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Corporate Social Media Governance- A Key Boardroom Agenda!!

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Our Article on ” Corporate Social Media Governance-A Key Boardroom Agenda” Published in ICSI 44th National Convention Souvenir!

1.Introduction

Over the past few years, corporations around the globe have been trying to figure out how to enter the social media ecosystem. Some decided to jump in and quickly learn how to swim. Others were pushed into the deep end and figured it out after thrashing around a bit. And then there are those that choose to avoid it altogether, hoping to avoid risk. Unfortunately, if such organizations believe they can avoid social media – they cannot. The organization can choose not to participate, but that does not mean the organization, or its products, its services, its programs, or its own workforces are not being talked about by the social community. And so while there are risks in engaging the stakeholders of an organization using social media, there are also risks in avoiding it altogether. The key to managing such risks is developing a clear-cut social media governance program.

Social media governance is a set of business processes put in place to support the social vision of a company with relevant targets and guidelines. Its purpose is multi-fold – educate and guide the relevant stakeholders, define social media processes, maintain brand reputation across all channels online and offline, establish rules which govern conduct and broadly define company social media goals.

Since the rise of the Internet in early 1990s, the world’s networked population has grown from the low millions to the high billions. Over the same period, social media  has become a fact of life for corporate society worldwide, involving not only the large corporate organizations, but also the regular organizations, the workforce, activists and also the key board personnel who play a key role in establishing such key policies to address the risks and challenges of social media while also using the medium to prosper company’s set objectives, goals and its vision, and thus in turn making initiatives to ensure high level of social media governance.

Social media has become an indispensable business tool. Most organizations have strong controls in place for email but few apply the same rigor to new methods such as enterprise social networks and social media. Sound social media governance will not only enable the organization to manage the risks that arise from social media’s inherently public nature and global accessibility, but also allow to make the most of the opportunities it brings and stay ahead of change.

It is becoming increasingly a key strategic component for companies and its Board of Directors to understand the risks and challenges related to social media and has a clear strategy in place which sets out how they will use it and for what purpose. Social media blunders are becoming increasingly more commonplace in the news and getting social media wrong can have a serious impact on a company’s reputation and its brand value. Social media brings its own challenges but having a sound and practical strategy which is easy to understand will ensure risks are managed and benefits realized.

  1. Effective Social Media Governance Model- Key Agenda for Board of Directors:

An effective social media governance model is not limited to controlling of risks and challenges involved in social media but there should also be consideration for various other components that can help implement a sound and effective Governance Model. The Board of Directors of any organization should consider the following key components and integrate them in the company’s social media governance measures to effectively address various social media risks:

 Social Media Policy:

A social media policy is the foundation of any social media governance model. Its purpose is twofold: to guide the employees of the organization and to protect the organization and its customers from risk. Any organization should have a social media policy regardless of whether or not your business is actively engaged in a social media strategy.

At a bare minimum the social media policy should include specific guidelines for each of the top three social media platforms: Facebook, Twitter and Linkedin. But though social media has become synonymous with that trio of powerhouses, the landscape is vast, encompassing blogs, wikis, podcasts, video sharing, micro-blogging, community forums and other tools. While it’s not necessary to develop a set of best practices for each of them, the Board should have a clear and consistent set of expectations that covers all your organization’s primary social channels and its review should form part of Board Meetings Agenda from time to time.

Monitoring:

Your brand is likely being discussed on the social web whether you’re engaged in the conversation or not. Google Alerts and Twitter are two social medium that offer simple ways to search for the names of your brand, employees and competitors. Social Media Monitoring tools like Sysomos and Hoot Suite offer more robust tools for acquiring, analyzing and acting on intelligence. Regardless of the tool you use, monitoring is a must for everything from shaping consumer sentiment about your brand to heading off a potential PR crisis.

Training & Education:

A solid governance model should have plenty of educational resources for employees. This should include training on responding to customer feedback, both positive and negative. Typically, it’s the customer support and Public Relation organizations that are tasked with the responsibility of responding to customer feedback. However, social media is breaking down the traditional boundaries and depending on company’s social media engagement policy, it could be a marketing or salesperson that has to respond to a customer query. So it’s essential to have training as a cornerstone of your social media governance model.

Approval Processes:

A governance model should clearly call out what approval processes are in place for employees to engage in social media. It should answer questions such as: Can everyone participate? or only certain key executives, directors or authorized representatives can via your company’s social channels? What is the process for getting approval for an official account? Approval processes ensure an organization’s social media accounts are headed by responsible personnel and the risks of misuse is minimized.

