Are Independent Directors watchdogs for good Corporate Governance?

Submitted by: Arjun Yadav (2013PGPM009)

1
Index
1. Introduction…………………………………………………………………………………………... 3 2. Basic
Concepts……………………………………………………………………………………….. 4
2.1 Corporate Governance……………………………………………………………………………………. 4
2.1.1 Principles of Corporate Governance……………………………………………………………………….. 4 2.1.2 Need
of Corporate Governance………………………………………………………………………………. 5

2.2 Board Size……………………………………………………………………………………………………….. 6

2.3 Independent Directors……………………………………………………………………………………………….. 6 2.3.1 Definition
of Independence……………………………………………………………………………………… 7

2.4 Role of Independent Directors in Corporate Governance………………………………… 8

2.4.1 Challenges faced by Independent Directors in Corporate Governance……………………. 8

3. Implementation of the Existing System…………………………………………………. 9

3.1 Provisions in the Current Law…………………………………………………………………………. 9 3.2 Selection of
Independent directors………………………………………………………………… 10

4. Alternative systems prevailing in other countries…………………………………. 12

4.1 Corporate Governance in the U.S…………………………………………………………………… 12 4.2 Corporate
Governance in the U.K…………………………………………………………………… 15 4.3 Corporate Governance in
Germany………………………………………………………………… 17

5. Data Analysis and Interpretation…………………………………………………………… 18

5.1 Ensuring the Independence of Judgment……………………………………………………….. 18 5.2 Corporate
Governance Failures……………………………………………………………………… 18
5.2.1 Enron…………………………………………………………………………………………………………………….. 18 5.2.2
Satyam…………………………………………………………………………………………………………………… 20 5.2.3
WorldCom……………………………………………………………………………………………………………… 22

6. Conclusion…………………………………………………………………………………………….. 25
6.1 Need of Independent Directors……………………………………………………………………… 25

7. Bibliography…………………………………………………………………………………………. 26

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1. Introduction
At the core of corporate governance lies the board of directors. A joint-stock
company is owned by the shareholders, who appoint a board of directors to supervise
and direct the management of the company and ensure that the board does all that is
necessary by legal and ethical means to make the business grow to maximize long-
term corporate value. The most important point to be noted is that the board
members are appointed by the shareholders and other key stakeholders, and are
accountable to them. In other words, the directors are fiduciaries of shareholders,
not of the management. This doesn’t imply that the board must have an adversarial
relationship with the CEO and top management. In fact, most successful boards have
remarkable collegiality and, more often than not, agree to most managerial
initiatives. However, in instances where the objectives of management differ from
those of the wide body of shareholders, the non-executive directors on the board
must be able to speak up in the interest of the ultimate owners and discharge their
fiduciary oversight functions. This is the reason why ‘independence’ has become
such a critical issue in determining the composition of any board. With global
competition getting more intense than ever, it would be very useful for boards to
have independent directors who can comment and contribute independently on a comp
any’s business strategies, as well as on its strengths, weaknesses, opportunities
and threats.

3
2. Basic Concepts

2.1 Corporate Governance

Corporate governance can simply be described as a process by which directors
control and direct the management of a company to achieve the best returns for its
owners.

2.1.1 Principles of Corporate Governance

The ICAEW in its latest paper suggests five underlying principles:  Leadership: A
company should be headed by an effective board. The Board should align its
interests to that of the company in order to meet its business purpose in both the
short and long term. 

Capability: The Board should have an appropriate mix of skills, experience and
independence to allow its members to effectively undertake their duties and
responsibilities.

Accountability: The Board should communicate to the company’s shareholders and

other stakeholders, at regular intervals, a fair, balanced and understandable
assessment of how the company is achieving its business purpose and meeting its
other responsibilities.

Sustainability: The Board should guide the business to create value and allocate it
fairly and sustainably to reinvestment and distributions to stakeholders, including

4
shareholders, directors, employees and customers. 

Integrity: The Board should lead the company to conduct its business in a fair and
transparent manner that can withstand scrutiny by stakeholders.

