cg05_ role of directors and the board

8/6/2019 CG05_ Role of Directors and the Board

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Board of Directors:Board of Directors:A powerful instrument inA powerful instrument in

governancegovernance

Prof GroverProf Grover

CORPORATECORPORATE

GOVERNANCEGOVERNANCE


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Who is a Director?Who is a Director?

Section 2 (13) of the Companies Act defines a

director as follows: A director includes any

person occupying th

e position of directorTo determine whether a person is a director or not,

is to refer to the nature of the office he holds and

his duties.

It does not matter by what name he is called. Ifhe

performs the functions of a director, he is a

director?


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What is Board of DirectorsWhat is Board of Directors

A group of citizens that volunteer to serve as the

governing, advisory or administrative body of an

organization represent the governing board.

Governing, advisory or administrative boards have

various responsibilities, accountability and

liabilities

Board of Directors is thus a governing board of a

company

Section 2(6) of the Companies Act states that

directors are collectively referred to Board of

Directors or simply the board.


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Most of the corporations are composed of:

Inside directors (management directors)

Officers & executives employed by the firmOutside directors

Executives of other firms but not employees of

boards firm

Can be affiliated to the firm legal or insurance,

client, retired executive of firm, family, etc.

Composition of the BoardComposition of the Board


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Kinds of DirectorsKinds of Directors

A director may be a full time working director,

namely, a managing director, an executive director

or a whole time director covered by some kind of a

service contract.

A company may also have non-executive directors

who do not have anything to do with the day-to-day

management of the company.


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Kinds of DirectorsKinds of Directors (contd(contd.).)

We in India recognize another category of directors

as per certain provisions of the Companies Act;

1956 as Shadow Directors.

These so-called deemed- directors acquire their

status by virtue of their giving instructions (other

than professional advices) according to which

appointed directors are accustomed to act.


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Appointment of DirectorsAppointment of Directors

Founding Directors: The Articles of AssociationFounding Directors: The Articles of Association((AoAAoA) of a company usually name the first set of) of a company usually name the first set ofdirectors.directors.

Appointment/Reappointment: Certain provisionsAppointment/Reappointment: Certain provisionsof the Companies Act govern the appointment,of the Companies Act govern the appointment,reappointment and rotation of directors by areappointment and rotation of directors by acompany in a general meeting.company in a general meeting.

If the chairman of the Company is a nonIf the chairman of the Company is a non--executive then oneexecutive then one--third of the board shouldthird of the board shouldconsist of independent directors, otherwise 50%consist of independent directors, otherwise 50%directors on the board aredirectors on the board are independantindependant..


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QualificationsQualifications ofof DirectorsDirectors

No body corporate, association or firm can

be appointed directors of a company.

A director must:

(a)be an individual;

(b)be competent to enter into a contract; and

(c)hold a share qualification, if so required bythe Articles of Association.


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QualificationsQualifications ofof DirectorsDirectors (contd(contd.)`.)`

The following persons are disqualified forThe following persons are disqualified for

appointment as directorsappointment as directors

a)a) AA person of unsound mind;person of unsound mind;

b)b) anan undischargedundischarged insolvent or one whose petitioninsolvent or one whose petition

for declaring himself so is pending in a Court;for declaring himself so is pending in a Court;

c)c) aa person who has been convicted by a Court forperson who has been convicted by a Court for

any offence involving moral turpitude; (iv) aany offence involving moral turpitude; (iv) a

person whose calls in respect of shares of theperson whose calls in respect of shares of thecompany held for more than six months havecompany held for more than six months have

been in arrears; andbeen in arrears; and


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QualificationsQualifications DirectorsDirectors (contd.)(contd.)

d) a person who is disqualified for appointment

as director by an order of the Court on

grounds of fraud in relation to the company

e) directors can be removed from office by

thethe shareholders;shareholders;

thethe CentralCentral GovernmentGovernment ;and;and

thethe Company Law BoardCompany Law Board..


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CORPORATECORPORATE MANAGEMENTMANAGEMENT STRUCTURESTRUCTURE

ShareholdersShareholders

Board ofBoard ofDirectorsDirectors

ExecutiveExecutive

CommitteeCommittee

Chief ExecutivesChief Executives

andand Senior ExecutivesSenior Executives

formsforms

electelect

appointsappoints


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Powers of the BoardPowers of the Board


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Powers of the BoardPowers of the Board

Board of Directors exercise the following powers:

a) make calls on shareholders in respect of money

unpaid on their shares

b) issue debenturesc) borrow moneys otherwise (For example, through

public deposits)

d) invest the funds of the company and

e) obtaining loans


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BoardBoard ofof DirectorsDirectors

CertainCertain otherother powerspowers AGM a prerequisiteAGM a prerequisite

a) to sell, lease or otherwise dispose of the whole or

part of the undertaking of the company;

b) to remit or give time for repayment of any debt

due to the company by a director except in the

case of renewal or continuance of an advance

made by the banking company to its director inthe ordinary course of business;

c) to borrow in excess of capital


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d) to contribute to charitable and other funds not

relating to th

e business of th

e company or th

ewelfare of its employees beyond a specified

amount;

e) to invest, compensation amounts received on

compulsory acquisition of any of company

properties; and

f) to appoint a sole selling agent.


