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just want you to check for grammar and spilling and to edit the font and format number basically organize the structure of the world and do a bibilography
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I. Introduc)on
In the evolving and intricate world of business today it is crucial to have strong corporate
governance in place to guarantee the prosperity and longevity of organizations. At the core of
this governance framework are board members who hold the responsibility of guiding
companies, towards their objectives and protecting the interests of stakeholders. Independent
directors in particular have a role to play in bolstering board efficiency and maintaining its
integrity.
The roles and obligations of board directors cover a spectrum of areas which include making
strategic decisions overseeing risks handling executive compensation and ensuring compliance
with regulations. These directors are usually divided into two groups: executive directors and
non executive directors. Executive directors are typically members of the management team
within the organization. Are accountable, for the everyday operations. On the non executive
directors offer an external viewpoint by bringing in diverse expertise and independent judgment
to board deliberations.
In the world of executive directors independent directors have a special role. Unlike directors
who might have personal or financial stakes in the organization independent directors are
selected for their neutrality, fairness and capacity to offer unbiased opinions. They don’t have
any financial or professional connections, with the company enabling them to make decisions
that prioritize the best interests of the organization and its stakeholders.
Having directors on the board is extremely important for a variety of reasons. Firstly they provide
an impartial perspective, during board meetings. Their independence enables them to question
management decisions assess strategies critically and advocate for transparency and
accountability. Through their viewpoint they can identify any potential conflicts of interest and
ensure that the needs of all stakeholders are taken into account effectively.
This essay will provide an overview of board directors and their responsibilities, with a particular
focus on independent directors. I will discuss the different types of directors, the role and
importance of independent directors, and the expectations and challenges they face.
Additionally, I will delve into the legal requirements for independent directors, including who
qualifies for the position, their qualifications and disqualifications, the annual independence
check conducted by the Nomination and Remuneration Committee, and their compensation.
The board of directors play a critical role in corporate governance and provide strategic guidance
to organizations. They are typically composed of a group of individuals who are elected or
appointed to represent the interests of shareholders and stakeholders. The board’s primary
responsibility is to oversee the management of the company and ensure its long-term
success1.One important category of directors is independent directors. Independent directors
are individuals who are not affiliated with the company in any other capacity, such as being an
1
Calder A, Corporate Governance: A Prac(cal Guide to the Legal Frameworks and Interna(onal Codes of Prac(ce
(Kogan Page 2008)
employee or a major shareholder. They are expected to bring an objective and unbiased
perspective to the boardroom2.
II.
Board of directors
The Board represents the interests of all shareholders. It is entrusted with the responsibility
of managing the Company’s affairs with the utmost care and loyalty. It is obligated to act in
the interests of the Company promote its growth and maximize its value. Even if certain
powers are delegated to committees, individuals or third parties the Board remains
ultimately accountable, for the Companys operations. Should a Board member fail to fulfill
their duties they should consider resigning from their position. Here are some examples of
the functions and powers that the Board possesses3.
1. Company’s Strategy
2. Relationship and Communication with Shareholders and Stakeholders
3. Finance Management
4. Internal Control System & Risk Management
5. Board Membership and Committees 4.
the Board represents shareholders’ interests, manages the company with care and loyalty,
and acts in its best interests. It possesses powers and functions related to strategy,
shareholder communication, finance management, internal control, risk management, and
overseeing Board membership and committees.
Classification of board members
III.
Types of Directors
It is crucial to comprehend the various kinds of directors while assessing the board of directors.
Both executive and non-executive directors are among them. Executive directors are usually
employees of the company. Hold both roles and responsibilities, within the board. On the other
hand non-executive directors do not have any formal employment ties with the company and
are not involved in day to day operations.
To gain a comprehensive understanding of board directors, it is important to briefly discuss the
different types of directors. This section touches upon the main categories: executive and nonexecutive directors and Independent director.
Executive Directors:
2
Brown G, The Independent Director: The Non-Execu(ve Director’s Guide to Effec(ve Board Presence (Palgrave
Macmillan 2015)
3
Cme board member guide ﺳوي اﻻﺳﺎﯾﺗﺎﺷﯾن
4
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The management roles, within the company are handled by the executive directors. These
directors can be assigned responsibilities, such as overseeing finance, leading operations or
managing sales. While it is not mandatory, from a standpoint typically one of the directors
assumes the role of managing director5. Executive directors perform two roles for the company:
they are executives as well as members of the board. They are specifically in charge of
monitoring several functional areas, putting strategic decisions into action, and managing the
company’s operations.
