State of Independent Directors through the years

The role of independent directors has evolved significantly over the years. Independent
directors are non-executive directors who are not affiliated with the company's management
and are appointed to provide an objective and independent perspective on the company's
activities.
Adolf Berle and Gardiner Means were two American legal scholars who co-authored a
seminal book titled "The Modern Corporation and Private Property" in 1932. The book is
considered a classic in the fields of corporate law and corporate governance and is still
widely read and cited today.
Although Berle and Means did not use the term "Corporate Social Responsibility" (CSR) in
their treatise, their work is often seen as an important contribution to the development of CSR
theory. In their book, Berle and Means argued that the separation of ownership and control in
modern corporations gave rise to a "new class of managers" who were more interested in
maximizing their own personal wealth and power than in serving the interests of shareholders
and other stakeholders.
Berle and Means identified a number of problems with this new corporate structure, including
the potential for managers to engage in self-dealing, the lack of transparency and
accountability in corporate decision-making, and the possibility of conflicts of interest
between managers and shareholders.
Their work helped to lay the foundations for a more socially responsible approach to
corporate governance, by emphasizing the need for greater accountability, transparency, and
stakeholder engagement in corporate decision-making. In particular, Berle and Means argued
that corporate managers had a fiduciary duty to act in the best interests of the company's
shareholders, which included taking into account the interests of other stakeholders such as
employees, customers, and the broader community.
Their treatise also contributed to the development of the stakeholder theory of the firm, which
posits that companies have a responsibility to balance the interests of all stakeholders, not just
shareholders. This idea has been a key driver of the modern CSR movement, which
emphasizes the importance of companies taking responsibility for their social and
environmental impacts, and of engaging with a range of stakeholders to create shared value
for all.

a. Role of corporate scandals in shaping CSR

In the 1960s in the United States, many directors of corporations were drawn from
management. At that time, it was common for a company's board of directors to be made up
of executives from the company or individuals with close ties to the company. One reason for
this was that the prevailing belief was that directors with industry expertise and experience
could provide valuable insight and guidance to the company. There was also a sense of
loyalty and trust among executives, which made it natural for them to serve on each other's
boards. However, a string of scandals from 1970s through 1990s shaped Corporate Social
Responsibility (CSR) as the idea that businesses have a responsibility to contribute to society
beyond their economic activities.
The Watergate scandal, which took place in the early 1970s, involved the Nixon
administration's involvement in illegal activities, including the break-in at the Democratic
National Committee headquarters. The scandal involved a failure of ethics and governance.
In fact, the Watergate scandal had a significant impact on the development of CSR. The
scandal highlighted the need for greater transparency and accountability in business, and led
to a growing demand for businesses to act in a socially responsible manner. As a result, many
companies began to adopt CSR policies and practices, including codes of conduct,
environmental and social reporting, and stakeholder engagement. The Watergate scandal
served as a wake-up call for businesses to take their responsibilities to society more seriously.
Today, CSR has become a widely accepted and important concept, and many companies are
actively working to address social and environmental issues and to contribute to their
communities in a positive way.
In 1990s, the Maxwell Corporation scandal was a high-profile corporate scandal that
involved the late British media tycoon Robert Maxwell and his business empire. One of the
key issues in the scandal was the failure of CSR practices at Maxwell Corporation.
Maxwell Corporation was a conglomerate of media and publishing companies, including
Mirror Group Newspapers and Macmillan Publishers. Robert Maxwell was known for his
aggressive business practices and his tendency to prioritize short-term gains over long-term
sustainability. As a result, Maxwell Corporation engaged in several unethical and illegal
activities, including the misappropriation of pension funds, the manipulation of stock prices,
and the falsification of financial statements.
Despite these practices, Maxwell Corporation had a CSR policy that emphasized its
commitment to ethical business practices, social responsibility, and environmental
sustainability. However, the company's actions did not reflect its stated values, and its CSR
policy was seen as little more than a public relations exercise. The failure of CSR practices at
Maxwell Corporation was evident in several ways. For example, the company's pension fund
was used to finance its acquisition spree, which put the retirement savings of its employees at
risk. The company also engaged in aggressive tax avoidance schemes, which deprived the
government of much-needed revenue.
In addition, Maxwell Corporation's media outlets were criticized for their biased reporting
and for their invasion of privacy. The company was also accused of polluting the
environment through its paper and printing operations. Overall, the Maxwell Corporation
scandal highlights the importance of aligning CSR policies with actual business practices. A
company's CSR policy should not be just a box-ticking exercise, but should reflect the
company's values and its commitment to social responsibility and sustainability.

