1. Independent Directors and Governance

2. 2 Agenda Introduction Definition of independent director Selection of independent directors The dual roles that independent directors play Accountabilities of independent directors Corporate governance Risk management Independent director – Requirements to accomplish the role Independent directors in audit committees

3. 3 Introduction This presentation covers only independent directors of public listed companies whether it is family controlled or widely held through institutions and shareholders of a wide spectrum Major happenings on independent directors 340+ independent directors have quit in 2009 after the Satyam episode Role of independent directors questioned after global financial collapse

4. 4 Definition(s) of Independent Director Four committees appointed in the past to formulate guidelines for corporate governance have broadly agreed on the definition of independent director. The definition summed up simply says that he or she must be a non- executive director does not derive financial benefit from any transaction with the company and its affiliates as a vendor, customer, client etc is not related to the promoters or key management does not own more than 2% or more of the block of the voting shares; and should not have been a past employee of the company Clause 132 of the The Companies Amendment Bill 2008 has summarised this into a legal form as in clause 49 of the listing agreement

5. 5 Clause 132 of the Companies Amendment Bill, 2008- A new section introduced "Independent director", in relation to a company, means a non-executive director of the company, other than a nominee director,- (a) who, in the opinion of the Board, is a person of integrity and possesses, relevant expertise and experience; (b) who, neither himself nor any of his relatives- (i) has or had any pecuniary relationship or transaction with the company, its holding, subsidiary or associate company, or its promoters, or directors amounting to ten per cent. or more of its gross turnover or total income during the two immediately preceding financial years or during the current financial year; (ii) holds or has held any senior management position, position of a key managerial personnel or is or had been employee of the company in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed; (iii) is or has been an employee or a partner, in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed, of- (A) a firm of auditors or company secretaries in practice or cost auditors of the company or its holding, subsidiary or associate company; ( B) any legal or a consulting firm that has or had any transaction with the company, its holding, subsidiary or associate company amounting to ten per cent. or more of the gross turnover of such firm; (CONTINUED…)

6. 6 Clause 132 of the Companies Amendment Bill, 2008 (iv) holds together with his relatives two per cent. or more of the total voting power of the company; or (v) is a Chief Executive or director, by whatever name called, of any non- profit organisation that receives twenty-five per cent. or more of its income from the company, any of its promoters, directors or its holding, subsidiary or associate company or that holds two per cent. or more of the total voting power of the company; or (c) who possesses such other qualifications as may be prescribed Explanation.-For the purposes of this section, "nominee director" means a director nominated by any institution in pursuance of the provisions of any law for the time being in force, or of any agreement, or appointed by any Government, to represent its shareholders An independent director shall not be entitled to any remuneration, other than sitting fee, reimbursement of expenses for participation in the Board and other meetings, profit-related commission and stock options as may be approved by the members.

7. 7 Selection of independent directors Chosen by the company from a list of persons with professional competence, integrity and with adequate experience and expertise. Nomination committee of the Boards can perform this function more effectively. The object of such a selection is to bring on board persons with an objective view and thereby promote healthy debate In the Board on various issues, strategic or ongoing management or policy issues. The Board of Directors recommend to shareholders such appointees Independent directors also: facilitate resisting pressures and conflicts mentor and act as sounding boards to full – time directors bring their professional expertise in forming independent perspectives

8. 8 Roles played by independent Directors Guardian They protect the minority which either did not have the right to vote nor exercised it Stakeholders look upon them as guardians Activities in this role would include risk management, corporate governance and so on… Dynamic Role They are part of a Board that has to think of the future and grow Expansion, diversification, joint ventures, overseas ventures, meeting global competition are part of todays issues facing the Board Activities in this role would include strategy formulation, mergers, JVs and so on…

9. 9 Accountabilities of independent directors Approve, monitor and review regularly the strategy and finances of the company, and the structure and relationships of the Board Maintain a good all- round understanding of the companys business and activities, and contribute as appropriate on any major issues which arise Monitor and review the performance of the company and the chief executive Review the calibre and performance of the executive directors Participate effectively as required in discharging the functions of relevant board committees Take the lead in resolving potential conflicts of interest as and when they arise, and if appropriate act as the conscience of the board Identify the need for and initiate changes, in whatever area, when appropriate

10. 10 Independent directors – Requirements to accomplish the role Knowledge Legal and regulatory framework Financial reporting Corporate governance Board practice – inside and outside meetings Accountabilities of the role Possible crisis situations (e.g.takeovers) Skills Gaining adequate understanding of an unfamiliar business Obtaining relevant information in a comprehensible form Defining the key issues on which to focus Developing a broad strategic vision of what the company requires

11. 11 Corporate Governance Corporate governance is the framework by which companies are managed and controlled. Agenda for independent directors for effective governance The independent directors need a framework that effectively addresses the following issues: Risk management and mitigation measures Budgets – annual and operating and capex including diversifiaction Quarterly results and variance analysis Significant transactions of a non-recurring nature such as brand acquisition, intellectual property etc Cash management Recruitment / attrition of below Board level employees and their effect on the company Default if any of financial obligations All statutory compliances and defaults including any non-payment of dues to State and Central Govt Human resource management initiatives

12. 12 Risk Management & Mitigation Current scenario of wide funding options and risks that arise out of planning exponential growth ERM framework is critical in guiding the decisions of the independent director Get management to prepare a detailed risk bulletins and ensure that risk mitigation is planned and executed Risk mitigation is to be followed up at every meeting

13. 13 Independent directors role in audit committees Management discussion and analysis of financial condition and results of operations Statement of significant related party transactions (as defined by the audit committee) submitted by management Management letters / letter of internal control issued by the statutory auditor Internal audit reports relating to internal control weaknesses; and The appointment, removal and terms of remuneration of the Chief Internal auditor shall be subject to review by the Audit Committee

14. 14 Independent directors in audit committees This is the second and most commonly perceived role of independent directors as members or Chairman of Audit committee Clause 49 is wide in coverage - systems, internal controls, internal audit, accounting and presentation of financial statements and a host of other issues concerning financials Many committees and SEBI has outlined audit committees and their framework The audit committee shall have a minimum of three directors and with 2/3rds of them being independent directors. All members are expected to be financially literate. However the Chairman of the Audit Committee needs to be an independent Director