Non executive: On the board of directors, non-executive directors perform a variety of crucial
duties, including monitoring the senior managers and participating in strategic decision-making.
They also provide experience and a useful set of resources to the company6.
Independent director: independent directors are specifically evaluated for their independence
from the company’s management and any potential conflicts of interest. They should not have
any financial or personal relationships with the company or its executives that could compromise
their objectivity. Independent directors are expected to bring an impartial perspective to board
discussions and decision-making.
IV.
Why the board need independent directors
Executive directors may have conflicts of interest between their operational tasks within the
company and their responsibilities as board members as a result of their dual function. Executive
directors must strike a balance between acting in the best interests of the firm overall and their
fiduciary responsibility to shareholders, even though there might be a complect of interest.
Therefore, independent directors function as overseers ensuring that management remains
responsible and thoroughly examining decisions with utmost attention7. This impartiality
protects against any conflicts of interest and places emphasis on long term shareholder value,
than temporary executive benefits8. In a time where transparency are highly valued independent
directors serve as connectors that inspire trust, in investors. Their involvement signifies the
implementation of corporate governance measures showcasing a dedication, to behavior and
thorough supervision9.
V.
Independent director role and challenges
Independent directors hold a position, in the world. They have the responsibility of protecting
the interests of stakeholders while dealing with conflicts and limitations. Their role involves
5
Jones, L. (2017) Introduc(on to business law. Oxford: Oxford University Press.
Goh, L. and Gupta, A. (2016) ‘RemuneraQon of non-execuQve directors: Evidence from the UK’, The Bri(sh
Accoun(ng Review, 48(3), pp. 379–399. doi:10.1016/j.bar.2015.05.001.
7
KPMG. (2020, February 12) The Role of Independent Directors in Good Corporate Governance.
8
NACD. (2023, January 1). About NACD. [h_ps://www.nacdonline.org/]
9
ICGN Global Governance principles (2014). London: InternaQonal Corporate Governance Network.
6
monitoring management providing expert advice and guidance and ensuring compliance, with
regulations and best practices10. This requires them to maintain a balance to walking on a
tightrope as they face various challenges that require both unwavering independence and
strategic involvement.
It can be quite challenging to maintain independence when faced with the influence of
corporations. Management teams, driven by their interests and persuasive abilities often put
pressure on directors to align with the company’s goals. Additionally dominant shareholders
have an impact as their dissenting opinions or subtle threats of disengagement can sway the
most determined director. It’s a struggle to stay true, to ones beliefs prioritize the good over
personal agendas and resist the tempting allure of compromising values.
Ability to look beyond the challenge, for directors lies in their capacity to think beyond what’s
presented by the management. It is crucial for them to recognize warning signs and strategically
plan for the future considering developments, competition and various factors that affect the
business. Independent directors should fearlessly and impartially raise questions regarding
proposals brought before the Board assessing their impact, on the company and its stakeholders
while also seeking information whenever necessary11. The role of directors entails providing
perspectives.
Lack of information Executive directors play a role in the day, to day operations of a company
possessing expertise and knowledge about the company operations. On the hand independent
directors may not necessarily have detailed operational knowledge when they are appointed.
One of the challenges is ensuring that independent directors become familiar, with the company
operations to bridge any knowledge gaps and facilitate discussions and decision making within
the Board12. Additionally, it is equally important for independent directors to stay updated on
the developments and technologies that impact the company business.
VI.
How important are independent director in decision making:
I.
Unbiased Perspectives and Unconstrained Opinions: Unlike directors who may have
interests, at stake independent directors bring independency to the discussion. They are
not bound by pressures or conflicts which enables them to evaluate proposals and
question assumptions. This independent viewpoint plays a role, in avoiding groupthink,
where conformity can result in decision making13.
Guardians of Governance: Independent directors serve as overseers keeping an eye, on
management conduct and making sure that regulatory guidelines and ethical standards
II.
10
Independent director (2023) Corporate Finance InsQtute. Available at:
h_ps://corporatefinanceinsQtute.com/resources/career/independent-director/ (Accessed: 01 January 2024).
