Independent Directors

The role of independent directors is considered pivotal to the company’s growth and effective management in today’s day and time

- Rudra Pandey

The origins of the concept of independent directors can be traced to the United Kingdom and United States of America. In the United States of America, in the second half of the 20th century, listed companies were encouraged to have at least two ‘outside directors’ on their boards. This was primarily to introduce objectivity to the decision-making process, provide a solution to management-shareholder conflicts, and improve performance of the company. However, corporate scandals like Enron and Worldcom, featuring management transgressions like poor reporting standards, ignorance of high risk issues, unsanctioned loans and guarantees, accounting loopholes, etc. prompted amendments to the listing rules of key stock exchanges like NYSE and NASDAQ.1 These changes also found legislative backing with the enactment of the Sarbanes Oxley Act of 2002, which provided for listed company audit committee independence requirements and responsibilities.