Evolution and Effectiveness of Independent Directors in Indian Corporate Governance
92 Pages Posted: 6 Feb 2010 Last revised: 31 May 2010
Date Written: February 6, 2010
The goal of this Article is two-fold: (i) to identify the rationale for the emergence of independent directors by tracing their evolution in the U.S. and the U.K. where they originated; and (ii) to examine the transplantation of that concept into India with a view to evaluating the effectiveness of independent directors in that country. This Article finds that there are significant differences in the corporate ownership structures and legal systems between the countries of origin of independent directors on the one hand and India on the other. Due to the diffused shareholding structures in the U.S. and the U.K., the independent directors were ushered into corporate governance norms in those countries in order to operate as a monitoring mechanism over managers in the interest of shareholders. Each stage in the evolution of board independence bears testimony to this fact. However, a transplantation of the concept to a country such as India without placing emphasis on local corporate structures and associated factors is likely to produce unintended results and outcomes that are less than desirable. This Article finds that due to the concentrated ownership structures in Indian companies, it is the minority shareholders who require the protection of corporate governance norms from actions of the controlling shareholders. Board independence, in the form it originated, does not provide a solution to this problem. While this Article is skeptical about the effectiveness of board independence in India, it suggests reforms to embolden independent directors that may empower them to play a more meaningful role in corporate governance.
Keywords: Independent Director, Corporate Governance, Agency Problems, India
JEL Classification: G38, K22
Suggested Citation: Suggested Citation