11
ibid
12
Independent Directors and stakeholders protecQon: A case of Sime Darby. Accessed January 4, 2024.
h_ps://www.researchgate.net/publicaQon/267230153_Independent_Directors_and_Stakeholders_ProtecQon_A_C
ase_of_Sime_Darby.
13
ICGN (N9)
III.
IV.
are followed. They actively engage in risk management meticulously examine statements
and hold management for their decisions. Such thoroughness promotes transparency.
Helps mitigate the likelihood of scandals or unethical practices within corporations. As
highlighted by the Harvard Business Review independent directors play a role in holding
management accountable, for their actions. Ensuring that the company fulfills its legal
and ethical obligations14.
Long-Term Visionaries: independent directors, not influenced by short term gains have
the freedom to prioritize the long term sustainability and profitability of the company.
They advocate for practices, environmental concerns and ethical behavior making sure
that decisions are, in line with the company’s mission and values15.
Effective independent directors understand the importance of building bridges than
working in isolation. They play a role, in connecting the board with stakeholders such, as
investors, employees and communities. By taking into account the perspectives and
interests of all stakeholders when making decisions they cultivate trust. Prioritize social
responsibility16.
What the stakeholders expectation from independent directors
Independent directors have a role to play in ensuring that a company remains accountable and
responsive, to its stakeholders. These stakeholders, each with their interests and priorities have
expectations, from the independent directors who sit on the board. Lets explore the
expectations of groups of stakeholders:
Shareholders: Independent directors are supposed to maintain independence from the
management and fulfill their role as representatives of shareholders. However, it is important to
note that this expectation applies to all directors. This means they should actively engage in
board and committee meetings inquire about any uncertainties they may have assess proposals,
from the standpoint of minority shareholders review the flow of information and recommend
any modifications as needed17.
stakeholders expect independent directors to focus on the long-term sustainability of the
organization. They want directors to consider environmental, social, and governance (ESG)
14
Every family business needs an independent director (2021) Harvard Business Review. Available at:
h_ps://hbr.org/2020/01/every-family-business-needs-an-independent-director (Accessed: 03 January 2024).
15
ibid
16
World Bank Group (2017) Corporate governance, World Bank. Available at:
h_ps://www.worldbank.org/en/topic/financialsector/brief/corporate-governance (Accessed: 02 January 2024).
17
ICSI, Guidance Note on Independent Directors (Revised EdiQon, 2022)
factors when making decisions and to ensure that the organization operates in a responsible and
sustainable manner18.
Banks and financial institutions play a role as stakeholders, in companies as they have invested
public funds in these organizations. These institutions rely on directors to work diligently and
responsibly ensuring the safety of their investments and the expected returns.
Employees being members of the organization have expectations, from independent directors.
They expect these directors to serve as protectors of their interests free from any influence,
from the management. Referring to the principles of governance19. Employees have
expectations, for directors who play a crucial role in overseeing the company performance. They
want these directors to prioritize conduct and focus on long term sustainability. Additionally,
employees seek directors who will protect their rights and ensure compensation practices. It is
important for these directors to champion transparency and open communication creating an
avenue for employees to express concerns and engage in dialogue with management. By
meeting these expectations independent directors can build trust. Foster a sense of shared
purpose, within the organization ultimately boosting employee morale and productivity20.
Society: As a stakeholder society expects independent directors to responsibly and sustainably
manage the company’s resources ensuring that they are used in the way, for societal activities
and benefitting a larger portion of the community21.
I.
Independent director legal requirement
As, per the guidelines laid out in the UK Corporate Governance Code it is recommended
that premium listed companies on the London Stock Exchange have a minimum of 50%
executive directors, on their board excluding the chairperson22.And as in the Saudi
Capital Market Authority regulation for the listed company the board must be either “the
majority of the Board members shall be of Non-Executive Directors.” Or “the number of
Independent Directors shall not be less than two members or one-third of the Board
members, whichever is greater”23.Therefor, its important to know there legal
requirements. They are like any other board member they required to be professionally
capable and has the required experience, knowledge, skill and independence, which
18
Team, T.I. (no date) What is environmental, social, and governance (ESG) inves(ng?, Investopedia. Available at:
h_ps://www.investopedia.com/terms/e/environmental-social-and-governance-esg-criteria.asp (Accessed: 05
January 2024).