2.1.2 Need of Corporate Governance

Over the last decade there has been a realized importance of corporate governance
among the corporations and stakeholders. Some key factors that led up to this are:
 The subject of corporate governance got in the limelight after a string of
collapses of high profile companies like Enron, WorldCom and Satyam. The government
realized that these companies are large and have public funds invested in them in
huge amounts.  Capital markets are now getting closely integrated. Now there are
virtually no constraints on either foreign equity funds investing in India or in
Indian companies listing in the US or elsewhere. This is a boon for a lot of
companies, it also brings in some vulnerabilities.  Global agencies such as
Standard & Poor have already begun to rate companies according to corporate
governance standards. Domestic rating agencies like CRISIL and ICRA have also got
into this act. It is, therefore, both meaningful and strategically important for
corporations to focus on corporate governance definition and raise the bar. This
made the role of independent directors more important than ever. Keeping that in
mind, The Companies Act, 2013 has made some provisions which deal with the term
“independent director”.

5
2.2 Board Size
The number of members in the board is the board size. The relationship between the
size of board and it effectiveness follows an inverted U curve. As the number of
board members are added initially, more ideas and knowledge flows and its
effectiveness is enhanced till a threshold point after which the size becomes a
problem. Problems of coordination and conflict arise and the effectiveness starts
to decrease.

Relationship between effectiveness and board size

2.3 Independent Directors

An independent director of a company is a non-executive director who:  Apart from
receiving director’s remuneration, does not have any mate rial pecuniary
relationships or transactions with the company, its promoters, its senior
management or its holding company, its subsidiaries and associated companies.

6
  

Is not related to promoters or management at the board level, or one level below
the board (spouse and dependent, parents, children or siblings). Has not been an
executive of the company in the last three years. Is not a partner or an executive
of the statutory auditing firm and the internal audit firm that is associated with
the company, and has not been a partner or an executive of any such firm for the
last three years. This will also apply to legal firm(s) and consulting firm(s) that
have a material association with the entity.

  

Is not a significant supplier, vendor or customer of the company. Is not a

substantial shareholder of the company, i.e. owning 2 per cent or more of the block
of voting shares. Has not been a director, independent or otherwise, of the company
for more than three terms of three years each (not exceeding nine years in any
case).

2.3.1 Definition of Independence

To rephrase Bertolt Brecht, independence is a bit like communism: very easy to
understand, very hard to achieve. An independent director is one who should be able
to exercise his or her reasoned judgment without being unduly influenced by
pressures either from management or any dominant shareholder or stakeholder. An
independent director, also known as an outside director, is a member of the board
of directors who doesn’t own stake in the company. An independent director cannot
have any material relationship with the company and its related persons, except
sitting fees. As of 2004, a majority of the minimum seven directors of public
companies having a share capital in excess of Rs 5 Crore should be independent. The
word “Independent Director” was first used in Clause 49 under the heading Corporate
Governance. Since then there have been many changes under the Companies Act
including sections that talk about the requirement of Independent Director. The
only difference between a non-executive and a non-executive independent director is
the latter is forbidden to have any 7
pecuniary relationship with the company apart from receiving a sitting fee which
has been raised to Rs. 20,000/-.

2.4 Role of Independent Directors in Corporate Governance

 Provide input and support to the Lead Independent Director on:   Selection of
committee chairs and membership on Board committees. Establishment of the agendas
for the Nominating and Corporate Governance Committee meetings.   Compensation
philosophy for the Board and candidates for Board membership.

Be accountable to and provide leadership for all issues of corporate governance

which should come to the attention of the Board and the Nominating and Corporate
Governance Committee.

2.4.1 Challenges faced by Independent Directors in Corporate Governance

 Asymmetry of Information: The management of the company including promoters has
far more information and knowledge regarding the affairs of a company and more
resources at their disposal compared to independent directors. This poses as a
challenge to understand what the best is for the company.  Vested Interests of
Promoters: The management also has more financial stake in decisions and,
therefore, has a major tendency to protect their interests. This makes it very
difficult for the voice of an outside director to be heard fairly.

