Beyond the label: How independent is an Independent Director, really?

Independence in form is defined by regulation, but independence in substance is shaped by courage, competence, and character. An independent director is truly effective only to the extent that he or she is willing to ask uncomfortable questions, challenge entrenched assumptions, and take positions that may not always align with management or controlling interests—while still acting constructively in the best interest of the company

Recently, a colleague raised an important question during a discussion: “How independent is an independent director, really?” He went on to note that with the introduction of new guidelines expanding the responsibilities of independent directors on listed Boards, their role has gained renewed significance. My answer was that independence in form is defined by regulation, but independence in substance is shaped by courage, competence, and character. An independent director is truly effective only to the extent that he or she is willing to ask uncomfortable questions, challenge entrenched assumptions, and take positions that may not always align with management or controlling interests—while still acting constructively in the best interest of the company. Yet a fundamental question still remains: how effective are independent directors in practice, and to what extent can they truly exercise independence? Equally important is the question of accountability in moments of concern. If independent directors become aware that something is fundamentally wrong, should there be an expectation of earlier and more decisive action, rather than waiting for years before responding? And when they eventually step away, should resignations be more transparent and specific, rather than expressed in vague terms that leave investors and other stakeholders in uncertainty? Ultimately, independence is not only about appointment or structure—it is about timely judgment, responsible action, and the clarity of communication when it matters most.

Banks 

In contrast to banks—where over 90% of capital employed typically comes from borrowed funds or public deposits—non-financial companies rely more heavily on entrepreneurial capital and bank financing. Regardless of the funding structure, a Board’s effectiveness ultimately depends on how well it understands the business. That understanding is not built solely in the Boardroom; it is cultivated on the shop floor, through real engagement with operations. Sound decision-making requires more than reviewing reports. It demands the ability to interpret data from multiple perspectives and convert insight into action. Traditionally, Boards have framed risk in terms of strategy, operations, finance, and compliance. Today, that lens must widen to include less tangible but equally critical factors such as corporate reputation and stakeholder trust. Board discussions, therefore, must go beyond passive review. They should involve rigorous examination of context—what has worked, what has not, and what lies ahead. The objective is to build a shared perspective that supports decisions capable of generating long-term value. In an increasingly complex environment, reliance on historical playbooks or box-ticking governance is no longer adequate.

Independent? But how independent?

Regulators have rightly emphasised the inclusion of independent directors as a cornerstone of good governance. Yet independence, in reality, is far more nuanced than formal definitions suggest.

In closely connected corporate environments, relationships often run deep. A chairman’s longtime associate may technically qualify as “independent,” but in practice may lack the objectivity the role demands. Conversely, an outsider with no such ties may bring greater impartiality and challenge.

There is also the question of motivation. Independent directors are often compensated with relatively modest, fixed fees and hold limited financial stakes in the business. This raises a valid concern: are they sufficiently incentivised to drive long-term value creation?

True independence cannot be reduced to compliance with governance codes. It is reflected in behavior—particularly the willingness to question assumptions, voice dissent when necessary, and even step down when principles are compromised.

To strengthen independence in substance, not just form, Boards must diversify their information sources and avoid over-reliance on a few voices. Direct engagement is essential: interacting with management across functions, encouraging unfiltered presentations to the Board, and spending time on-site to understand operations. This is not about overstepping into management territory, but about building informed judgment.

Board discussions, must go beyond passive review. They should involve rigorous examination of context—what has worked, what has not, and what lies ahead. The objective is to build a shared perspective that supports decisions capable of generating long-term value

Beyond compliance: A mindset shift

Governance frameworks provide structure, but they do not guarantee effectiveness. What ultimately matters is the mindset with which these frameworks are applied. Boards that approach governance as a checklist exercise risk becoming disconnected from the realities they are meant to oversee. In contrast, those that embrace responsible self-regulation are better equipped to navigate complexity and uncertainty. The implications extend beyond individual Boards. As regulatory scrutiny intensifies, companies that demonstrate strong internal governance practices can help reduce the need for intrusive external oversight. In doing so, they contribute not only to their own resilience but also to the stability of the wider corporate ecosystem. Good corporate governance, therefore, is not merely about adherence to rules. It is about embedding values—integrity, accountability, and long-term thinking—into the fabric of decision-making.

Conclusion

At its core, the role of an independent director is to ensure that management maintains the right balance between short-term performance and long-term sustainability, while serving both shareholders and the wider set of stakeholders beyond the institution. A Board’s responsibility is not to manage day-to-day operations, but to provide direction and oversight on critical areas such as corporate strategy, leadership succession, talent development, and industry positioning. Directors are valued not for operational control, but for their experience, judgment, and ability to guide. While it is widely accepted that day-to-day management rests with the CEO, regulatory expectations often become less clear when accountability is tested in moments of crisis. For listed companies that manage public capital and are accountable to a broad stakeholder base, the obligation to remain transparent, responsible, and accessible carries particular weight. In that context, the contribution of directors must be meaningful and proportionate to the responsibility they bear and must be compensated accordingly. Ultimately, the true measure of an independent director does not lie in formal classification, but in the courage to challenge, the integrity to uphold ethical standards, and the commitment to ensuring that companies create sustainable, long-term value—beyond mere compliance and short-term shareholder returns.

References;

1. “Independence of directors exists only in form, says SEBI chief Tuhin Kanta Pandey” Source: The Hindu (April 6, 2026) 

2.”’Independent director’: Has it run its course?” Source: The Times of India (April 29, 2026) Key Example: An HDFC Bank independent director resigned citing «certain happenings and practices» that troubled his values—but only after two years, and without specifying what they were. The bank›s shares fell 8.7%, wiping out over ₹1 lakh crore in investor wealth.

3. https://www.ft.lk/Opinion-and-Issues/Business-should-not-be-limited-to-making-boatloads-of-money/44-653561