Posts Tagged 'Independent Directors'

Will the corporate governance structure change?

by Deepak Patel for Business Standard

With the government notifying new rules for the appointment of (IDs) for public sector banks (PSBs), public sector insurance companies, Reserve Bank of India (RBI) and (FIs), it has become clear that the government wants to alter the level ofpractised in these boardrooms. However, many experts familiar with the functioning of these companies’ boards feel that it might not be enough to change the status quo and more needs to be done to change the governance structure in the boardrooms.

So what has changed?
While the Companies Act, 2013, which was implemented last year, was one step forward to give IDs more power, they were much more broadly defined – focusing more on the duty on the ID to ensure that the interest of all stakeholders are protected; particularly minority shareholders.

According to Companies Act, 2013, an ID should be a person who, in the opinion of the Board, is a person of integrity and possesses relevant expertise and experience. Further, he/she should also possess ‘appropriate skills, experience and knowledge’ in one or more fields of finance, law, management, sales etc.

On the other hand, the rules recently notified for PSB, FIs, and have a much more focused tone – giving them a tenure of six years, asking for a minimum 20 years of experience from persons coming from industry, putting an age restriction at 67 years.

Moreover, the government officials who have 20 years of experience with 10 years at joint secretary or above; retired chief managing directors/executive directors of PSBs after one year of cooling period; academicians, chartered accountants and professors with more than 20 years experience ; will be the only eligible ones to apply.

“The normal expectation globally of the role of an Independent Director is essentially two-fold: advisory and monitoring,” said an expert who did not wish to be named.

“While the focuses more on the ‘monitoring’ part – asking ID to ensure the interest of all stakeholders; particularly minority shareholders; the rules for ID appointment in and insurance companies envisage him/her more as a ‘strategic advisor,” the expert added. ” For example, one of the acceptable qualifications of an independent director is that he or she led a reputed organisation or brought turnaround in a failing organisation.” Read more here.

Director Independence and Corporate Governance

by Bruce Dravis for American Bar Association – Business Law Today, November 22nd, 2010.

This article summarizes the role of independent directors in corporate governance, and describes recent material governance law changes enacted in 2010.

Since the turn of the millennium, independent directors have become the focus of corporate governance. In this still-developing corporate governance environment, the work, time commitment, and responsibilities of independent directors have increased significantly.

This increased focus started with the massive corporate scandals and failures of the early 2000s (e.g., Enron), which propelled the passage of the Sarbanes-Oxley Act of 2002 (SOX). The financial crisis of 2007-2008 resulted in the federal government adopting the nearly $1 trillion Troubled Asset Relief Program (TARP), and in a renewed focus on the role of independent directors in evaluating corporate strategy, risk, and compensation. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank) included many corporate governance provisions.

Both SOX and Dodd-Frank emphasize the importance of independent directors in the governance process.

What is Governance Good For?

The term “governance” refers to a combination of state and federal legal requirements (including statutes, regulations, and case law) and developing doctrines regarding the control of corporations.

For example, the law sets certain minimum requirements regarding how directors and officers are selected, what decision-making processes they must use, and how corporate financial reporting systems are structured and their accuracy verified. At the same time, institutional investors and their advisors are advancing an evolving set of “best practices” governance recommendations that represent standards beyond the legal minimum.

Compared to governance practices prior to 2000, there is now more active oversight of corporate management by the board and by committees of the board. On some matters, such as the authority to engage the company’s auditors or advisors to the compensation committee, decisions have been taken out of management’s hands entirely. (continue reading… )

Pratip Kar: Directors’ dilemma

by Pratip Kar for Business Standard, September 13th, 2010.

Vesting independent directors with more responsibilities cannot guarantee better corporate governance.

The Parliamentary Standing Committee on Finance has reviewed the Companies Bill, 2009. Some of its recommendations underpin the importance of independent directors as a critical instrument to nurture the financial health of a company and to protect the interests of various stakeholders, particularly the minority shareholders. The Committee rightly emphasised that safeguards should be put in place in the Bill, so that the independent directors can play their designated role in the boards and help improve the board governance. Two of the Committee’s suggestions that the ministry of corporate affairs, the chambers of commerce and boards of the companies would do well to recognise are: First, “the role of independent directors should be distinguished from other directors in the Bill” and, second, “the appointment of independent directors should not be a case of mere technical compliance reduced to the letter of the law” (source: press release of the Press Information Bureau).

To implement these, the government would need to prescribe the mode of appointment, qualifications, extent of independence from promoters/management, roles and responsibilities and liabilities of the independent directors. What remains to be seen is the manner in which these useful recommendations would be translated into the letter of law, the way the companies would implement these and the direct or indirect monitoring mechanism that the ministry of corporate affairs would put in place.