Crisis Management Plan:

In 2009, Toyota launched the largest recall in the company’s history in response to hundreds of reported cases of sticking accelerator pedals on account of the pedal getting caught in the floor mat, making affected vehicles speed up uncontrollably, and it was linked to at least 50 reported fatalities. Rumors and panic spread across the web, and suddenly the brand, a model of automotive safety for decades, was embroiled in a digital disaster with little foundation in social media with which to combat it.

A PR crisis doesn’t have to be as dramatic as Toyota’s to be damaging. The Toyota recall illustrates a common thread that runs through all PR crises: a slow response from the organization exacerbates the crisis. At its basic level, a crisis management plan should outline how to use the social media channels to deliver a quick and appropriate response and it should form part of your social media governance initiative.

Toyota eventually turned to social media to repair its image, but its effort would have no doubt been more effective if it could have been leveraged to diffuse the controversy before it spiraled out of control.

While keeping in consideration such components of social media governance model, board should also first assess such social media risks and develop an eco system to effectively address such risks.

  1. Social Media Risk

Social Media risk becomes a prime concern for every business in the present global competitive and knowledge based environment. The company uses the social media platform to reach out its goals and at the same time social media has many risks which affects the growth of the Management. The risks are as varied as an unauthorized post, a social media account getting hacked or an authorized company post that ultimately proves ill-advised. A time-tested strategy of pre-emptive mitigation and comprehensive pursuit of insurance coverage post-loss provides the best protection against social-media related losses.

Whether it is a small, medium, or large-sized business, the brand’s health and reputation is often defined by the way they engage in public environments.  In short, the board need to identify the risks of social media, develop comprehensive governance policies to mitigate risk and then deploy the right technology to reinforce those polices.

Managing Social Media Risk

Every business entity in the world exists to provide value for its stakeholders. All entities face uncertainty or risk and the challenge for the board is to determine how much uncertainty or risk to accept as it strives to grow stockholder value. Uncertainty presents both risk and opportunity with potential to erode or enhance value.

Social media offers considerable advantages like Branding, Marketing/advertising, Corporate Communications, servicing, grievances resolution to business entities, but establishing and maintaining a social media presence can also expose companies to a broad array of risks. By considering the current scenario, companies are not taking the social Media risks seriously and inadequately prepared to for the challenges brought by social media.

Various types of Social Media Risk:

While offering a host of potential business benefits, the use of social media can expose companies to numerous business risks. Most of these risks result from a combination of organizational weaknesses and vulnerabilities exposed through data misuse and data sharing:

Reputational Risk :

Negative exposure on social media sites about the company’s name, can result in loss of trust and revenues. There are other several risks also connected to the reputational risks like Strategic risk, Business risk, Regulatory risk, Legal risk, Market risk. If reputational risk is not handled in a proper way, these connected risks can lead to serious negative consequences including fraud, intellectual property loss, financial loss, privacy violations and failure to comply with laws and regulations.

Fraud Risk:

While engaging directly with the public, in real time, mistakes are bound to happen. Employees may also be hacked in the social media and may lead to manipulate the information and it leads the way for fraudsters to gain access to company’s database.

Legal Risk:

Potential issues range from adherence with privacy laws, to content ownership, to intellectual property infringement, to human resources issues such as such as harassment, discrimination and defamation.

Data Risk:

Firms need to meet the regulatory requirements of collecting, processing, handling and storing data. The corporate network should be secured to prevent confidential client data and other information from leaking out, or even across, the organization. The firm should be protected from incoming threats when social media users inadvertently introduce malware into the organization or employees are targeted by cyber criminals. Global firms need to comply with local data protection regulations when employees are connecting with each other and sharing documents across borders.

Non Compliance Risk:

Industry regulations vary by industry, geography and culture. There are many rules and regulations are available to govern electronic communications. Categories of rules include recordkeeping, adhering to advertising requirements and supervision of employees. Firms must be able to provide proof of compliance when regulators conduct audits as well as respond to e-discovery requests.

Financial Risk:

Missteps can have a negative impact on share prices and result in fines from regulators or data protection enforcement agencies.

Costs Risk:

 Although social media is viewed as “free”, firms may need to hire experts to work through their governance issues, third party vendors to provide platforms to manage access and retain records and writers or agencies to develop content.

Bandwidth Risk:

Resources are required to develop, manage, supervise and adjust both internal and external social media programs. Updates may be reviewed by departments that could include corporate communications, marketing and compliance.