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3. Implementation of the Existing System
In India there is a problem about the training of directors. A professional might
be able to give excellent corporate advice and guide a company in ways that
maximise long-term shareholder value but he or she might not be aware of the nitty-
gritty of the rights, responsibilities, duties and liabilities of a legally
recognised fiduciary. Barring corporate lawyers, chartered accountants and company
secretaries, these technical aspects are not obvious to some of the best qualified
directors. Fully understanding such issues requires specialised training. A lot of
debate has been going on the subject of Independent Directors in the past few
years. While some say that an independent judgment is vital for efficient
governance of an organization, others have shown open criticism towards it.

3.1 Provisions in the Current Law

The new Companies Act, 2013 has several additional provisions regarding independent
directors:  Section 134(3)(d) deals with a statement on declaration of status of
independent directors which will be attached with Directors Report of the Company.


Section 135(1) deals with constitution of Corporate Social Responsibility Committee

in which one member should be an independent director.

 

Section 149 deals with appointment and qualifications of independent directors.

Section 150 deals with manner of selection of Independent directors and maintenance
of data bank of independent director.

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

Section 152 deals with total strength of directors in which independent director
will not included in that total number of directors of the company.

Section 161 says that no person shall be appointed as an alternate director for an
independent director unless he is qualified to be an independent director under the
provision of this Act.

Section 173(3) talks about Board Meeting at shorter notice in which at least one
Independent director should be present.

Section 177 talks about Audit Committee of the Company in which minimum number of
Independent Directors will be three.

 

Section 197 covers the different type of fee given to Independent Directors.

Schedule IV deal with Code for Independent Directors

3.2 Selection of Independent directors

A difficult task is to select independent directors in the board of a company.
There are numerous criteria that govern the selection procedure:    In the
private sector, one has to be well known and trusted by the promoters to be invited
to join a board as an independent director. In public sector companies, where
government is the promoter, these appointments are not made by the chairman but by
the minister in charge of the PSU. Another criterion for selection of independent
directors is their skills which vary across corporations as well as with time.
However, international experience suggests that all 10
boards benefit from a few specialized skills. One of these is financial expertise.
This implies that they should have sufficient skills and experience to carefully
read income statements, cash flow statements, balance sheets, notes on accounts,
and be able to convene meaningful Audit Committee proceedings.

11
4. Alternative systems prevailing in other countries
Companies in different countries operate in different social, legal and economic
environments. As a result, each country has developed its own corporate governance
system to serve its business operations in the best way possible. As the
globalization of business speeds up, it is unknown whether there exists a unanimous
corporate governance system for all countries. The following section compares the
corporate governance factors in the United States of America, United Kingdom and
Germany. The three countries were selected because they adopt different corporate
governance models. Their corporate governance component factors can be classified
into three groups: those related to top management organization, the board as whole
and individual board members. The reason for choosing German share companies and US
listed corporations is that they each adopt very different board models. While the
Germans follow the one-tier model assigns the combined monitoring and executive
functions duties to one board. On the other hand, U.S follows the two-tier model
which that allows companies to assign these functions to two independent boards:
the supervisory and the management boards. These two board models are typical
corporate governance structures for most listed corporations in the world. In
France, companies are allowed to choose between any of the two models. Switzerland
share companies are not limited to any of the above two models and are free to
choose any model of their choice.

4.1 Corporate Governance in the U.S

The shareholder-centered model used in America combines features from both the
shareholder and stakeholder models, defined by a less clear separation between
dispersed ownership and managerial control. It includes dispersed ownership, strong
legal protection for shareholders

12
and indifference to other stakeholders. This hybrid model allows stakeholders to
have more influence over the operation of the company. Companies listed on the NYSE
must comply with the Listed Company Manual, which requires listed companies to have
a majority of independent directors. The tests for independence are as follows: 
No director qualifies as ‘independent’ without the affirmation of the board of
directors which determines that the director has no material relationship with the
listed company (directly or as a partner, shareholder or officer of an organization
that has a relationship with the company). Companies must disclose the nature of
directorship and inform the basis of that determination. 

The director is, or has been within the last three years, an employee of the listed
company, or an immediate family member is, or has been within the last three years,
an executive officer of the listed company.

