitates a prospective independent director to be someone who has not been convicted by a court as a defaulter in payment of any loan and has not been convicted for a criminal offence.
The significant breadth of text provided by the Notification indicates that the Commission views independent director as an essential organ of listed companies. This is buttressed by the requirements of ensuring that the post of independent director(s) is not vacant for more than ninety days and that an individual is not an independent director in more than three listed companies. The limited tenure of three years of an independent director, which may be extended for one term, only strengthens the argument that the Commission desires listed companies to receive objective assessment of their performance.
It is to be noted that these conditions are imposed only on a “comply” basis. As per Clause 7(i) of the Notification, all a listed company is required to do is to obtain a certificate from a practicing professional regarding compliance of the conditions and send the same to the shareholders along with the Annual Report.. Under Clause 7(ii) of the Notification, the directors of a listed company are only required to state in the directors' report whether the company has complied with these conditions. This leaves room for dishonest individuals to use this requirement to their advantage by premising compliance even when a listed company has not accurately adhered to the conditions for appointment of independent directors. Given that public money is involved in listed companies, it is felt that these compliance notifications should be cross-checked and investigated by the Commission.
Furthermore, with the powers of appointment of independent directors being vested in the hands of directors and approved by shareholders in the AGM, one may question the actual independence of the independent directors. It may be that directors and shareholders would like to appoint individuals who are more inclined towards furthering their interests as opposed to the interest of the company and public at large. In such a situation, the independent directors may find themselves in a conundrum i.e, whether to protect the interest of the appointing shareholder directors or the interest of the company – which may not necessarily be the same. In order to ensure such impartiality, the Notification should be amended so that independent directors are appointed after sufficient restrictive scrutiny and approval by the Commission.
The importance of corporate governance in today's progressive business environment cannot be denied. Good corporate governance is intended to increase the accountability of a company and to avoid any mishaps before they occur. For example, failed energy giant Enron Corporation, and its bankrupt employees and shareholders, is a prime argument for the importance of solid corporate governance. Since independent directors form an integral part of good corporate governance in listed companies, it is not only important but essential that all listed companies duly comply with the Notification in the interest of the company and its general shareholders at large.
The writer is an Advocate, Supreme Court of Bangladesh and founder of law firm Sattar & Co.