b. Recommendations of Cadbury Committee

The Cadbury Committee was a UK committee established in 1991 to address concerns about
corporate governance following a series of high-profile corporate scandals. The committee
was named after its chairman, Sir Adrian Cadbury. The committee's final report, known as
the Cadbury Report, was published in 1992 and provided recommendations for improving
corporate governance practices in companies. While the report did not specifically focus on
corporate social responsibility (CSR), it did address the responsibilities of directors, including
the need to take into account the interests of stakeholders and to act in the long-term interests
of the company. It required average number of insider directors as five and eight outside
independent directors. The independent directors were required to bring independent
judgements and selected through formal process by board as whole.
The Cadbury Report is often cited as the first formal code of corporate governance and its
recommendations have been influential in shaping corporate governance practices in many
countries around the world.

c. The Sarbanes-Oxley Act (SOX) of 2002

The Sarbanes-Oxley Act (SOX) of 2002 is a federal law that was enacted by the American
Congress in response to a series of corporate scandals, including the Enron and WorldCom
scandals, which rocked the business world in the early 2000s. SOX had some provisions that
impacted CSR and corporate governance practices.
One of the key provisions of SOX was the requirement that companies establish and maintain
internal controls to ensure the accuracy of their financial reporting. This provision was aimed
at preventing corporate fraud and ensuring the accuracy of financial statements. While this
provision was not directly related to CSR, it did have implications for corporate governance
practices and accountability. Another provision of SOX required companies to establish a
code of ethics for their senior financial officers. This code of ethics was intended to promote
ethical behaviour and discourage financial misconduct. While this provision was also not
specifically focused on CSR, it did contribute to the broader trend of promoting ethical and
responsible business practices.
Additionally, SOX required companies to disclose more information about their executive
compensation and financial performance. This increased transparency and accountability was
intended to give shareholders and other stakeholders more insight into a company's financial
health and decision-making processes.
Overall, while the Sarbanes-Oxley Act was not specifically focused on CSR, it did contribute
to the broader trend of promoting transparency, accountability, and responsible business
practices. These trends have become increasingly important in the wake of the corporate
scandals of the early 2000s, and they have helped to shape the modern landscape of corporate
governance and CSR.

d. International Finance Corporation Report (2004)

The International Finance Corporation (IFC) is a member of the World Bank Group that
provides financing and advisory services to promote private sector development in
developing countries. In 2004, the IFC released a report titled "Corporate Governance in
Emerging Markets: An Overview" which highlighted the challenges of implementing good
corporate governance practices in poor and developing countries.
The report found that corporate governance conditions were generally unfavourable in poor
and developing countries due to a number of factors. These factors included weak legal and
regulatory frameworks, lack of enforcement mechanisms, insufficient access to capital
markets, and limited capacity for governance and oversight. In particular, the report noted
that many developing countries lacked the legal and institutional frameworks necessary to
enforce corporate governance standards. This made it difficult for companies to establish
effective governance structures and for investors to protect their interests.
The report also highlighted the challenges of accessing capital markets in poor and
developing countries, which can limit the availability of funding for companies and hinder
their growth prospects. This can exacerbate governance challenges by limiting the ability of
companies to invest in governance and oversight mechanisms.
Finally, the report noted that limited capacity for governance and oversight in poor and
developing countries can make it difficult to establish effective governance structures. This
can be due to a lack of skills, training, or experience among board members and other
stakeholders, as well as a lack of understanding of governance principles and best practices.
Overall, the IFC report highlighted the significant challenges of implementing good corporate
governance practices in poor and developing countries. These challenges continue to be a
major issue today, and efforts to promote good governance and oversight in these contexts
remain a key priority for international development organizations and other stakeholders.

e. Securities and Exchange Board of India (SEBI) Clause 49 Listing

Agreement
The Securities and Exchange Board of India (SEBI) is the market regulator for securities
markets in India. In 2000, SEBI introduced Clause 49 of the Listing Agreement, which laid
down guidelines for corporate governance for companies listed on Indian stock exchanges.
One of the key provisions of Clause 49 was the mandatory requirement for listed companies
to have independent directors on their boards.
The introduction of the mandatory provision for independent directors under Clause 49 was a
significant development in the history of corporate governance in India. Prior to this, many
Indian companies had weak governance structures and lacked independent oversight. The
requirement for independent directors was intended to address this issue by introducing a
mechanism for greater oversight and accountability in corporate decision-making.
SEBI played a key role in introducing this provision by setting standards for the appointment
and functioning of independent directors. Under the guidelines, independent directors were
required to have relevant expertise, experience, and qualifications, and were expected to
provide an independent perspective on corporate decision-making. They were also expected
to act in the best interests of the company and its stakeholders, and to help ensure compliance
with relevant laws and regulations.
The introduction of mandatory independent directors under Clause 49 has had a positive
impact on corporate governance in India, helping to improve oversight, accountability, and
transparency in the country's corporate sector. The requirement for independent directors has
also helped to improve investor confidence in Indian companies, and has been widely
credited with helping to drive growth and development in the country's economy.