19
“The Report of the Cadbury Commi_ee on the Financial Aspects of Corporate Governance: The Code of Best
PracQce.” Corporate Governance: An Interna(onal Review 1, no. 3 (1993): 124–124.
h_ps://doi.org/10.1111/j.1467-8683.1993.tb00025.x.
20
‘Stakeholder theory and corporate social responsibility’ (2010) Stakeholder Theory,
doi:10.1017/cbo9780511815768.009.
21
(n16)
22
Financial ReporQng Council, Guidance on the Applica(on of the UK Corporate Governance Code (Financial
ReporQng Council 2023).
23
Capital Market Authority (Saudi Arabia), Corporate Governance Regula(ons (Capital Market Authority 2023).
enable him/her to perform his/her duties efficiently24. Although there is nine issues
affecting independence as in the Saudi jurisdiction:
1. wnership of Significant Shares: Holding 5% or more of the companys shares or those of
any company.
2. Familial Connections, to Board Members: Being a relative of any board member or their
associated companies.
3. Family Ties to Executives: Being a relative of any ranking executive within the company or
its related companies.
4. Board Membership in Related Companies: Already serving on the board of another
company within the group.
5. Recent Employment, Control or Business Dealings: Having been an employee held a
controlling interest. Engaged in business with the company or its affiliates within the two
years.
6. Conflict of Interest in Contracts: Having an indirect interest in any contracts made by the
company.
7. Excessive Financial Gains: Receiving compensation from the company that exceeds SAR
200,000 or 50% of their years board pay whichever’s lower.
8. Competing Business Ventures: Owning or operating a business competing with the
company.
9. Term Limit: Serving on the board for more than nine consecutive years.25
these disqualifications aim to ensure board members’ independence, avoid conflicts of
interest, and promote long-term stability while preventing undue influence by
shareholders or business associates.
I.
Selecting Independent director and qualification needed
Choosing the director for your board is a critical choice that can have a considerable impact, on
your company’s governance, transparency and overall prosperity. These individuals bring in a
wealth of expertise, varied perspectives and impartial supervision to the forefront playing a role,
in holding management responsible and safeguarding the interests of shareholders. However,
with a vast pool of candidates available navigating through the selection procedure can present
its challenges.
Expertise and Experience: When searching for directors it is important to find individuals who
have demonstrated expertise in areas that’re relevant to your industry and business operations.
Look for references such as board positions, executive roles in similar companies or specific
consulting engagements to ensure that they have a good understanding of the challenges and
opportunities within your sector. It is advisable to select individuals with a proven track record of
24
Sama Issues key principles for governance of Financial Ins(tu(ons.
25
(n23) arQcle 19 (SAMA)
success in areas such, as financial analysis, risk management, strategic planning, or corporate
governance26.
Independence and Objectivity: Independent directors as their name implies should be unbiased
and capable of making decisions in the interests of the company. It is important to consider
factors such as having no connections to the company or its competitors not having personal
relationships with management and being independent, from any controlling shareholder
group27. It is advisable to seek individuals who are known for their integrity, ethical behavior and
willingness to question established norms when it is called for28.
Effective Communication and Interpersonal Skills: Strong communication skills are vital for a
director to bridge the gap between the board and various stakeholders. The ability to articulate
complex issues clearly, listen actively to diverse perspectives, and foster constructive dialogue
within the boardroom is crucial for effective collaboration and consensus building.
Maintaining the ethical principles is extremely important for independent directors. These
individuals should be known for their integrity and dedication to fairness, transparency and
responsibility. It is crucial that they openly acknowledge any conflicts of interest report any
instances of misconduct they witness and hold themselves to the ethical standards. Evaluating
their integrity and ethical leadership can be done by considering their reputation, involvement in
the community and past experiences, in leadership positions where they had to make ethical
decisions in challenging situations29.
Commitment and Time Dedication: Serving on a board demands an amount of time and
dedication. It is crucial to ensure that potential directors have the availability and capacity to
fulfill their responsibilities effectively. You can gain insights into their time commitment by
considering factors such as their workload, existing board commitments and flexibility regarding
travel. It is advisable to select individuals who genuinely possess a passion, for your company and
are willing to invest the required time and effort to make contributions30.
