An Overview Of D&O Policy For Independent Directors And Its Benefits
No organization can run efficiently without the assistance of competent leaders. The directors and high-ranked officials in an organization are the driving forces that make a company run smoothly. The greater the post in the organization, the more responsibilities. Even if the qualified personnel hold the designation of independent director, there are several crucial duties that they have to execute. Thus, both executive and independent directors have defined duties that need proper execution, as they are answerable to the employees, consumers, and stakeholders of the company.
A brief into for independent directors
While many would be aware of the designation of executive directors appointed by the organizations, there is confusion about the independent directors. Are they not part of the organization? Do the corporate rules apply to them? Many such questions require proper clarification.
An independent director in an organization is a non-executive director. They help in the growth of the organization by looking after the corporate credibility. With their expertise and diligent service, the independent directors improve the governance standards in the organizations. The independent director in a company does not have any relationship with the organization that may cause an impact on their judgment and service towards the company.
Job role and duties
As per the Companies Act, 2019, there are defined professional duties for the independent directors in an organization. Ideally, the independent director works as a guide to the company and maintains overall supervision to ensure satisfactory corporate governance. They are involved in multiple committees set up by the organization and perform their duty as a mentor. Following are some of the key responsibilities of an independent director –
- Facilitate and manage pressure from the company owners
- Play active role in succession planning
- Get involved in crucial tasks like strategy-making, risk management, key appointments, etc.
- Monitor the managerial performances and supervise
- Balance the interest of the company’s stakeholders in cases of conflicts
- Safeguard the shareholder’s interest; especially minority shareholders
Liability management for independent directors
When you discuss the need for a D&O policy for independent directors, the question of liability can never get excluded! Are there any liabilities for an independent director like that of the executive directors? It is one question that confuses many people. The answer is – yes, they are equally liable to perform their duties. If there is a mismatch in the execution of their duties and bestowed responsibilities, they can be held legally responsible like other high-ranked officers and executive directors.
As per the Company law in India, the independent directors have to take responsibility in case of financial loss to the company or anyone associated with the company for a breach of their service contract. The reasons can be many, like – mismanagement, negligence, alleged fraudulence, unjust conduct, harassment, etc. Thus, they are also liable to perform their on-job responsibilities rightly to ensure no liability breach legal steps are taken against them. If there is any such unwanted incident, the liability coverage policy comes as a rescuer for the independent directors.
Do they need the D&O policy?
In the wake of a host of instances, where Independent and Non-Executive Directors (NEDs) coming under the scanner for alleged corporate misconduct, the Ministry of Corporate Affairs, has issued a directive to safeguard the interests of Independent Directors and Non- Executive Directors. The circular was issued on the 2nd of March, 2020; which clarifies that :
Under the Companies Act, 2013; imposition of liability upon Independent Directors and Non-Executive Directors is not a rule and needs to be evaluated on a case to case basis.
The circular further clarifies that ordinarily, a Whole-time Director and a Key Managerial Personnel are associated with the day-to-day activities of the company and accordingly they would be liable for defaults committed by a company. Delving deeper into the circular, brings about the mention of Section 149 (12), which mentions Liability of an Independent Directors and Non-Executive Directors, not being a promoter or Key Managerial Personnel would be limited to :
Such acts or omissions or commission by a company which had occurred with their knowledge, attributable through board processes, and with their consent, or where they did not act diligently.
In this view, the Independent Directors and Non-Executive Directors, (non-promoters and non-KMP), “should not be arrayed in any criminal or civil proceeding under the Act”.
A key take away from this circular however is that Independent Directors and Non-Executive Directors are protected under this circular from unnecessary harassment and loss of reputation, for instance investigation under the Companies Act.
However the same is not true for statutes like:
- Income Tax Act
- Prevention of Money Laundering Act
- Negotiable Instruments Act
- SEBI Act
- Environmental Legislations
The Independent Directors and Non-Executive Directors are still exposed to the risk of liabilities arising from the aforementioned statutes, as these statutes do not differentiate the roles like the Companies Act for the Directors and Officers.
The perks of having a D&O policy
The rules and terms of coverage of the D&O policy are the same for the independent directors. The elementary purpose of having a D&O policy is to safeguard the high-ranked official and protect their personal asset in case of any legal charges. Thus, an independent director also enjoys similar policy benefits for the following claims and legal allegations –
- Coverage for regulatory investigations and defense expenditure
- Coverage for combating the legal charges brought by employees of the company, stakeholders, and consumers for breach of duty
- For taking legal action for allegations of discrimination, reputation damage, and harassment
A plan for risk-management – A major benefit
The duties and responsibilities of an independent director are not easy to execute. Thus, the risks are also high with the supreme designation. Having the D&O policy as a backup for managing corporate liabilities can be a life-saver in many ways. Not only does it help the director in saving the huge spendings on legal proceedings but also assists in reputation management. D&O policy is a risk mitigator for the director and the organization as well. Why is it useful for the organization? Because it helps attract competent and efficient professionals to step into the shoes of the independent director designation in the company.
Good for the career of the independent directors
Are you a competent professional, having the qualities to fit into the role of an independent director of a company? If yes, ensure that the company offers a D&O policy as a service perk. It is essential to check this service feature as it will help reduce the reputation management and asset management worries during any unwanted allegation charges brought upon you. Escalate your career to a newer height but take calculative steps in climbing the ladder. Ensure that the company offers a D&O policy to safeguard your assets when in need.
D&O policy features determine the utility
For those looking for the right D&O policy to buy, here is a piece of advice. Do not overlook the inclusion and exclusion sections in the policy coverage details. As a policyholder, you can land into trouble if the insurer denies coverage for a lumpsum expenditure incurred due to legal proceedings. It would be best to consult an expert before your purchase the policy.
Get expert assistance with PlanCover.
Connecting to PlanCover is a wise step while buying D&O policies. The top-rated insurance broker brings you the best plans that mitigate the risks associated with the roles and responsibilities of the high-rank holders in an organization. Consult with their expert team and buy the policy that meets the requirements.