f. Recommendations of Expert Committee under J.J.Irani

In 2004, the Ministry of Corporate Affairs in India appointed a committee under the
chairmanship of J.J. Irani to review and update the existing legal and regulatory framework
for corporate governance in India. The committee was tasked with making recommendations
to improve the effectiveness of corporate governance practices in the country, with the aim of
promoting investor confidence and encouraging sustainable economic growth.
One of the key recommendations of the Irani Committee was the introduction of a minimum
requirement for independent directors on corporate boards. The committee recommended that
at least one-third of the total number of directors on a board should be independent directors.
The recommendation was based on the committee's belief that independent directors play a
critical role in providing oversight and promoting good governance practices in companies.
The committee argued that independent directors bring an external perspective and
specialized expertise to corporate decision-making, which can help to mitigate risks and
promote sustainable growth.
The recommendation for a minimum of one-third independent directors was subsequently
incorporated into the Companies Act of 2013, which requires all listed companies to have at
least one-third of their board made up of independent directors. This requirement has been
widely seen as a significant step forward for corporate governance in India, and has helped to
improve the accountability and transparency of the country's corporate sector.
Overall, the Irani Committee's recommendation for a minimum requirement for independent
directors was an important milestone in the development of corporate governance practices in
India. The requirement has helped to improve the quality of corporate decision-making and
promote sustainable growth, and has become an important part of the legal and regulatory
framework for corporate governance in the country.

g. Companies Act 2013 Article 149(A)

The Companies Act 2013, which is the primary legislation governing companies in India,
introduced a legal provision under Article 149(4) that requires every listed company to have
at least one-third of its board made up of independent directors.
Section 149 of the Companies Act sets out the qualifications, appointment, and remuneration
of directors on the board of a company. Subsection 149(4) provides that every listed company
shall have at least one-third of its total number of directors as independent directors.
The introduction of this provision was a significant development in the history of corporate
governance in India. The requirement for a minimum of one-third independent directors on
the board of listed companies has helped to promote transparency, accountability, and
responsible corporate behavior in India's corporate sector.
Independent directors are appointed to provide an external perspective and bring specialized
expertise to the board's decision-making process. They are expected to act in the best interests
of the company and its stakeholders, and to help ensure compliance with relevant laws and
regulations.
The requirement for a minimum of one-third independent directors on the board has been
widely seen as a positive step towards promoting good governance and improving investor
confidence in Indian companies. The provision has helped to address some of the weaknesses
in the corporate governance structures of Indian companies and has encouraged greater
oversight and accountability in the country's corporate sector.

h. Listing Obligations and Disclosure Requirements (LODR) 2015

In 2015, the Securities and Exchange Board of India (SEBI) introduced the LODR
Regulations, which prescribe the listing obligations and disclosure requirements for
companies listed on Indian stock exchanges.
The LODR Regulations replaced the previous Clause 49 of the Listing Agreement, which had
been in force since 2000. The new regulations aimed to bring about greater transparency,
disclosure, and accountability in the Indian capital markets.
Under the LODR Regulations, listed companies are required to comply with various
disclosure requirements, including:
Periodic financial reporting: Listed companies are required to prepare and disclose periodic
financial reports, including annual reports, quarterly reports, and other financial statements.
Corporate governance: Listed companies are required to comply with certain corporate
governance requirements, such as the appointment of independent directors and the
establishment of an audit committee.
Related-party transactions: Listed companies are required to disclose related-party
transactions, which are transactions between the company and its related parties, such as
directors or other companies in the same group.
Insider trading: Listed companies are required to comply with regulations related to insider
trading, which prohibit insiders from trading on the basis of material non-public information.
Disclosures related to material events: Listed companies are required to disclose material
events that could impact their business, such as mergers and acquisitions, major contracts, or
changes in management.
The LODR Regulations have been widely seen as a positive development for the Indian
capital markets. They have helped to promote greater transparency and accountability in the
country's corporate sector, and have improved investor confidence in Indian companies. The
regulations have also helped to align India's corporate governance practices with international
best practices, making the country more attractive to foreign investors.

References
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3. The 4 types of corporate social responsibility your business ... - Alaya.

https://alayagood.com/blog/types-of-corporate-social-responsibility/

4. Bebchuk, Lucian, and Roberto Tallarita. “Will Corporations Deliver Value to All
Stakeholders?” Vanderbilt Law Review, vol. 75, no. 4, Vanderbilt Law Review, May
2022, p. 1031.

5. What Is the Securities and Exchange Board of India (SEBI)? - Investopedia.

https://www.investopedia.com/terms/s/sebi.asp

6. National Committees on Corporate Governance - Your Article Library.

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