Question

Is the government's new requirement that board members of the audit and compensation committees be independent sufficient? Should there be a way to resolve this inherent conflict of interest or is this just an unpalatable side effect of a free market or something else? please answer in your own words and as long as you can becuse its opinion qustion ?

Answer 1

This is important that the board members should be sufficient independent as they are responsible to the shareholders of the company.

The role of board members are increasing becoming a part of scrutiny as there are many scandals in which the members of the boards were not independent and this had led to the scandals.

There are many type of committees but here we will discuss the committees that are in the question. So we have two committees to discuss that is audit committee and compensation committees.

• Audit committee

An audit committee works with the auditor of the company and makes sure that the books of the company are accurate and the actual figures are disclosed. Generally a CPA is the chairperson of the audit committee

In order to make sure that the books are prepared accurately and no fraud has been committed it is important that the members of the audit committee are not under influence of any person. If they are under influence or if they have conflict of interest then they might approve what is not to be approved and might fake the shareholder interest.

• Compensation committee

The salary of the top executives are decide by the compensation committee. This is important that the CEO should not be a part of this committee as this committee is related with setting the pay of top most executives.

Here high level of independence is required as the committee is required to set the pay of the top most executives of the company and this can cost much to the company if the pay or compensation is set in a wrong way.

In order to see that there is no conflict of interest and the members of the committee are independent the below things should be kept in mind or the below ways can be adopted to rule out the possibility of those facts that can reduce the independence of the members of the board.

• Full disclosure of conflicts of interest

A full disclosure should be made by the members about those interest that may conflict with the fiduciary duties. In this way this can be seen if the interest will have an impact on the independence or not. If the fact will adversely affect the independence then the member should not be appointed in the committee.

• Maximum outsiders

To increase the level of independence this is important that we have max no of persons those are from outside of the company. Here outsiders are those who has not worked with the company in the past or those who has not financial interest with the company. Here a retired CEO is not to be considered as an outsider as he may have some conflict of interest that may affect the level of independence.

• Contact with suppliers and customers

It should also be seen that the members that are appointed in the board do not have any interest with the larger supplier of customer of the company as this will leads to the conflict of interest and will affect the level of independence.

So in this way this can be make sure to certain limits that the members of the boards are working independently.