4.Social Media Governance by Board- A key element of Corporate Governance:

1.The Board shall frame the policy for Managing the Social Media Risk that helps in identifying and exploring many of the potential negative consequences posed by social media in terms of brand, strategy, regulatory, legal and market risk. More important, it outlines a holistic approach to identifying, assessing and managing those risks.2. Engage in enterprise-wide change management activities to create a more risk-aware culture in the organization which will give exposure to both the significant benefits and the distinctive risks of social media and putting in place the compliance and performance management capabilities that can lead to changed behavior in social media usage.3. Assess uncertainties arising from social media.4.Restructure the existing risk governance structures.5.Enforce advanced tools and technologies for monitoring social media.6.Evaluate the performance management capabilities to analyze and act on the metrics delivered from monitoring activities.8.Engage in enterprise-wide change management activities to create a more risk-aware culture.

 Steps involved in Implementing Social Risk Management Policy

  1. Governance:

Governance is focused on creating new structures, policies and accountabilities for managing social media risk, as well as the awareness of how the organization is using social media strategically and operationally. Although general governance principles apply in the realm of social media as with other corporate strategies, some specific differences and permutations need to be noted in several areas, including the need to coordinate effectively across functions and the need to have well-defined crisis management procedures that can be instituted at a moment’s notice.

An established social media risk management structure including:

  1. Formally defined roles and accountabilities enterprise-wide and within exposed functions.
  2. Coordination among business units.
  3. Acceptable-use policies for social media.
  4. Well-defined risk tolerance levels.
  5. Defined escalation pathways.
  6. An operating model for crisis management.

II. Process:

Effective social media risk management processes protect operations and the brand in a cost-effective way—adjusting operations for proactive social media risk assessment and monitoring. Companies are already aware of the importance of having consistent processes in place to handle identifying, measuring, managing and reporting on risks. However, such processes will often look somewhat different in the social media world, in part because of the always-on nature of social networking platforms.

Consistent processes to manage operations while identifying business opportunities. Processes include:

  1. Social media risk identification across categories (e.g., reputation, intellectual property, fraud prevention, business disruption)
  2. Risk assessment, reporting and monitoring.
  3. Cost-effective risk mitigation/transfer.

III. System:

Board should be capable of monitoring social media networks in real time to identify what is being said about your company and what issues arise from that chatter from the standpoint of regulatory, business and brand risks. Such monitoring is now largely dependent on advanced technology. Improving the effectiveness of IT systems in the context of social media risk management is primarily about improving the management and analysis of data and using new technologies to monitor social media sites as a means of mitigating risks. Vast amounts of data are now on social media platforms and so companies need and want to manage that data effectively. Several capabilities are important here.

Effective use of technologies to improve data management and the monitoring of social media activity, including:

  1. Social media data mining and capture (e.g., analytics, web crawlers)
  2. Text analytic engines
  3. Data security and storage
  4. Reporting and dashboards

5. Opportunities and Challenges Of Social Media On The Company and the Strategies to be adopted by the Board:

Hence, in today’s world of Social Media as discussed above, we feel that a blow to an organization’s reputation may prove to be fatal even without any actual wrong doing by the entity itself- Perhaps as a result merely of a perception of inappropriate behavior  or even just the grievances of one or two individuals. Such attacks on the reputation of the organization can have a drastic effect typically on the brand value of the company.

In order to mitigate the risks, challenges and opportunities as discussed earlier and to keep in mind the effective functioning of the Board amidst the scenario of such risks, opportunities and challenges , effective strategies shall be planned and implemented at the right point of time in the Organization.

It is essential that the Board takes pro active interest in the Governance of the Social Media, since in the Light of present circumstances of increasing participating stakeholders, a good board leads to good decisions and good decisions lead to value oriented sustainable stakeholder value.

To design a strategy that can be productively implemented is a tricky task. However, there are a few questions which the Board / the organization collectively can ask before developing a strategy.

  • Does our organization have a social media policy and what does it cover?
  • Do we think about social media from a perspective of both risk and opportunity?
  • Is there a designated position in our organization to manage social media
  • Does our organization monitor social media and, if so, for what?
  • Do we monitor social media internally, or is the function outsourced?
  • Does our organization monitor social media, traditional media, and other sources to determine the public perception of our organization and the public acceptability of our business strategies?
  • Do we monitor the public’s opinion on our competitors and our industry?

Above are vital concerns from the perspective of the Company/ Organization and the Board.

6.Role of Company Secretary- A Governance Professional:

Being a Governance Professional, a Company Secretary must be conscious  of the strategies the Boards shall devise for planning, implementing and monitoring the Social Media Governance Model . Times have changed and the Company Secretaries are getting transitioned into Governance Professional. Since Governance or the lack of it has assumed a centre stage, the professionals in our field need to be dynamic and zealous enough to guide the Board in not only in the matters of Law but also in recommending the Board good practices to carry out smooth functioning of the Board.