The director has received, or has an immediate family member who has received,
during any twelve-month period within the last three years, more than $100,000 in
direct compensation from the listed company, other than director and committee fees
and pension or other forms of deferred compensation for prior service.

The director or an immediate family member is a current partner of a firm that is

the company’s internal or external auditor.

 

The director is a current employee of such a firm.

The director has an immediate family member who is a current employee of such a
firm.

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

The director or an immediate family member was within the last three years (but is
no longer) a partner or employee of such a firm and personally worked on the listed
company’s audit committee within that time.

The director or an immediate family member is, or has been within the past three
years, employed as an executive officer of another company where any of the listed
company’s recent executive officers at the same time serves or served on that
company’s compensation committee.

The director is a current employee, or an immediate family member is a current

executive officer, of a company that has made payments to, or received amounts
from, the listed company.

The companies comparatively have the smallest board size but not necessarily the
most effective one. The boards have the most number of meetings as they have to
monitor both monitoring and executive functions. Most companies of the US have
already had some form of independent board leadership for a while now and this
practice has continued to grow. Small-cap companies experienced the greatest growth
in independent board leadership, and show a preference for independent board
chairs. Mid- and large-cap companies tend to favor lead directors as they have more
at stake and tend to be more conservative. The following tables present data from
2007 and 2012 to give a comparative analysis of the growth.

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Source: Ernst & Young Corporate Governance Report May 2013

4.2 Corporate Governance in the U.K

The UK has developed a market-based approach that enables the board to retain
flexibility in the way in which it organizes itself and exercises its
responsibilities, while ensuring that it is properly accountable to its
shareholders.

15
This is done primarily through the UK Corporate Governance Code which is maintained
by the FRC. The Code operates on the basis of ‘comply or explain’. It identifies
good governance practices relating to, for example, the board and its committees
and risk management and internal control, but companies can choose to adopt a
different approach if that is more appropriate to their circumstances. Where they
do so, however, they are required to explain the reason to their shareholders who
must decide whether they are content with the approach that has been taken. This
‘comply or explain’ approach enables judgments about, for example, the composition
and performance of the board to be made on a case by case basis. It is supported by
companies, investors and regulators in the UK, and has increasingly been adopted as
a model in other markets. For the system to work effectively shareholders need to
have appropriate and relevant information to enable them to make a judgment on the
governance practices of the companies in which they invest. They also need the
rights to enable them to influence the behaviour of the board when they are not
content, and the willingness to use them. ‘Comply or explain’ therefore needs to be
underpinned by an appropriate regulatory framework. Under UK law, shareholders have
comparatively extensive voting rights, including the rights to appoint and dismiss
individual directors and, in certain circumstances, to call a general meeting of
the company. Certain requirements relating to general meetings, including the
provision of information to shareholders and arrangements for voting on
resolutions, are also set out in law, as are some requirements for information to
be disclosed in the annual report and accounts. These include requirements for a
Business Review (in which the board sets out its assessment of the company‘s future
prospects) and a report on directors’ remu neration, on which shareholders have an
advisory vote. There are also additional regulatory requirements for some specific
sectors, such as financial services. 16
This framework is reinforced by the rules that must be followed by companies listed
on the London Stock Exchange. The rules provide further rights to shareholders (for
example, by requiring that major transactions are put to a vote), and require
certain information to be disclosed to the market. For companies with a Premium
Listing, this includes the requirement to provide a ‘comply or explain’ statement
in the annual report explaining how the company has applied the UK Corporate
Governance Code.

4.3 Corporate Governance in Germany

Corporate Governance in Germany is characterized by a number of unique features,
chief among them being the requirement under the German Stock Corporation Law
(AktG) that boards of directors are divided into two tiers: a management board
(called the Vorstand) which is solely responsible for the management of the
company, and a supervisory board (called the Aufsichtsrat), which is charged with
overseeing the activity of the management board. German boards of directors are
also unique in that, under the German 'Co-determination Law', supervisory board
members of large companies (> 500 employees) are elected both by shareholders and
by company employees: the employees elect one third or half of the board (depending
on the size of the company). Neither shareholders nor employees elect members to
the management board; instead, these members are appointed by the supervisory
board. The German Corporate Governance Code (Codex) works on a 'comply or explain'-
basis and aims at making the German Corporate Governance system more transparent
and understandable. The companies have the largest board size. They have a higher
probability to suffer from the adverse affects of too large a board but a research
study conducted by Leimkühler suggested that the notion supervisory boards are in
general inefficient as a consequence of their large size isn’t validated. German
companies have the fewest board meetings. Since they follow a one tier model, they
do not require meetings to be held as frequently as companies in the US.

