Navigating the Complexities of Independent Directors: Applicability, Roles, and Duties

The concept of Corporate Governance revolves around the idea of transparency, accountable empowerment, responsibility and impartiality. By strategically promulgating conditions on the shoulders of the directors and managers of the company, it ensures that key individuals and decision-makers of the company are held accountable while safeguarding the interest of all the relevant stakeholders. Bangladesh Securities and Exchange Commission by a Notification dated 03 June 2018, prescribed a Corporate Governance Code (“Code”) which is applicable to all the listed companies in Bangladesh, to further regularize the membership and functions of corporate boards. One of the core mechanisms under this Code is the role of an independent director. The Code requires companies to encourage effective representation of independent directors on their Board of Directors and at least one-fifth of the board members shall be independent directors.

The Code strategically enunciates a stringent guideline over the general competencies of an independent director, which must be adhered to. As far as the qualifications of such an individual are concerned, the Code suggests that any such person shall be a knowledgeable individual with integrity who is able to ensure compliance with financial laws, regulatory requirements, and corporate laws and can further enhance the efficacy of the company from a business perspective. An independent director can be a business leader, corporate leader, former official of government or statutory or autonomous or regulatory body, university teacher who has educational background in economics or commerce or business studies or law; or a professional who is or was an advocate practicing at least in the High Court Division of Bangladesh Supreme Court or a Chartered Accountant or Cost and Management Accountant or Chartered Financial Analyst or Chartered Certified Accountant or Certified Public Accountant or Chartered Management Accountant or Chartered Secretary or of equivalent qualification.

Note that, an independent director shall have at least 10 (ten) years of prior experience in any of the fields mentioned hereinabove to be qualified for the position, and any such appointment shall be subject to prior approval of the Securities Exchange Commission. The tenure of an independent director shall be for a period of three (3) years and can only be extended once.

Apart from being an active participant in the Board Meetings, the Code designated the role of Chairperson in the sub-committees for the Independent Director of the company, namely the Audit Committee and Nomination and Remuneration Committee. As the Chairperson of these committees, it is a statutory requirement for the selected independent director entrusted with the role, to be actively present in all the meetings of the respective committees. On the other hand, in the case of a listed subsidiary company operating under a holding company, at least one independent director on the Board of the holding company shall undertake the role of a director on the board of the subsidiary company.

Even though the Code was originally intended to be applied on a ‘comply or explain’ basis, the Securities and Exchange Commission moved away from this stance by the issuance of a Notification dated 05 February 2020. The Notification explicitly mentions that the Code shall be subject to mandatory compliance, and in the event of any refusal or failure, or contravention of any provisions of the Code by an entity, will expose such entity to the penal provision of the Securities and Exchange Ordinance, 1969. It even goes further to state that non-compliance with any of the provisions of the Code may be subject to punitive measures including delisting or suspension from trading in the exchange. By the issuance of this Notification, the Securities and Exchange Commission communicated its clear intent to promote Corporate Governance as a compulsory component for every listed corporate body, whereas it previously offered flexibility in this regard by adopting the ‘comply or explain’ principle, where the compliance issue was left at the discretion of the companies.

Therefore, in the present context of Bangladesh, it is essential to appoint an Independent Director for any publicly listed company and one that cannot be overlooked anymore. As discussed hereinabove, the role is entrusted with various core responsibilities and greatly intertwines with the key functions of the company. As such, the appointment of any individual for the role should be done with greater scrutiny, while also strictly adhering to regulatory compliances.