Below are few guidelines which we as professionals shall recommend to the Board and which shall also be supportive to the Board in shaping strategies for Social Media Governance:

1) Demystify social Media during a Board Meeting. To ask the Company to deploy staff/employees who can look after the following:

  1. company’s specific target market who uses social media
  2. a comparative analysis of what competitors are doing
  3. research on reach and future trends in social media; criteria to use research on reach and future trends in social media; criteria to use
  4. the difference between inbound and outbound social media

2) Advise the Board in determining the material matters relating to the Social Media Disclosures and taking up those material matters for approval in the Board meeting and /or committees thereof in order to avoid the circumstances of Insider Trading claims and risk of confidential information getting leaked. Social Media Risk should be part of Risk Management Policy of the Company.

3)  Advise the Board in maintaining a reasonable approach while divulging information on the Social Media. As a Governance Professional to the Organization, care must be taken to guide the client on the information to be placed on the social media since social media tools can be used during a crisis to federate the protestors in gathering the information that can be used in litigation, putting Board Members in a liability suit situation.

A very talked about example shall demonstrate on why it should be ensured that social media should be on a Board’s Agenda. A few years ago, Nestlé was the target of a Greenpeace social media campaign for using palm oil that they claimed was harvested unsustainably, endangering several animal species in Indonesia. The group posted videos on YouTube and other channels that went viral before the company was able to get them removed. The removal then prompted further outcry: tweets and Facebook posts multiplied, and damage that in the past would have taken months of on-street petitions and letter campaigns accrued in mere days, with hundreds of thousands of conversations happening outside the company’s reach and influence.

4) Enlighten the Board regarding various provisions of Cyber Laws in order to be meticulous with the disclosures. There are several Intellectual Property Rights concerns for which the Company / the Organization needs the expert guidance of Professional experienced in dealing with the Proprietary aspects of the Company.

5) Advise whether the Company should have a whistle blowing mechanism through social media or not depending upon the size of the stakeholders and nature of business the Company is in.

However, be that as may, there are opportunities as well which are seldom unexploited by the Board since social media tends to make the Board of Directors perturbed.

Further, the Board can also carry on  developing frameworks with regards to stakeholder value that address the key challenges of social media governance for the workforce, including

1) Listening to what is being said:

Listening to what the stakeholders feel about the Company is an essential thing which most of the Companies fail to notice. Most of the activities happen on the website of the Company on advent of a new move of the Company and in order to propagate what the Company or the Board of Directors feel about the same. With the social media coming into the picture, the stakeholders of the company would be able to voice their opinions for a particular move and thereby the Board and the Company shall be able to reasonable inference regarding success or failure of the same.

2) Employees Perspective:

Social media provides an opportunity for senior management and boards to understand employees’ opinions and perspectives as well. An internal Social Media Platform should be created so that the employees can express their opinions and voices in a decent and constructive manner. The Board of the Company in this regard shall always keep in mind that the employees of the Organization are the first advocates of the Organization. Every employee talks about his/her workspace with his/her peers. The Board / the management of the company has to take care that the organization is valued in the eyes of the people who work for it. After all, no review is better than the review from the person who is working for the organization. The Board should take steps to harness this very fact.

3) A Channel of Communication with the Public:

Companies that understand what stakeholders are saying, and where to find the conversations, are better able to integrate their social media strategy into the broader corporate communications strategy. Companies that are willing to engage themselves onto a Social Media conversational platform tend to make a larger customer base since the doubts queries and concerns are responded to infect immediately.

4) Social Media is like a market research group which is never commissioned:

There are all sorts of communications about the Company when the Company is on social media. Social Media is so far one of the best ways to figure whether the Companies activities are niche to a market or not.

5) Influencing Decision making:

Once the management of the Company is done with the phase of propagating and exchange of ideas and receiving of the feedbacks, the Board/top management of the Company by then becomes well equipped with the relevant information and/or report regarding the market sentiment and the level of stakeholder satisfaction on any particular move of the Company. In this manner the Board or the top management may rather be able to make a better informed decision. The Probability of the Board / the top management going wrong in their decisions is significantly reduced through the adoption of social media mechanism.

6) Mitigating Social Media Impact:

The Board should develop speedy approval processes to enable rapid responses to Social Media Chatter and authorized designated officer for such speedy responses. Board should constitute “Digital Acceleration Team” to respond speedily to the problems as they surfaced.

Conclusion:

The advantages of using various social media effectively can be considerable in terms of insight, competitive advantage, cost savings and efficiencies. Good Social Media Governance ensures that the outlays associated with social media blunders can be minimized. This is vital. A happy customer’s view can be beneficial to business but the viral nature of social media means that organizations can be at risk, not just externally but internally. We as professionals along with board can play a key role in social media governance by not only growing organization wide awareness and developing a social media strategy but also ensuring compliances and addressing key issues to ensure that social media is compliant and ensuring Social Media is on the Board agenda.