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Nominee DirectorsNominee Directors

A Nominee Director is generally appointed in a

company to ensure that the affairs of the

company are conducted in a manner dictated by

the laws governing companies and to ensuregood corporate governance.

A nominee director, as an affiliated director, is

nominated to ensure that the interests of the

institution whichhe or she represents are duly oreffectively safeguarded.


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Nominee Directors (contd.)Nominee Directors (contd.)

Kumar Mangalam Birla Committee on Corporate

Governance suggested that financial institutions

should not have their representatives on theboards of assisted companies.


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Liabilities of DirectorsLiabilities of Directors

(1) Directors are liable to third parties in connection withissue of Prospectus,

which does not contain particulars required underthe Companies Act or

which contains material misrepresentations.

(2) Directors may also incur personal liability under the Act

a) Failure to repay application money

b) Irregular allotment of shares if damage is

sustained;c) Failure by the company to pay a bill of exchange,

hundi, promissory note, cheque or order formoney or goods wherein the name of thecompany is not mentioned in legible characters.


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Liability of Directors to the CompanyLiability of Directors to the Company

(1) Ultra vires Action:

Directors are personally liable to the company in

matters of illegal acts.

(2) Negligence:

A director may be held liable fornegligence in the

exercise ofhis duties.


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The Directors Liability to the CompanyThe Directors Liability to the Company

(contd.)(contd.)

(3) Breach of Trust:

L

iable to the company forany material lossonaccount of the breach of trust.

(4) Misfeasance:

Directors are liable to the company for

willful misconduct (misfeasance).


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Liability for Breach of Statutory DutiesLiability for Breach of Statutory Duties

The Companies Act imposes penalty upon the directors for

not complying with or contravening the provisions of the

Act, which include sections on

a) criminal liability for mis-statements in Prospectus,

b) penalty for fraudulently inducing persons to investmoney,

c) purchase by a company of its own shares,

d) concealment of names of creditors entitled to object

to reduction of capital,

e) penatly for default in filing with the Registrar for

registration of the particulars of any charge created

by the company.


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Liability for Acts ofhis CoLiability for Acts ofhis Co--directorsdirectors

A director is not liable for the acts ofhis co-

directors provided he has no knowledge and he

is not a party.

When more than one director is alleged to have

neglected his duties of care, all the directors are

jointly and severally liable.


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Directors with Unlimited LiabilityDirectors with Unlimited Liability

In a limited company, the liability of all or any of

the directors may, if so provided by the

Memorandum is unlimited.


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DisabilitiesDisabilities of Directorsof Directors

InIn order to protect the interest ofa company and itsorder to protect the interest ofa company and its

shareholders, the Companies Act has placed theshareholders, the Companies Act has placed the

following disabilities on the directors:following disabilities on the directors:

1. Any1. Any provision in the Articles oranagreement whichprovision in the Articles oranagreement which

exempts a director (including any officer of theexempts a director (including any officer of the

company oranauditor) from any liability onaccountcompany oranauditor) from any liability onaccount

ofany negligence, default, misfeasance, breach ofofany negligence, default, misfeasance, breach of

duty or breach of trust by him shall be wholly voidduty or breach of trust by him shall be wholly void..


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Disabilities of Directors (contd.)Disabilities of Directors (contd.)

2. An2. An undischargedundischarged insolvent shall not be appointed toinsolvent shall not be appointed to

act as director ofany company or inany way to takeact as director ofany company or inany way to take

part in the management ofany company.part in the management ofany company.

3.3. NoNo person shall hold office at theperson shall hold office at the samesame time astime as

director in more than 15director in more than 15 companies.companies.