6. Disqualification of independent director:
disqualifications for independent directors are vital safeguards for board integrity and
shareholder protection. By excluding individuals with financial instability, criminal records,
conflicts of interest, and insufficient expertise, companies can ensure a board of independent,
26
(n9)
NYSE Listed Company Rule 303A (2024).
28
NACD Blue Ribbon Commission Report: Independent Directors: Leading with ObjecQvity (NACD, Washington,
D.C., 2014).
29
Palmer, J. (2023) What is an independent director? (overview, roles, and responsibili(es), OnBoard Board
Management SoVware | Board Portal | Board Intelligence. Available at:
h_ps://www.onboardmeeQngs.com/blog/independent-director/ (Accessed: 05 January 2024).
30
Stevenson, J. (2021) 5 ways to become a great board member, Korn Ferry. Available at:
h_ps://www.kornferry.com/insights/this-week-in-leadership/5-ways-to-become-a-great-board-member (Accessed:
05 January 2024).
27
ethical, and qualified individuals who can effectively hold management accountable and act in
the best interests of the company. This, in turn, fosters trust and confidence in the corporate
governance practices, creating a more sustainable and successful enterprise.
One important disqualification pertains to the issue of instability. People who have declared
bankruptcy or insolvency are not eligible to serve as directors because their financial difficulties
might affect their objectivity and decision making abilities. For example a director facing
insolvency could be more vulnerable to bribery or manipulation by the company, which would
undermine their role as a watchdog31. This aligns with the principle that independent directors
should have independence and not be dependent on the company, for their livelihood.
Convictions for crimes involving turpitude or economic offenses make individuals ineligible for
independent director positions. These convictions raise concerns about the persons values and
their suitability to hold a position of trust. Having a record suggests the possibility of misconduct
and undermines public trust in the boards integrity32. This highlights the significance of
upholding ethical standards, within the boardroom.
Apart from the financial aspects conflicts of interest present a real challenge to an independent
directors impartiality. Any personal or professional connections that may influence their
judgment in favor of the company or certain stakeholders make them unfit for the role. This
includes family relationships with company executives owning significant shares in the company
or serving as directors, in competing businesses33. These conflicts can undermine the directors
capacity to act in the best interests of all shareholders and can result in biased decision making.
Ultimately the absence of knowledge or practical experience can also serve as a detracting
element. While it is not necessary for independent board members to possess expertise in the
industry of the company it is crucial that they have a fundamental grasp of corporate
governance, financial analysis and risk management. Without understanding they might
encounter difficulties, in thoroughly evaluating management decisions and fulfilling their
responsibilities as overseers34. This emphasizes the need for a balanced board composition with
directors possessing diverse skillsets and experience relevant to the company’s
operations.composition comprised of directors who possess diverse skill sets and relevant
experiences aligned with the companys operations.
7. How independent director get paid.
31
Grounds for director disqualifica(on and removal of disqualifica(on (no date) cleartax. Available at:
h_ps://cleartax.in/s/director-disqualificaQon-removal-disqualificaQon (Accessed: 05 January 2024).
32
ibid
33
Director disqualifica(on: Francis Wilks & Jones solicitors (2023) Francis Wilks & Jones. Available at:
h_ps://www.franciswilksandjones.co.uk/smes-directors-shareholders/director-disqualificaQon/ (Accessed: 05
January 2024).
34
Madaan, S. (2021) All about independent directors, TaxGuru. Available at: h_ps://taxguru.in/companylaw/independent-directors.html (Accessed: 05 January 2024).
In the realm of governance independent directors play a vital role, as vigilant overseers
ensuring that companies operate with transparency, accountability, and the sustained welfare.
However how do these individuals receive compensation for their time and expertise? The
answer is multifaceted, much like aspects within the domain. It involves finding a balance,
between remuneration adhering to regulations and maintaining the trust of shareholders.
One of the common ways that independent directors receive payment is through meeting fees.
These freezer fixed amounts given to directors for attending board and committee meetings,
where they share their insights and provide guidance on important decisions. The exact amount
can vary greatly ranging from a hundred dollars to several thousand dollars per meeting. Various
factors influence this range, such as the size of the company the complexity of the industry the
expertise of the director and even the length or complexity of the meeting itself35. For instance
larger companies, in industries often offer higher fees in order to attract and retain top level
talent.