17
5. Data Analysis and Interpretation

5.1 Ensuring the Independence of Judgement

Defining independence is not sufficient to ensure independence of judgement. The
choice of directors and the skills that they bring to the board helps in ensuring
independence of judgement. Some factors that play an important are:   The conduct
of board meetings.

The quality with which financial, strategic and operational information is supplied
to the board by the management.

Management’s appreciation for independent evaluation and criticism of performance

and strategies.

 

The actual role of the various committees of the board.

Willing of a company to pay for the experience and skill sets of professional,
independent directors.

5.2 Corporate Governance Failures

5.2.1 Enron
Billions of dollars of market value erased. Thousands of jobs lost. Savings wiped
out. A demise as spectacular as Enron’s has failure written all over it. And in
some quarters, that failure is at 18
least partially attributed to the complex derivatives transactions that Enron
entered into – transactions that some believe may have been used to conceal or
obscure the company’s true financial condition, to hide losses, and to bolster
earnings. Yet a close analysis of the Enron situation yields a different story, one
that is unfortunately not likely to sell many newspapers or provide much fodder on
the floors of Congress. Put simply, the market worked. This story – which ISDA
articulates in the following report – centers on the powerful and protective market
forces that ultimately compelled the truth about Enron’s financial condition and
financial transactions to be exposed, and that enabled the derivatives business to
function smoothly in the event of Enron’s collapse. As documented in this report
(and using supporting material as noted throughout the paper):  The Enron failure
demonstrated a failure of corporate governance, in which internal control
mechanisms were short-circuited by conflicts of interest that enriched certain
managers at the expense of the shareholders. Although derivatives made appearances
in the course of the governance failures, they played no essential role. 

Enron’s actions appear to have been undertaken to mislead the market by creating
the appearance of greater creditworthiness and financial stability than was in fact
the case. The market in the end exercised the ultimate sanction over the firm.

Even after Enron failed, the market for swaps and other derivatives worked as
expected and experienced no apparent disruption. There is no evidence that the
market failed to function in the Enron episode. On the contrary, the market did
exactly what it is supposed to do, which is to use reputation as a means of
monitoring market participants.

There is no evidence that existing regulation is inadequate to solve the problems

that did occur. Had Enron complied with existing market practices, not to mention
existing 19
accounting and disclosure requirements, it could not have built the house of cards
that eventually led to its downfall. 

Finally, it is likely that additional government regulation, by increasing moral

hazard and decreasing legal certainty, could have the unintended consequence of
making future failures and market instability more likely along with increasing the
cost and decreasing the availability of risk management tools like swaps.

In sum, ISDA articulates in this paper that the market imposes a substantial
discipline on swaps activity. ISDA asserts that these powerful forces of market
discipline were in play as Enron sought to establish itself as a major participant
in energy and energy derivatives trading. As it did so, Enron attempted to evade
the discipline of the market and inflate its creditworthiness through its well-
documented failures in corporate governance, accounting and disclosure. These
attempts at deception, and the ultimate fate of Enron, are themselves confirmation
of the relevance and power of the discipline the market imposes on participants in
swaps activity.