                                                          ***********

(References: Online resources including following links:
http://www.rmmagazine.com/2013/10/02/effectively-managing-social-media- risks/,

http://www.pwc.co.uk/governance-risk-compliance/insights/do-you-think-policy-is-the-only-way-to-manage-social-media-risk1.html

,https://erm.ncsu.edu/library/article/social-media-risks,

http://www.instituteforpr.org/social-media-and-financial-services-rules-regulations-and-risk/,

http://www.socialmediatoday.com/content/what-social-media-governance-and-5-key-elements-successful-model,

http://socialmediavoice.com/2012/01/10-social-media-law-governance.html,

http://www.kunocreative.com/blog/bid/69119/9-Steps-for-Creating-Corporate-Social-Media-Governance

 

Article on “WOMEN COMPANY SECRETARIES- EMBARK ON A JOURNEY TO BOARD SEAT!!

Around the Globe, Companies Act 2013, company secretaries, Corporate Governance, The Companies Act, , , , , , , , ,

Read my Article published in ICSI e-nitor on  “WOMEN COMPANY SECRETARIES- EMBARK ON A JOURNEY TO BOARD SEAT!! https://www.icsi.edu/Webmodules/EJournel/1st%20october%202014%20e-csnitor.pdf

INDEPENDENT DIRECTORS: THINGS TO PONDER AS YOU ENTER INTO BRAVE NEW WORLD?

Companies Act 2013, Corporate Governance, ,

In recent years, corporate governance has received increased attention because of high-profile most talked scandals i.e.  Enron in USA and Satyam and Reebok in India, involving abuse of corporate power and, in some cases, alleged criminal activity by corporate officers. The need for Independent Directors is recognized the world over.  One of the most of important driver for effective better corporate governance is appointment of Independent Director who with their specialized skills serves as strategic advisor to the company and act as a watchdog for the interest of stakeholders of the company.

The role and responsibilities of Independent Directors have increased substantially and become more stringent under Companies Act, 2013. Let us analyze the legal position of the Independent Directors under The Companies Act, 2013 :

Meaning of Independent Director-

A layman’s definition of an Independent Director can be –

A corporate director who has no material relationship with the company in which he or she serves as director.  For example, an independent director cannot be employed or have a family member employed by the company.

Independent Directors was not defined under The Companies Act, 1956. However clause 49 of the Listing Agreement provides the definition. As per earlier rule under Companies Act, 1956, it was not applicable to unlisted companies (whether public or private) and applicable only to listed companies. All listed companies have to appoint 1/3rd to ½ of total directors to be independent directors (depending upon executive/non-executive nature of chairman).

Independent Directors are well and extensively defined as per Section 149(6) under the Companies Act, 2013:

149(6) An independent director in relation to a company, means a director other than a managing director or a whole-time director or a nominee director,—

(a) who, in the opinion of the Board, is a person of integrity and possesses relevant expertise and experience;

(b)   (i) who is or was not a promoter of the company or its holding, subsidiary or   associate company;

     (ii) who is not related to promoters or directors in the company, its holding, subsidiary or associate company;

(c)   who has or had no pecuniary relationship with the company, its holding, subsidiary or associate company, or their promoters, or directors, during the two immediately preceding financial years or during the current financial year;

 (d)  none of whose relatives has or had pecuniary relationship or transaction with the company, its holding, subsidiary or associate company, or their promoters, or directors, amounting to two per cent. or more of its gross turnover or total income or fifty lakh rupees or such higher amount as may be prescribed, whichever is lower, during the two immediately preceding financial years or during the current financial year;

 (e) who, neither himself nor any of his relatives—

      (i) holds or has held the position of a key managerial personnel or is or has been employee of the company or its holding, subsidiary or associate company in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed;

        (ii) is or has been an employee or proprietor or a partner, in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed, of—

            (A) a firm of auditors or company secretaries in practice or cost auditors of the company or its holding, subsidiary or associate company; or

            (B) any legal or a consulting firm that has or had any transaction with the company, its holding, subsidiary or associate company amounting to ten per cent. or more of the gross turnover of such firm;

 (iii) holds together with his relatives two per cent. or more of the total voting power of the company; or

 (iv) is a Chief Executive or director, by whatever name called, of any nonprofit organization that receives twenty-five per cent. or more of its receipts from the company, any of its promoters, directors or its holding, subsidiary or associate company or that holds two per cent. or more of the total voting power of the Company; or

 (f) Who possesses such other qualifications as may be prescribed.