Apart from meeting fees some companies choose to provide retainers which’re annual payments
made to directors regardless of their attendance at meetings. This acknowledges the dedication
and commitment that directors bring, particularly those serving on crucial committees or holding
leadership positions such as the chairperson. The amount of these retainers typically varies
depending on the company’s size and significance ranging from tens of thousands to hundreds
of thousands.
While not as common compensation packages for directors may also include stock options and
performance-based bonuses. These components serve as incentives for directors to align their
interests with long term shareholder value ensuring that their decisions consider growth and
success rather than just immediate profits. Stock options grant directors the right to purchase
company shares in the future at a predetermined price potentially resulting in financial rewards
if the company performs well. Similarly, performance based bonuses link a portion of directors
compensation to achieving company goals further aligning their efforts with shareholder
interests. It is important to note that compensation does not exist independently but is
influenced by regulations and governance codes36. These frameworks play a role in shaping how
independent directors are remunerated by ensuring that compensation packages are fair,
reasonable and do not encourage behaviors detrimental, to the company or its shareholders.
Moreover, it is a requirement for companies to provide detailed information about the
remuneration of directors in their annual proxy statements. This allows shareholders to
thoroughly examine these practices and hold the board accountable.
35
FonQnelle, A. (no date) How much board of directors members get paid and what they do, Investopedia. Available
at: h_ps://www.investopedia.com/arQcles/wealth-management/040416/reQred-execs-what-do-corporate-boardspay.asp (Accessed: 13 January 2024).
36
Simon (2024) Independent director remunera(on – how much should you pay?, S(mulus. Available at:
h_ps://sQmulusnz.com/insights/how-much-should-you-pay-your-independent-director-remuneraQon/ (Accessed:
13 January 2024).
However, the matter of compensating directors extends beyond mere figures. It revolves
around finding a balance between attracting and retaining highly qualified individuals ensuring
just financial rewards for their expertise and dedication and maintaining the trust and
confidence of shareholders. By adopting a responsible approach to determining compensation
companies can secure the valuable oversight provided by independent directors while upholding
strong principles of corporate governance.
t’s important to note that independent directors are not full time employees; rather they
primarily contribute their expertise towards promoting corporate governance. Nevertheless,
offering fair and fitting compensation packages plays a role, in attracting and retaining top tier
individuals who can effectively fulfill this significant responsibility. Ultimately deciding how much
to compensate directors goes beyond mere numbers; it involves establishing a system that
benefits the company, its shareholders, and the broader corporate landscape.
8. The Nomination and Remuneration Committee’s Crucial Role
Ensuring the independence of independent directors on corporate boards is an essential pillar of
good corporate governance. These directors, unburdened by conflicts of interest, play a critical
role in holding management accountable, fostering ethical decision-making, and protecting
shareholder interests. To maintain this crucial independence, the Nomination and Remuneration
Committee (NRC) shoulders the vital responsibility of thoroughly assessing and verifying the
independence of potential and existing independent directors.
This thorough evaluation process usually includes steps. The NRC carefully examines the
directors professional associations, previous connections, with the company and its
management, financial ties and any other possible conflicts of interest. This assessment often
involves reviewing board meeting records, financial disclosures, professional affiliations and past
business interactions. Moreover the NRC may also hold interviews with the director and key
individuals involved to gain an understanding of their impartiality.
Furthermore, the NRC establishes and enforces clear independence criteria, typically aligned
with relevant corporate governance codes and regulations. These criteria may address
limitations on the director’s tenure, shareholding, business relationships, and compensation
packages. By adhering to these established frameworks, the NRC ensures consistency and
objectivity in its assessment37.
However it is not sufficient to have established criteria and a thorough vetting process. The NRC
should actively stay vigilant, to conflicts that may not be immediately obvious during the
assessment. It becomes crucial to monitor and periodically reassess the independence of the
directors. This may include reviewing disclosures assessing their attendance and involvement in
board meetings and addressing any reported concerns, about potential conflicts.
37
n(9)
The NRCs ability to assess independence has an impact, on the effectiveness of the board. When
directors are independent and not influenced unfairly they can actively support behavior
question management choices and prior