4.4. AA company shall not without obtainingcompany shall not without obtaining the previousthe previousapproval of the Centralapproval of the Central GovernmentGovernment in that behalf,in that behalf,

directly ordirectly or indirectlyindirectly make any loan tomake any loan to


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a)a) anyany director of the lending company or ofa company which isdirector of the lending company or ofa company which is

its holding company orany partner or relative ofany suchits holding company orany partner or relative ofany such

director;director;

b)b) anyany firm in whichany such director or relative is a partner;firm in whichany such director or relative is a partner;

c)c) anyany private company of whichany such director is a directorprivate company of whichany such director is a directoror member;or member;

d)d) anyany body corporate at a general meeting of whichnot lessbody corporate at a general meeting of whichnot less

than25 per cent of the total voting power may be exercised orthan25 per cent of the total voting power may be exercised or

controlled by any such director; orcontrolled by any such director; or

e)e) anyany body corporate, the board of directors, managing director,body corporate, the board of directors, managing director,

or manager whereof is accustomed to act inaccordance withor manager whereof is accustomed to act inaccordance with

the directions or instructions of the Board, or ofany director orthe directions or instructions of the Board, or ofany director or

directors of the lending company.directors of the lending company.


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(5) Except with the consent of the board of directors of acompany, a director of the company or his relative,a firm in which such a director or relative is apartner, any other partner, in such a firm, or a privatecompany of which the director is a member or

director, shall not enter into any contract with thecompany.

(a) for the sale, purchase or supply of any goods,materials or services; or

(b) for underwriting the subscription of any shares in,

or debentures of, the company.(6) A director shall not assign his office. Ifhe does, the

assignment shall be void.


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Effectiveness of the Board of DirectorsEffectiveness of the Board of Directors

(contd.)(contd.)

TheThe realistic functions of the boardrealistic functions of the board may, thereforemay, therefore, be, be

enumerated as follows:enumerated as follows:

1.1. ConfirmingConfirming management decisions on majormanagement decisions on major changeschanges inin

objectives, policies, and thoseobjectives, policies, and those transactionstransactions which willwhich willhave a substantialhave a substantial effecteffect on the success of the company;on the success of the company;

2.2. ProvidingProviding constructive advice to theconstructive advice to the executivesexecutives throughthrough

discussion on importantdiscussion on important mattersmatters suchas businesssuchas business

outlook, newoutlook, new governmentalgovernmental legislation, wage policy, etc.,legislation, wage policy, etc.,withwitha view to guiding the executives whena view to guiding the executives when thethe policiespolicies

are still in the process ofare still in the process of formationformation;;


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(contd.)(contd.)

3.Selecting the chief executives and confirming the

selection of the other executives in the company

made by chief executives; and4. Reviewing the results of current operations.


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Guidelines for ExecutionGuidelines for Execution

of Board Meetingsof Board Meetings

&&Remuneration of theRemuneration of the

Board of DirectorsBoard of Directors


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Board must meetBoard must meet at least four times a yearat least four times a year, witha, withamaximum time gap of four months between twomaximum time gap of four months between twosuccessive meetings.successive meetings.

The frequency of board meetings and boardThe frequency of board meetings and boardcommittee meetings, with their dates, must becommittee meetings, with their dates, must befully disclosed to shareholders in the annualfully disclosed to shareholders in the annualreportreport of the company.of the company.

TheThe attendance record of all directorsattendance record of all directors in boardin boardmeetings and board committee meetings must bemeetings and board committee meetings must befully disclosed to shareholders in the annual reportfully disclosed to shareholders in the annual reportof the company.of the company.


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Full and detailed remuneration of each directorFull and detailed remuneration of each director(salary, sitting fees, commissions, stock options and(salary, sitting fees, commissions, stock options andperquisites) must be fully disclosed to shareholders inperquisites) must be fully disclosed to shareholders inthe annual report of the company.the annual report of the company.

Loans given to executive directors are capped (noLoans given to executive directors are capped (noloans permitted to nonloans permitted to non--executives), and must be fullyexecutives), and must be fullydisclosed to shareholders in the annual report of thedisclosed to shareholders in the annual report of thecompany.company.

Independent directors who, apart from receivingIndependent directors who, apart from receivingdirectors remuneration should not have any otherdirectors remuneration should not have any othermaterial pecuniary relationship or transactions withmaterial pecuniary relationship or transactions withthe company.the company.


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ROLE OF DIRECTORSROLE OF DIRECTORS


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Determine companys vision & mission

Determine the values of the company

Determine and review companys goals

Determine companys policies

To establish vision,To establish vision,

mission and objectivesmission and objectives


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SWOT Analysis

Determine the strategy options

Select the best option

Formulate strategy andFormulate strategy and

set structureset structure


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Delegate authority to management

Monitor and implement the businessplan

Ensure the internal control is effective

Communicating with senior management

Delegate authorityDelegate authority

and Set Structureand Set Structure


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Ensure effective communications betweenshareholders and stakeholders

Monitor relations with shareholders andrelevant stakeholders by gathering andevaluation of appropriate information

Promote the goodwill and support fromshareholders

Shareholders interest withShareholders interest with

Stakeh

oldersStakeh

olders


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RESPONSIBILITIES OF DIRECTORSRESPONSIBILITIES OF DIRECTORS


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Directors are responsible for ensuring thatproper books of account are kept

Must act in favour of company and nototherwise

Directors must keep above the interests ofemployees of the company

Directors must look after the affairs of thecompany


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A director, or the secretary at the request of adirector, may call a directors' meeting.