 Need of Independent Directors…

  •  To fulfill statutory compliances for appointment of Independent Directors as laid down as per listing agreement and applicable provisions of The Companies Act, 2013.
  •  To have representatives on the Board who shall watch that the affairs of the company are run in a transparent manner, scrutinize the management performance, oversee that the interest of all its stakeholders (investors, employees, vendors, customers, government and society at large) are well protected, resolve the conflicts, establish best Internal controls and enhance the value of the company.

 Important provisions of Companies Act, 2013 to ponder before you accept position of Independent Director in any Company:- 

 Section 2(47) – Definition: ” Independent Director” means an Independent director referred to in sub-section(5) of section 149;

 Section 134(3)(d)-Financial Statements, Board Report: Board Report which shall be attached to the statements laid before a company in general meeting shall include a statement on declaration of status of independent directors made under section 149(6) (as discussed above)

 Section 135(1)-Corporate Social Responsibility(CSR): Every company having net worth of rupees five hundred crore or more, or turnover of rupees one thousand crore or more or a net profit of rupees five crore or more during any financial year shall constitute a Corporate Social Responsibility Committee of the Board consisting of three or more directors, out of which at least one director shall be an independent director.

  Section 149(4)- Listed companies to appoint Independent Directors: At least 1/3rd of the Board of every listed public company should consist of independent directors. The existing companies have been provided 1 year transition period to comply with the provisions of this Act (from the date of commencement of the Act). Also the every public company having paid up capital of Rs. 10 crore or more or public companies having turnover of Rs. 100 crore or more or having in aggregate outstanding   loans/debentures and deposits, exceeding Rs. 50 crore shall have at least 2 directors as Independent Directors.

 Maximum no. of directorships under the Companies Act, 2013 which Independent Director can hold is  20 companies out of which maximum of 10 public companies.  As per amended Clause 49B of Equity Listing Agreement vide SEBI Circular no.CIR/CFD/POLICY CELL/2/2014 dated April 17, 2014, a person shall not serve as an independent director in more than seven listed companies.  Further, any person who is serving as a whole time director in any listed company shall serve as an independent director in not more than three listed companies.

 Section  149(7-)Change in status of Independent Director: Every independent director shall at the first meeting of the Board in which he participates as a director and thereafter at the first meeting of the Board in every financial year or whenever there is any change in the circumstances which may affect his status as an independent director, give a declaration that he meets the criteria of independence as provided in sub-section (6).

 Section  149(8)- Provisions specified in schedule VI :The company and independent directors shall abide by the provisions specified in Schedule IV as under:

 The independent directors shall—

  • undertake appropriate induction and regularly update and refresh their skills, knowledge and familiarity with the company;
  • seek appropriate clarification or amplification of information and, where necessary, take and follow appropriate professional advice and opinion of outside experts at the expense of the company;
  • strive to attend all meetings of the Board of Directors and of the Board committees of which he is a member;
  • participate constructively and actively in the committees of the Board in which they are chairpersons or members;
  • strive to attend the general meetings of the company;
  • where they have concerns about the running of the company or a proposed action, ensure that these are addressed by the Board and, to the extent that they are not resolved, insist that their concerns are recorded in the minutes of the Board meeting;
  • keep themselves well informed about the company and the external environment in which it operates;
  • not to unfairly obstruct the functioning of an otherwise proper Board or committee of the Board;
  • pay sufficient attention and ensure that adequate deliberations are held before approving related party transactions and assure themselves that the same are in the interest of the company;
  • ascertain and ensure that the company has an adequate and functional vigil mechanism and to ensure that the interests of a person who uses such mechanism are not prejudicially affected on account of such use;
  • report concerns about unethical behaviour, actual or suspected fraud or violation of the company’s code of conduct or ethics policy;
  • acting within his authority, assist in protecting the legitimate interests of the company, shareholders and its employees;
  • not disclose confidential information, including commercial secrets, technologies, advertising and sales promotion plans, unpublished price sensitive information, unless such disclosure is expressly approved by the Board or required by law.

Hence, Schedule IV sets out a code of conduct for the role, responsibilities and functions of the independent director.

  Section 149(9)-Norms  for stock Option and remuneration: Notwithstanding anything contained in any other provision of this Act, but subject to the provisions of sections 197 and 198, an independent director shall not be entitled to any stock option and may receive remuneration by way of sitting fee up to one lacs provided under sub-section (5) of section 197, reimbursement of expenses for participation in the Board and other meetings and profit related commission as may be approved by the members.

  Section 149(10)& 11-Term of office: Subject to the provisions of section 152, Independent Directors shall hold office for a term upto 5 (original term) + 5 years (additional term subject to a special resolution). After expiry of term individual ineligible for re appointment for 3 years. His tenure shall be non-rotational.

