At the request of National Stock Exchange of India, Centre for Excellence in Corporate Governance, I wrote a short Briefing Note for circulation to company directors, secretaries, and other interested persons. This was released earlier this week.The topic of the Briefing was Board and Director Independence in Controlled Companies. Full text of this Briefing, No. 18, June 2017, is available here.
The Briefing describes what are "controlled companies" (in effect where some shareholders control the composition of their board of directors with or without a majority of equity holding in their companies, and also exercise directly or indirectly management control of the business operations); how in such a situation independence of the board and its directors can be compromised and their monitoring of the executive can suffer; some not-so-apparent-nuances of director independence; what can the controlling shareholders, the regulators, and the independent directors do to safeguard and exercise independent judgement on matters to protect and promote the interests of the absentee (or non-controlling) shareholders.
Among the suggested measures are appointments and removals of independent directors by a majority of non-controlling shareholders, with some safeguards to preempt any abuse of this power to the detriment of the company, and similar measures in respect of independent auditors on whom independent directors and investors largely depend for the fair representation of companies' financial affairs. The suggestions may sound radical but there are signs of similar directional movement in some other countries as well, given the increasing trends towards concentration of voting power in the hands of controlling shareholders and the potential abuse of such power for their entrenchment and enrichment at the expense of other shareholders.
The Briefing describes what are "controlled companies" (in effect where some shareholders control the composition of their board of directors with or without a majority of equity holding in their companies, and also exercise directly or indirectly management control of the business operations); how in such a situation independence of the board and its directors can be compromised and their monitoring of the executive can suffer; some not-so-apparent-nuances of director independence; what can the controlling shareholders, the regulators, and the independent directors do to safeguard and exercise independent judgement on matters to protect and promote the interests of the absentee (or non-controlling) shareholders.
Among the suggested measures are appointments and removals of independent directors by a majority of non-controlling shareholders, with some safeguards to preempt any abuse of this power to the detriment of the company, and similar measures in respect of independent auditors on whom independent directors and investors largely depend for the fair representation of companies' financial affairs. The suggestions may sound radical but there are signs of similar directional movement in some other countries as well, given the increasing trends towards concentration of voting power in the hands of controlling shareholders and the potential abuse of such power for their entrenchment and enrichment at the expense of other shareholders.
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