Quick Links
Connect us
Directors Databank (Empannel Yourself)
Become a faculty
Blog
Become an Awards Assessor
Publications
Contact Us
Role of Independent Directors: In Crisis Management, Corporate Scandals, & Risk Management
Introduction
Independent directors have become central figures in strengthening corporate governance, especially in the Indian corporate ecosystem where promoter dominance often blurs lines of accountability. Their role becomes even more crucial in scenarios of corporate distress, financial irregularities, and broader risk environments. While their significance in handling crises and corporate scandals is well-acknowledged, a relatively underexplored yet immensely critical area of focus is their role in enterprise risk management (ERM).
Risk management is not merely about compliance - it is a strategic function that ensures long-term sustainability, value creation, and protection against both foreseeable and unforeseen disruptions. In India, as companies are increasingly exposed to economic volatility, regulatory upheavals, digital transformation, and ESG considerations, independent directors serve as vital overseers and strategic advisors in embedding robust risk governance frameworks.
Regulatory Foundation for Risk Management Oversight
Under the Companies Act, 2013, and SEBI (LODR) Regulations, 2015, the role of independent directors in risk management is formalized through mandatory participation in key board committees:
• Risk Management Committee (RMC): For top one thousand listed entities (by market capitalization), this committee must include a majority of directors, with at least one independent director. Their role includes defining risk management policies, overseeing the risk management framework, and monitoring key risk indicators.
• Audit Committee: Tasked with reviewing internal controls, audit reports, and financial disclosures, this committee - with a majority of independent directors serves as a checkpoint for financial risk management.
• Corporate Governance Responsibilities: Clause 49 of SEBI listing agreements encourages boards to ensure that independent directors have a firm understanding of risk-related matters and that risk culture permeates the organization.
• Audit Committee: Tasked with reviewing internal controls, audit reports, and financial disclosures, this committee - with a majority of independent directors serves as a checkpoint for financial risk management.
• Corporate Governance Responsibilities: Clause 49 of SEBI listing agreements encourages boards to ensure that independent directors have a firm understanding of risk-related matters and that risk culture permeates the organization.
Key Areas of Risk Management Oversight by Independent Directors
1. Strategic Risk Assessment Independent directors should critically evaluate strategic decisions such as M&A, capital expenditure, international expansion, and digital transformation through a risk lens. They must question underlying assumptions, expected ROI, and contingency plans.
2. Operational and Financial Risk Review By reviewing internal audit reports, MIS, and business continuity plans, they must identify operational bottlenecks, cost overruns, fraud vulnerabilities, and supply chain risks. Financial risk scrutiny includes reviewing liquidity positions, debt structures, and market exposure.
3. Regulatory and Compliance Risk Ensuring that the company remains in alignment with laws such as FEMA, FCRA, SEBI regulations, and environmental norms is another key role. Non-compliance can lead to significant legal and reputational consequences.
4. Cybersecurity and Technology Risk As digitization accelerates, companies face increasing threats from cyberattacks, data breaches, and IT disruptions. Independent directors must demand regular assessments of IT infrastructure, data protection policies, and incident response mechanisms.
5. ESG and Reputational Risk Environmental, Social, and Governance risks now influence investor sentiment and regulatory attention. Independent directors should drive ESG strategy, ensure alignment with global benchmarks, and oversee sustainability risk reporting.
6. Risk Culture and Internal Controls Independent directors must play a proactive role in shaping the company's risk culture - where open reporting, ethical behaviour, and accountability are encouraged. They should ensure robust whistle-blower mechanisms and periodically assess the effectiveness of internal controls.
Best Practices in Risk Governance by Independent Directors
• Early Warning Systems: Advocate for dashboards and systems that detect red flags such as declining KPIs, audit anomalies, or whistle-blower complaints.
• Risk Appetite Statements: Help articulate and periodically review the organization's risk appetite and tolerance levels, aligning them with long-term strategy.
• Scenario Planning and Stress Testing: Encourage management to model best- and worst-case scenarios and test organizational resilience under crisis simulations.
• Integrated Risk Reporting: Insist on consolidated reporting that links risk metrics to business performance, enabling timely and informed board discussions.
• Board-Level Risk Champions: Lead or participate in board-level taskforces on emerging risks such as AI ethics, climate transition, or geopolitical tensions.
Global Standards and Learnings for Indian Context
Indian boards can draw from international governance models such as:
• UK Corporate Governance Code: Emphasizes the board's responsibility for determining risk appetite and ensuring a sound risk management system.
• COSO ERM Framework: Encourages holistic integration of risk into business strategy and performance.
• OECD Principles: Advocate for board diversity and risk oversight as essential to sustainable governance.
Risk management is no longer the domain of technical experts alone - it is a board-level, strategic function that demands vigilance, expertise, and courage.
Real-World Illustrations of Risk Management Failures
Enhancing Independent Directors' Role in Risk Management
• Specialized Induction and Continuing Education: Regulators and industry bodies must introduce mandatory risk management training, including domain-specific case studies and regulatory simulations.
• Use of Risk Dashboards and AI Tools: Boards should leverage technology to track risk heat-maps, trend analyses, and real-time alerts.
• Third-Party Risk Audits: Independent directors should champion the use of external consultants for unbiased risk assessments.
• Multi-Stakeholder Dialogue: They should engage with rating agencies, proxy advisors, auditors, and large shareholders to get diverse views on potential risks.
• Linking Remuneration to Risk Outcomes: Ensure executive bonuses and stock options are tied not only to performance metrics but also to risk-adjusted achievements.
Conclusion
As the Indian corporate sector transitions from promoterled to professionally managed organizations, the maturity and foresight of its independent directors in handling risk will determine its resilience. Risk management is no longer the domain of technical experts alone - it is a board-level, strategic function that demands vigilance, expertise, and courage.
In times of crisis, when the foundations of trust begin to crack, it is the Independent Director who must rise as the pillar of integrity, guiding the board not with noise, but with necessary truth.
Independent directors must reimagine their roles as risk stewards, not just compliance monitors.
Independent directors must reimagine their roles as risk stewards, not just compliance monitors. Their active participation in shaping risk culture, challenging assumptions, and guiding organizations through uncertainty will be instrumental in building sustainable, trustworthy businesses for the future.
Back to HomeAuthor
Dr. Tania Dehury
He is a seasoned leader with over 20 years of experience in Enterprise Risk Management (ERM) and Environmental, Social, and Governance (ESG) Strategy. He currently serves as the Head of Risk and Business Continuity at Soudah Development, a subsidiary of the Public Investment Fund (PIF). An expert in risk frameworks, risk management strategy, Risk appetite, and Governance, Risk, and Compliance (GRC), he holds a PhD, an MBA, and several global certifications including CFI ESG, MIT, and TCFD. A Fellow of the Institute of Directors (IOD), he is also the author of three books and a published researcher, widely recognized as a thought leader in risk and sustainability.
Owned by: Institute of Directors, India
Disclaimer: The opinions expressed in the articles/ stories are the personal opinions of the author. IOD/ Editor is not responsible for the accuracy, completeness, suitability, or validity of any information in those articles. The information, facts or opinions expressed in the articles/ speeches do not reflect the views of IOD/ Editor and IOD/ Editor does not assume any responsibility or liability for the same.