An independent director shall not, during the said period of three years, be appointed in or be associated with the company in any other capacity, either directly or indirectly.

 Section  149(12)-Liability of Independent Director:Notwithstanding anything contained in this Act,—

 (i) an independent director;

(ii) a non-executive director not being promoter or key managerial personnel,

 shall be held liable, only in respect of such acts of omission or commission by a company which had occurred with his knowledge, attributable through Board processes, and with his consent or connivance or where he had not acted diligently.

 Section 150(1)-Manner of selection of Independent Director:Subject to the provisions contained in sub-section (5) of section 149, an independent director may be selected from a data bank containing names, addresses and qualifications of persons who are eligible and willing to act as independent directors, maintained by anybody, institute or association, as may be notified by the Central Government, having expertise in creation and maintenance of such data bank and put on their website for the use by the company making the appointment of such directors:

 Provided that responsibility of exercising due diligence before selecting a person from the data bank referred to above, as an independent director shall lie with the company making such appointment.

  Section 150(2)-Appointment of ID to be approved in General Meeting:The appointment of independent director shall be approved by the company in general meeting as provided in sub-section (2) of section 152 and the explanatory statement annexed to the notice of the general meeting called to consider the said appointment shall indicate the justification for choosing the appointee for appointment as independent director.

Section 152(5)-Explanatory Statement required to be given: In the case of appointment of an independent director in the general meeting, an explanatory statement for such appointment, annexed to the notice for the general meeting, shall include a statement that in the opinion of the Board, he fulfils the conditions specified in this Act for such an appointment.

  Section 161(2)-Alternate Director; if appointed as independent director shall be required to qualify as independent Director:  No person shall be appointed as an alternate director for an independent director by the board of directors as authorized by Articles of Association unless he is qualified to be appointed as an independent director under the provisions of this Act.

  Section 173(3)-Notice of Board Meeting and exception if an Independent Director is present:A meeting of the Board shall be called by giving not less than seven days’ notice in writing to every director at his address registered with the company and such notice shall be sent by hand delivery or by post or by electronic means:

 A meeting of the Board may be called at shorter notice to transact urgent business subject to the condition that at least one independent director, if any, shall be present at the meeting:

 Provided further that in case of absence of independent directors from such a meeting of the Board, decisions taken at such a meeting shall be circulated to all the directors and shall be final only on ratification thereof by at least one independent director, if any.

 Section  177(2)- Audit Committee :The Board of Directors of every listed company and every public company having paid up capital of more than Rs. 10 cr. Or turnover of more than Rs. 100 cr. Or Borrowings of more than Rs.50 cr. shall constitute the Audit Committee which shall consist of a minimum of three directors with independent directors forming a majority.

 Section 178(1)-Nomination and Remuneration Committee: The Board of Directors of every listed company and every public company having paid up capital of more than Rs. 10 cr. Or turnover of more than Rs. 100 cr. Or Borrowings of more than Rs.50 cr. shall constitute the Nomination and Remuneration Committee consisting of three or more non-executive directors out of which not less than one-half shall be independent directors.

 Schedule IV:Code for Independent Directors [Pursuant to section 149(8)]

  1. Guidelines of professional conduct:

An independent director shall:

  • uphold ethical standards of integrity and probity;
  • act objectively and constructively while exercising his duties;
  • exercise his responsibilities in a bona fide manner in the interest of the company;
  • devote sufficient time and attention to his professional obligations for informed and balanced decision making;
  • not allow any extraneous considerations that will vitiate his exercise of objective independent judgment in the paramount interest of the company as a whole, while concurring in or dissenting from the collective judgment of the Board in its decision making;
  • not abuse his position to the detriment of the company or its shareholders or for the purpose of gaining direct or indirect personal advantage or advantage for any associated person;
  • refrain from any action that would lead to loss of his independence;
  • where circumstances arise which make an independent director lose his independence, the independent director must immediately inform the Board accordingly;
  • assist the company in implementing the best corporate governance practices.

 2.Role and functions:

The independent directors shall:

  • help in bringing an independent judgement to bear on Board’s Deliberations especially on issues of strategy, performance, risk management, resources, key appointments and standard of conduct;
  • bring an objective view in the evaluation of the performance of board and management;
  • scrutinize the performance of management in meeting agreed goals and objectives and monitor the reporting of performance;
  • satisfy themselves on the integrity of financial information and the financial controls and the systems of risk management are robust and defensible;
  • safeguard the interests of all stakeholders, particularly the minority shareholders;
  • balance the conflicting interest of stakeholders;
  • determine appropriate levels of remuneration of executive directors, key managerial personnel and senior management and have a prime role in appointing and where necessary recommend removal of executive directors, key managerial personnel and senior management;
  • moderate and arbitrate in the interest of the company as a whole ,  in situations of conflict between management and shareholder’s interest.