5.2.2 Satyam
On a quarterly basis, Satyam earnings grew. Mr. Raju admitted that the fraud which
he committed amounted to nearly $276 million. In the process, Satyam grossly
violated all rules of corporate governance (Chakrabarti, 2008). The Satyam scam had
been the example for following “poor” CG practices. It had failed to show good
relation with the shareholders and employees. As Kahn (2009) stated, “CG issue at
Satyam arose because of non-fulfillment of obligation of the company towards the
various stakeholders. Of specific interest are the following: distinguishing the
roles of board and management; separation of the roles of the CEO and chairman;
appointment to the board; directors and executive compensation; protection of
shareholders rights and their executives.” In fact, shareholders never had the
opportunity to give their consent prior to the announcement of the Matyas deal and
‘falsified’ documents with 20
grossly ‘inflated’ financial reports were delivered to them. Ultimately,
shareholders were at a loss and felt cheated. Surely, questions about management’s
credibility were raised, in addition to the non‐payment of advance taxes to the
government. Together, these issues raise questions about Satyam’s financial health.

Lessons learnt from Satyam The 2009 Satyam scandal in India highlighted the
nefarious potential of an improperly governed corporate leader. As the fallout
continues, and the effects were felt throughout the global economy, the prevailing
hope is that some good can come from the scandal in terms of lessons learned
(Behan, 2009). Here are some lessons learned from the Satyam Scandal:  Investigate
All Inaccuracies: The fraud scheme at Satyam started very small, eventually growing
into $276 million white-elephant in the room. Indeed, a lot of fraud schemes
initially start out small, with the perpetrator thinking that small changes here
and there would not make a big difference, and is less likely to be detected. This
sends a message to a lot of companies: if your accounts are not balancing, or if
something seems inaccurate (even just a tiny bit), it is worth investigating.
Dividing responsibilities across a team of people makes it easier to detect
irregularities or misappropriated funds. 

Ruined reputations: Fraud does not just look bad on a company; it looks bad on the
whole industry and a country. “India’s biggest corporate scandal in memory
threatens future foreign investment flows into Asia’s third-largest economy and
casts a cloud over growth in its once-booming outsourcing sector. The news sent
Indian equity markets into a tail-spin, with Bombay’s main benchmark index tumbling
7.3% and the Indian rupee fell” (IMF, 2010). Now, because of the Satyam scandal,
Indian rivals will come under greater scrutiny by the regulators, investors and
customers.

21


Corporate Governance needs to be stronger: The Satyam case is just another example
supporting the need for stronger CG. All public-companies must be careful when
selecting executives and top-level managers. These are the people who set the tone
for the company: if there is corruption at the top, it is bound to trickle-down.
Also, separate the role of CEO and Chairman of the Board. Splitting up the roles,
thus, helps avoid situations like the one at Satyam.

The Satyam Computer Services’ scandal brought to light the importance of ethics and
its relevance to corporate culture. The fraud committed by the founders of Satyam
is a testament to the fact that “the science of conduct” is swayed in large by
human greed, ambition, and hunger for power, money, fame and glory. Scandals from
Enron to the recent financial crisis have time and time again proven that there is
a need for good conduct based on strong ethics. Not surprising, such frauds can
happen, at any time, all over the world. Satyam fraud spurred the government of
India to tighten CG norms to prevent recurrence of similar frauds in the near
future. The government took prompt actions to protect the interest of the investors
and safeguard the credibility of India and the nation’s image across the world.

