Independent directors: The role and its evolution

In the case of Prof Dr Rahmat Ullah vs. Bangladesh Bank, our High Court Division has held that, "Professional directors or members are those who associate with the companies…for rendering their expert knowledge as independent directors or members. Such directors, apart from receiving honorarium, do not have any material pecuniary relationship or transactions [sic.] therein or [with] its promoters or its management or its subsidiaries."

The Bangladesh Securities and Exchange Commission ("BSEC") in a notification first introduced the Corporate Governance Code in 2012, which saw a substantial update in 2018 and further ad hoc changes in 2022, 2023 and 2024. This article discusses only the Independent Directors provisions in the Corporate Governance Code ("CGC"), but what is to be remembered immediately is that the CGC has the force of law in Bangladesh.

Companies listed with the stock exchanges in Bangladesh are subject to certain conditions set out in the Corporate Governance Code, on a 'comply' basis meant to enhance corporate governance in the interest of investors and the capital market. The test therefore is the enhancement of corporate governance in the interest of: (a) the investors, and (b) the capital market. The term 'investor' is not defined in the Securities and Exchange Ordinance, 1969 nor in the Securities and Exchange Act, 1993. However, our Courts have been known to categorically state that in case of a listed company's failure to run smoothly, the BSEC may take appropriate action against the company in the "greater interest of all stakeholders, particularly the investors", as has been seen in the case of Md. Sarwar Hossain & ors. vs. BSEC & ors. This indicates that the recurring use of the term 'investors' alludes to the investors in the stock market.

The first point to note is that the appointment or re-appointment of any independent director on the board of a listed company requires the approval of the BSEC. The BSEC requires that at least 2 directors or one-fifth of the total number of directors in a listed company be independent directors. The maximum size of the board shall be 20 directors (the minimum board size is set at 5 directors). Independent directors can be appointed for up to two terms of three years each (a total of 6 years at a stretch). In a welcome move, as of April 2024, it has been resolved that at least one independent director appointed to the board of listed companies has to be a woman.

The term 'Independent Director' generally globally refers to a director within the board of directors of a listed or OTC company who is independent of the company's shareholders and does not hold an internal position within the company. Independent directors, in concept, are capable of making impartial judgments regarding company affairs, who are not employees of the company, do not participate in specific operational matters, and hold little company stock. Their role is to enhance corporate governance.

An independent director in our CGC is described as a "knowledgeable individual with integrity". The 'knowledge' criteria are further elaborated and determined on the criteria of the ability to "ensure compliance with financial, regulatory and corporate laws" and make meaningful contributions to business. It is deemed that persons who are: (1) business leaders, (2) corporate leaders, (3) bureaucrats, (4) university teachers with economics, business studies or law backgrounds, (5) professionals like advocates, chartered accountants, Cost & Management Accountants and Chartered Secretaries with at least 10 years of professional experience fulfill these criteria of 'knowledge' and 'integrity'. The BSEC, however, has the authority to relax this criterion in special cases, and our Courts have also been known to intervene when there has been a 'relaxation' of criteria in the appointment of independent directors when requisite educational qualification or experience in the relevant field is missing. This can be seen in the case of Abdus Salam Murshedy & ors. vs. Envoy Textiles & ors.

On the other hand, the 'independence' of a proposed person being considered for independent directorship is viewed through the lens of certain disqualifiers, such as:

• whether a person is a sponsor of the listed company, whether the proposed person's "family members" hold 1% or more shares in the listed company (certain sectors such as banks have stricter regulation on this criteria with a zero-shareholding requirement),
• whether he/she had been an executive of the company in the past 2 years or had a pecuniary relationship or a direct or indirect material business relationship with the listed company or a subsidiary or 'associated' company of the listed company. It may be noted that although the term "associated company" is not defined in the Companies Act, 1994, the frequent appearance of the term in the Companies Act suggests that the concept of an associated company relates to the financial and operational interconnectedness between entities,
• whether he/she is involved as a stakeholder in a stock exchange or an intermediary of a stock exchange or an audit firm engaged by the listed company (for the last 3 financial years in this case),
• whether the person is convicted of a crime or as a loan defaulter to a bank or an NBFI.