It is possible that these recommendations may not go down well with a large segment of companies and those who consider the position of independent directors an ornamental post-superannuation perk. These may even give rise to protestations from different quarters that there is a dearth of good people in the country to become independent directors; if these recommendations are implemented, the numbers of willing candidates will decline further. Set in the context of our professed dalliance with GDP numbers and our “all-round growth story”, these refrains would perhaps seem a trifle trite and pedestrian.

But why this emphasis on independent directors? Is this emphasis rational or misplaced? Is it an issue that is being given undue importance? This is clearly a subject of considerable debate with equivocal responses across economies. India is a late entrant in this debate, perhaps after the Satyam episode.(continue reading… )

Biostar Pharmaceuticals Strengthens Corporate Governance with Appointments of New Independent Directors, Establishment of Board Committees and Adoption of Code of Ethics

by PR Newswire, January 4, 2010.

Biostar Pharmaceuticals, Inc. (OTC Bulletin Board: BSPM) (“Biostar” or “the Company”), a Xianyang-based developer, manufacturer and supplier of pharmaceutical products and medical nutrients addressing a variety of diseases and conditions, today announced a series of measures adopted to strengthen the Company’s corporate governance in compliance with the listing requirements of a senior U.S. exchange.

First, two directors, Mr. Michael Segal and Mr. Xifeng Nie, voluntarily resigned from the Company’s board of directors (the “Board”), and concurrently with their resignations, the Board appointed two independent directors, Mr. Zibing “Zack” Pan and Mr. Zhongyang Shang, to the Board, effective December 30, 2009.

Mr. Pan is a Certified Public Accountant, certified by the Oklahoma State Board of Accountancy and member of American Institute of Certified Public Accountant (AICPA) and Oklahoma Society of Certified Public Accountants (OSCPA). Mr. Pan is currently chief financial officer of China Education Alliance, Inc., to which he was appointed in August 2009. Prior to that position, Mr. Pan was an audit manager with Eide Bailly CPAs & Business Advisors (“Eide Bailly”) at its Oklahoma Cityoffice. Mr. Pan had been working at Eide Bailly since September 2005. From September 1998 to September 2005, Mr. Pan was a statistical analyst and economist with the State of Oklahoma. From 1994 to 1996, Mr. Pan worked as a loan project officer for Asian Development Bank Loan Management Office in Anhui, China. From 1988 to 1994, Mr. Pan was an associate professor at Anhui University, China, teaching English language. Mr. Pan graduated with a Master of Business Administration from the University of Central Oklahoma in 1999. He obtained his Bachelor of Arts from Anhui University,China in 1988…(continue reading)

Restoring American Financial Stability Act of 2009: Separating the Chairman and CEO: The Battle Begins

by J. Robert Brown, for The Race to the Bottom, December 4, 2009.

One of the newest fronts in the corporate governance area has been the consistent decision on the part of most public companies to combine the positions of chairman and CEO.

The approach is facially inconsistent with the role of the board.  To the extent that the board has as a primary obligation the duty to oversee the CEO, it defies logic to set up boards consisting mostly of independent directors, a status that, while not ensuring independence, does generally ensure that they have no independent source of information about the company except what they get in the popular press or from board meetings, but having them be chaired by the person they must oversee.  The chair typically calls special meetings of the board and controls the agenda.  In short, if problems arise with the CEO, it is the chair who presumably alerts the other directors, something that has to diminish inordinately when the chairman is the CEO.

Nor is this conjecture.  In the realm of global corporate governance, the practice of combining the two positions is the exception.  Indeed, some of the pressure for reform is coming from overseas sources…(continue reading)

The Irrelevancy of Interested Influence on the Board: In re Nat’l City Corp. Shareholders Litigation

by Christopher Brown, for The Race to the Bottom, November 9, 2009.

In Delaware, courts consider boards independent if they contain a majority of independent directors.  That the board might include some percentage of interested or non-independent directors, who can influence the decision making process, appears to have little relevancy to the court’s analysis.  This can be seen In re Nat’l City Corp. Shareholders Litig.

In that case, the Delaware Court of Chancery approved a proposed settlement agreement between National City Corporation (“NCC”) and its shareholders.  The settlement arises from a suit brought by NCC shareholders to enjoin a merger between NCC and PNC Financial Services Group, Inc. (“PNC”).

The economic crises that produced capital, liquidity and credit problems for the financial sector culminating in the Lehman bankruptcy in September, 2008 forced NCC to consider strategic options to prevent failure.  To further complicate the problem, the Office of the Comptroller of the Currency informed NCC that it was “very possible” that NCC would not receive government assistance.  The confluence of circumstances narrowed NCC’s options.  Consequently, NCC began to shop for potential buyers…(continue reading)

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