A secretary may not call a meeting unlessrequested to do so by a director or the

directors.

Each director must be given reasonable noticeof the meeting, stating its date, time and

place.Commonly, seven days is given but what is

'reasonable' depends in the last resort on thecircumstances.

Calling Directors MeetingCalling Directors Meeting


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Ensure auditing of accounts on time

Follow the rules and regulations

Be answerable for the outsiders

Financial StatementsFinancial Statements


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EFFECTIVENESS OF BOARD OFEFFECTIVENESS OF BOARD OFDIRECTORSDIRECTORS


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Though the board is recognised legally as the

top layer of management with the responsibility

of governing the enterprise, yet, in actual

practice, the board of directors delegates most of

its managerial power to chief executives- say,

the managing director or manager. In many

cases, the board appoints many committees and

clothes them with its power.


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(contd.)(contd.)

The realistic functions of the board may, therefore, be

enumerated as follows:

(a) Confirming management decisions on major changes

in objectives, policies, and th

ose transactions wh

ich

willhave a substantial effect on the success of the company;

(b) Providing constructive advice to the executives through

discussion on important matters such as business

outlook, new governmental legislation, wage policy, etc.,

with a view to guiding the executives when the policiesare still in the process of formation;


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(contd.)(contd.)

(c)Selecting the chief executives and confirming the

selection of the other executives in the company

made by chief executives; and

(d) Reviewing the results of current operations.


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THETHE BOARDBOARD VS.VS. CORPORATE GOVERNANCECORPORATE GOVERNANCE

BoDsBoDs assume ahigh degree of obligation to theassume ahigh degree of obligation to the

company and its shareholderscompany and its shareholders

Thus there is need fora strategic board with broadThus there is need fora strategic board with broad

governing responsibilities supported by qualitygoverning responsibilities supported by quality

directorsdirectors, their competence,, their competence, their commitment andtheir commitment and

willingnesswillingness to performto perform

And not the oneAnd not the one that acts in response to the demandsthat acts in response to the demandsof the CEOof the CEO


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CHANGING PARADIGM IN GOVERNANCECHANGING PARADIGM IN GOVERNANCE

THROUGH PROFESSIONAL BOARDSTHROUGH PROFESSIONAL BOARDS

THE ERA OF 2002 TO 2008 HAS

BROUGHTFORTH MANY PROBLEMS OF

DEFICIENCIES OF GOVERNANCE IN THE

CORPORATE WORLD.

FAILURES OF CORPORATE GOVERNANCE IN

ENRON (2002) BROUGHTFORTH THE FIRST ACT

IN Sarbanes-Oxley Act W

ITH THE

INTRODUCT

IONOF NEWER CONCEPTS ON GOVERNING.


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SOX followed by various othernations of the WorldSOX followed by various othernations of the World

became complaint with such laws that suited eachbecame complaint with such laws that suited each

country in the globalized environment.country in the globalized environment. Independent directors, audit committees, nominatingIndependent directors, audit committees, nominating

committees, compensation committees are all incommittees, compensation committees are all in

place under suitable legislation.place under suitable legislation.

Still 8 years later deficiencies surfaced during recentStill 8 years later deficiencies surfaced during recentglobal melt down.global melt down.

NEED FOR NEW CULTURE OF GOVERNANCENEED FOR NEW CULTURE OF GOVERNANCE

THROUGH PROFESSIONAL BOARDSTHROUGH PROFESSIONAL BOARDS11


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Even in our own country, scams of globalEven in our own country, scams of global

magnitude surfaced in global companies likemagnitude surfaced in global companies like

SatyamSatyam .. Insufficient board members involvement with theInsufficient board members involvement with the

companys affairs appears to have lead to somecompanys affairs appears to have lead to some

of the chronic deficiencies observed in theof the chronic deficiencies observed in the

current corporate boards.current corporate boards.




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It has been observed that the following areasIt has been observed that the following areas

have emerged as problem areas:have emerged as problem areas:

1.1. Boards are often too largeBoards are often too large2.2. Members frequently lack sufficient expertiseMembers frequently lack sufficient expertise

in relevant industryin relevant industry

3.3. Only few members devoted sufficient timeOnly few members devoted sufficient time

needed to understand the complexities of theneeded to understand the complexities of theglobalized operations.globalized operations.

1) Ref. Robert C. Pozen, The case for Professional Boards, HBR SouthAsia,

December 2010,pp.36-42




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cg05_ role of directors and the board

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