Once approval is accorded by the BSEC for appointment of an independent director on the basis of meeting the tests of knowledge, integrity and independence - and it is a matter of some prestige for professionals to be so appointed - what is oft overlooked is that the role is about service which comes with a higher responsibility/duty of care to ensure that the company is run professionally, ethically and transparently in order to serve the best interests of the investors, and particularly of the small investors who rely on listed companies to hold or enhance the value of their savings. The BSEC when approving the application of an independent director is putting its trust as the regulator in the professional to conduct this service honestly and diligently. This reposition of trust is exemplified through the committee structures set out in the CGC. Independent Director representation is a must in a listed company's Audit Committee, the job of which committee is to ensure that the financial statements reflect a true and fair view of the state of affairs of the company and in ensuring that a good monitoring system is in place, and also in the Nomination and Remuneration ("NRC") Committee. The Chairperson of the Audit Committee and the NRC Committee must be an independent director, and a quorum is not formed for meetings of committees unless an independent director is present.

Keeping in mind the mantle of responsibility reposed on independent directors, a simple way to explain what is required of an independent director is to refine a quote thus - "The fundamental role of an independent director is to see that the company is properly run, but not to run the company." (Steele, M, The Business Case for Corporate Governance, Cambridge).

Independent directors should be seen by executives in the company as having the ability, as outsiders, to see things differently: an independence of mind that allows independent directors to challenge executive thinking on the basis of their external experience. The challenge, here, does not need to be a bad thing or an adversarial exercise. Boards never function optimally when everyone thinks along similar lines. Independence should encourage greater openness which should lead to the full use of the independent director's experience and judgement.

On the other hand, independent directors should be aware of their own limitations and be sure that they are able to dedicate the time and commitment required for the role. At a minimum, this requires showing up to meetings having read the pre-reading material. Independent directors should also be honest enough to admit a lack of knowledge of the company or industry - to themselves and to the company.

Good governance requires challenging inadequate time given for preparation or lack of disclosure of materials to the board on the basis of which decisions are supposed to be made by the board members. Withholding of information and documents affects the real independence of independent directors and the effective discharge of their duties and should be challenged or reported to the BSEC where independent directors face such issues. The flip side of the coin is to remember that an externally-initiated complaint or investigation into the company, which could have been highlighted by an Independent Director but was not done, potentially affects the credibility of the Independent Director and his/her broader professional reputation.

It is safe to state that the concept of independent director positions has matured and evolved through learning from ground-level experiences since the introduction of the concept in 2012. A recent example of this is that by BSEC's Directive dated 22 March 2021, there are now certain protections accorded to independent directors serving on boards of "Z category" listed companies such as the fact that Independent Directors' names will not appear in regulatory compliance relating to particulars of directors (Form XII), they are exempted from providing personal guarantees for a company's loans and they will not be listed as loan defaulters where the company is in default.

Albeit, there is always room for improvement.

For example, for our minimum two or one-fifth of independent directors, most European and American countries mandate that over half the board seats be held by independent directors and Asian countries like China, Japan and India require that at least one-third of board seats be filled by independent directors. In India, every unlisted public company, subject to thresholds, is to have a minimum of two Independent Directors as well. In Bangladesh, we have no direction on whether unlisted companies can appoint Independent Directors. Arguably, there is no bar to such appointment (so long as the company's articles of association make room for the same), however, whether independent directors in unlisted companies can vote in board meetings and appear in Form XII (Particulars of Directors) maintained with the Registrar of Joint Stock Companies (RJSC) requires direction and clarification. Looking to the future, other matters that should be addressed include clarifying that independent directors have the same right to information as other directors, and directing that when an independent director opposes or expresses reservations on board discussions, it is essential to record such dissenting views in the minutes of the board meeting. In matters of reappointment, the BSEC can also consider whether the number of meetings attended by an independent director be taken into account for re-election.

To sum up, the role of an independent director is one of preparedness for the tasks, impartial decision-making and responsibility of safeguarding the interest of the small investors. The role requires time and commitment, an open mind for learning and debate while maintaining a professional distance and repeating repeatedly to oneself that one is not the owner of the company but is there to do the service of good governance to the best of his/her abilities.

Anita Ghazi Rahman is the Managing Partner of The Legal Circle (www.legalcirclebd.com) and currently serves as an Independent Director of Brac Bank PLC.

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