Nikunj Mahajan, O.P. Jindal Global University
In this age of globalization, companies and countries are interconnected in such a way that a fraud/scam in one company can have huge repercussions on other companies/countries. Just in the last two decades of this century, we have seen how a failure of a single banking company (Lehman Brothers) can trigger a global financial crisis and how the fraud committed by the directors of a leading software giant (Satyam) led to loss of investor confidence and a massive change in corporate governance practices. This has led to emergence of concept of Independent Directors.
An Independent director is a director who is “independent” of any “interest” in the company and is hired to provide an objective “set of eyes” to look into the functioning of the board and for the protection of interest of the shareholders particularly minority shareholders. After all, company’s shareholders have close and well defined interest in the proper functioning of the company. Their interest, unlike other stakeholders, is not indirect in the sense that it’s hard to locate and yet they have minute protection except for the company’s internal control procedure. Shareholders have invested their money into the company and still they are the last ones to get anything in case of liquidation, which in most of the cases is nil, enterprise value of such a corporate being negative. Amongst the shareholders, the ones who suffer the most in the absence of Independent Directors, are the minority shareholders, as the majority shareholders, by virtue of their massive shareholding, are able to exercise control over the management anyways.