 3.Duties:

 The independent directors shall—

  • undertake appropriate induction and regularly update and refresh their skills, knowledge and familiarity with the company;
  • seek appropriate clarification or amplification of information and, where necessary, take and follow appropriate professional advice and opinion of outside experts at the expense of the company;
  • strive to attend all meetings of the Board of Directors and of the Board committees of which he is a member;
  • participate constructively and actively in the committees of the Board in which they are chairpersons or members;
  • strive to attend the general meetings of the company;
  • where they have concerns about the running of the company or a proposed action, ensure that these are addressed by the Board and, to the extent that they are not resolved, insist that their concerns are recorded in the minutes of the Board meeting;
  • keep themselves well informed about the company and the external environment in which it operates;
  • not to unfairly obstruct the functioning of an otherwise proper Board or committee of the Board;
  • pay sufficient attention and ensure that adequate deliberations are held before approving related party transactions and assure themselves that the same are in the interest of the company;
  • ascertain and ensure that the company has an adequate and functional vigil mechanism and to ensure that the interests of a person who uses such mechanism are not prejudicially affected on account of such use;
  • report concerns about unethical behaviour, actual or suspected fraud or violation of the company’s code of conduct or ethics policy;
  • acting within his authority, assist in protecting the legitimate interests of the company, shareholders and its employees;
  • not disclose confidential information, including commercial secrets, technologies, advertising and sales promotion plans, unpublished price sensitive information, unless such disclosure is expressly approved by the Board or required by law.

 4.Manner of appointment:

  •  While selecting independent directors (ID’s) the board shall ensure that there is appropriate balance of skills, experience and knowledge in the board.
  • The appointment of IDs of the company shall be approved at the meeting of the shareholders.
  • The Explanatory Statement attached to the notice of the meeting  for approving the appointment of IDs shall include a statement that in the opinion of the board, the IDs proposed to be appointed fulfils the conditions specified in the Act and the rules made there under and that the proposed director is independent of the management.
  • The appointment of independent directors  shall be formalized through a letter of appointment, which shall set out the terms of appointment, the expectation of the board from the appointed director, the fiduciary duties, provisions for D & O Insurance Policy, code of business ethics, remuneration and other fees, list of actions which IDs should not do while functioning as such in the company.
  • The terms and conditions of appointment of independent directors shall be open for inspection at the registered office of the company by any member during normal working hours and also terms and conditions of the appointment letter should be uploaded on the company’s website.

 5.Re-appointment:

 The re-appointment of ID’s shall be on the basis of report of performance evaluation.

 6.Resignation or removal:

  •  The resignation or removal of an independent director shall be in the same manner as is provided in section 168 & 169 of the Act.
  • An independent director who resigns or is removed from the board of the company shall be replaced with 180 days from the date of such resignation or removal, as the case may be .

  7. Separate meetings:

  • All the ID’s to meet at-least once in a year. The meeting must be convened without the presence of the non-independent directors and members of the management.
  • An ID would also evaluate the performance of the chairperson of the company and review the performance of the non-independent directors and the Board as a whole of the company.
  • They shall also evaluate the quality, quantity and timeliness of flow of information between the company management and the board that is necessary for the board to effectively and reasonably to perform their duties.

 8.Evaluation Mechanism:

  • The performance evaluation of ID’s shall be done by the entire board of directors, excluding the director being evaluated.
  • On the basis of evaluation report, ID shall be reappointed or continue his terms as ID.

 

 Section 149 (12)-Penalty for non compliance of independent director provisions: Penalty under Companies Act, 2013; INR 50,000 to INR 5,00,000 v. upto imprisonment upto 10 years or fine upto INR 25 crores under the SCRA. Independent director liable for acts/omissions of company unless lack of knowledge/ consent or “acting diligently” is proved. There is no restriction on indemnification by company.

 From the above, it is quite evident that the roles, functions and duties of Independent directors have increased substantially. One has to ponder on all these provisions thoroughly before accepting the invitation for becoming Independent Director of the Company. Further, it is also noted that remuneration and fees to be given to Independent Directors as per provisions of The Companies Act, 2013 is not consistent with the duties, roles, functions and responsibility of the Independent Directors as enumerated in the Act. The Companies Act,2013 have put lot of restrictions for Independent Directors that now even, the most eligible candidates will be more cautious before the joining the board of any company as Independent Directors or even extending their terms as ID’s.