5.2.3 WorldCom
The WorldCom case has become a kind of poster child for corporate governance
failures in this new century. WorldCom, the world’s second largest
telecommunications company, filed for bankruptcy in the federal court in Manhattan
in the summer of 2002, after the disclosure of massive accounting irregularities. I
was appointed as Examiner by the bankruptcy court in August, 2002, filed my first
interim report that November, a second interim report in June of 2003 and my final
report earlier this year. My remarks tonight will, understandably, reference only
the results of our completed investigations which have been made public. But even
the public story provides a genuine case study in the failure of corporate
governance and suggests a number of lessons in how to avoid its repetition. 22
At the outset, I suspect you might logically ask, “What is a bankruptcy examiner?
What does a bankruptcy examiner do?” Put simply, I was appointed by Judge Arthur
Gonzales in the Bankruptcy Court in the Southern District of New York in Manhattan
to carry out an independent investigation into “what happened” in the WorldCom
matter. My job was to assure the judge that procedures and persons involved in any
past wrongdoing were not carried forward into the reorganized entity. We were also
asked to identify potential causes of action that the company might have against
third persons responsible for losses to the company and to make recommendations to
aid in avoiding repetition elsewhere of the acts that caused the downfall of
WorldCom. We worked closely with the U.S. Department of Justice and state
prosecutors, although we had no criminal jurisdiction. We also worked with the SEC
and other regulators, although we had no regulatory responsibility. And we worked
with representatives of the creditors of the company and the Corporate Monitor
appointed in connection with the SEC proceedings to fully develop the facts. Our
completed reports are now in the hands of the public and the new management of
WorldCom for their guidance. What happened in the WorldCom case? Most of the
deviations from proper corporate behavior of which we took note resulted from the
failure of Board of Directors to recognize, and to deal effectively with, abuses
reflecting what our reports identified as a “culture of greed” within the
corporation’s top management. Others resulted from an abject failure of responsible
persons within the company to fulfill their fiduciary obligations to shareholders.
A third contributing factor was a lack of transparency between senior management
and the Company’s board of directors. In the final analysis, what we saw was a
complete breakdown of the system of corporate governance. The checks and balances
designed to prevent wrongdoing and irregularities simply failed to operate. The
actual fraud within WorldCom consisted of a number of so called “topside
adjustments” to accounting entries to prop up declining earnings. Mostly these
consisted of improper drawdowns of reserves accumulated from its acquisition
program and other sources and improper capitalization of costs which should have
been expensed. It was, in short, a classic case of “cooking the books” While
WorldCom has not completed the restatement of its financials, the 23
judge handling the SEC proceedings in New York reported that the company overstated
its income by approximately $11 billion, overstated its balance sheet by
approximately $75 billion and, as a result, caused losses in shareholder value of
as much as $250 billion, a significant amount of the latter, of course, in employee
401(k) retirement funds.

24
6. Conclusion
Though there seems to be shortage of adequate independent directors, there are
enough capable people to play key fiduciary roles in boards of Group A, B1 and B2
companies — which together account for almost 95 per cent of market capitalization.
Good independent directors are not ubiquitous enough because they are not sought
enough by companies, and because they are not adequately compensated for their
time. If the compensation problem is taken care of, then it is feasible to attract
better talent on boards, despite a more stringent definition of independence.

6.1 Need of Independent Directors

 The idea of “Independent directors to act as watchdogs for corporate governance ”
stems from the fact that they are independent from the management giving them the
ability to provide a fresh outlook into the decision making of a company. The role
of independent director, in part, is to act as a watchdog on the promoters and the
management of the company and protect the interests of minority shareholders. 
Other closely held businesses may want independent directors who can offer
financial, technical, and/or strategic advice to the operational officers of the
company. The independent directors here act as advisors to Executive Directors and
the management. Though the independent directors play an important role in
corporate governance of a company, they cannot be held completely liable for any
sort of malignancy in a company’s overall governance.

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7. Bibliography
https://www.frc.org.uk/getattachment/1db9539d-9176-4546-91ee-828b7fd087a8/The-
UKApproach-to-Corporate-Governance.aspx

http://www.ey.com/IN/en/Services/Assurance/Fraud-Investigation---
DisputeServices/Corporate-governance--role-of-independent-directors

http://www.mca.gov.in/Ministry/pdf/CompaniesAct2013.pdf

http://www.oecd.org/daf/ca/oecdprinciplesofcorporategovernance.htm

http://articles.economictimes.indiatimes.com/2013-12-
19/news/45377580_1_independentdirectors-satyam-fraud-corporate-governance

http://company.ingersollrand.com/ircorp/en/discover-us/our-
company/corporategovernance/corporate-governance-guidelines.html

https://www.smu.edu.sg/perspectives/2013/01/30/corporate-governance-role-
independentdirectors

http://digitalcommons.law.msu.edu/cgi/viewcontent.cgi?article=1027&context=ilr

http://www.asx.com.au/documents/asxcompliance/cg_principles_recommendations_with_20
10_amendments.pdf 26
http://www.corpgov.deloitte.com/site/gereng/

http://www.isda.org/whatsnew/pdf/enronfinal4121.pdf

https://knowledge.wharton.upenn.edu/article/scandal-at-satyam-truth-lies-and-
corporategovernance/

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