CORPORATE

GOVERNANCE

Board of Directors:
A powerful instrument in
governance

Prof Grover
 Who is a Director?

Section 2 (13) of the Companies Act defines a

director as follows: “A director includes any
person occupying the position of director”
To 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. If he
performs the functions of a director, he is a
director?
 What 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’.
 Composition of the Board

Most of the corporations are composed of:

Inside directors (management directors)
 Officers & executives employed by the firm
Outside directors
 Executives of other firms but not employees of
board’s firm
 Can be affiliated to the firm – legal or insurance,
client, retired executive of firm, family, etc.
 Kinds 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.
 Kinds of Directors (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.
 Appointment of Directors
Founding Directors: The Articles of Association
(AoA) of a company usually name the first set of
directors.

Appointment/Reappointment: Certain provisions

of the Companies Act govern the appointment,
reappointment and rotation of directors by a
company in a general meeting.

If the chairman of the Company is a non-

executive then one-third of the board should
consist of independent directors, otherwise 50%
directors on the board are independant.
 Qualifications of Directors

• 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 by
the Articles of Association.
 Qualifications of Directors (contd.)`

The following persons are disqualified for

appointment as directors
a) A person of unsound mind;
b) an undischarged insolvent or one whose petition
for declaring himself so is pending in a Court;
c) a person who has been convicted by a Court for
any offence involving moral turpitude; (iv) a
person whose calls in respect of shares of the
company held for more than six months have
been in arrears; and
 Qualifications Directors (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
 the shareholders;
 the Central Government ;and
 the Company Law Board.
CORPORATE MANAGEMENT STRUCTURE

Shareholders

elect

Board of forms
Directors
Executive
Committee
appoints

Chief Executives
and Senior Executives
Powers of the Board
 Powers 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 debentures
c) borrow moneys otherwise (For example, through
public deposits)
d) invest the funds of the company and
e) obtaining loans
 Board of Directors
– Certain other powers
– AGM 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 in
the ordinary course of business;
c) to borrow in excess of capital
d) to contribute to charitable and other funds not
relating to the business of the company or the
welfare 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.
 Nominee 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 ensure
good corporate governance.
• A nominee director, as an affiliated director, is
nominated to ensure that the interests of the
institution which he or she represents are duly or
effectively safeguarded.
 Nominee Directors (contd.)

• Kumar Mangalam Birla Committee on Corporate

Governance suggested that financial institutions
should not have their representatives on the
boards of assisted companies.
 Liabilities of Directors

(1) Directors are liable to third parties in connection with

issue of Prospectus,
• which does not contain particulars required under
the 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 for
money or goods wherein the name of the
company is not mentioned in legible characters.
 Liability 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 for negligence in the
exercise of his duties.
 The Directors’ Liability to the Company
(contd.)

(3) Breach of Trust:

Liable to the company for any material loss
on account of the breach of trust.
(4) Misfeasance:
Directors are liable to the company for
willful misconduct (misfeasance).
 Liability 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 invest
money,
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.
 Liability for Acts of his Co-directors

• A director is not liable for the acts of his 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.
 Directors 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.
 Disabilities of Directors

In order to protect the interest of a company and its

shareholders, the Companies Act has placed the
following disabilities on the directors:
1. Any provision in the Articles or an agreement which
exempts a director (including any officer of the
company or an auditor) from any liability on account
of any negligence, default, misfeasance, breach of
duty or breach of trust by him shall be wholly void.
 Disabilities of Directors (contd.)

2. An undischarged insolvent shall not be appointed to

act as director of any company or in any way to take
part in the management of any company.
3. No person shall hold office at the same time as
director in more than 15 companies.
4. A company shall not without obtaining the previous
approval of the Central Government in that behalf,
directly or indirectly make any loan to
 Disabilities of Directors (contd.)
a) any director of the lending company or of a company which is
its holding company or any partner or relative of any such
director;
b) any firm in which any such director or relative is a partner;
c) any private company of which any such director is a director
or member;
d) any body corporate at a general meeting of which not less
than 25 per cent of the total voting power may be exercised or
controlled by any such director; or
e) any body corporate, the board of directors, managing director,
or manager whereof is accustomed to act in accordance with
the directions or instructions of the Board, or of any director or
directors of the lending company.
 Disabilities of Directors (contd.)
(5) Except with the consent of the board of directors of
a company, a director of the company or his
relative, a firm in which such a director or relative is
a partner, any other partner, in such a firm, or a
private company of which the director is a member
or director, shall not enter into any contract with the
company.
(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. If he does, the
assignment shall be void.
 Effectiveness of the Board of Directors
(contd.)
The realistic functions of the board may, therefore, be
enumerated as follows:
1. Confirming management decisions on major changes in
objectives, policies, and those transactions which will
have a substantial effect on the success of the company;
2. 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 policies
are still in the process of formation;
 Effectiveness of the Board of Directors
(contd.)

3. Selecting the chief executives and confirming the

selection of the other executives in the company
made by chief executives; and
4. Reviewing the results of current operations.
Guidelines for Execution
of Board Meetings
&
Remuneration of the
Board of Directors
Board must meet at least four times a year, with a
maximum time gap of four months between two
successive meetings.

The frequency of board meetings and board

committee meetings, with their dates, must be
fully disclosed to shareholders in the annual
report of the company.

The attendance record of all directors in board

meetings and board committee meetings must be
fully disclosed to shareholders in the annual report
of the company.
Full and detailed remuneration of each director
(salary, sitting fees, commissions, stock options and
perquisites) must be fully disclosed to shareholders in
the annual report of the company.

Loans given to executive directors are capped (no

loans permitted to non-executives), and must be fully
disclosed to shareholders in the annual report of the
company.

Independent directors who, apart from receiving

director’s remuneration should not have any other
material pecuniary relationship or transactions with
the company.
ROLE OF DIRECTORS
 To establish vision,
mission and objectives

Determine company’s vision & mission

Determine the values of the company

Determine and review company’s goals

Determine company’s policies

 Formulate strategy and
set structure

SWOT Analysis

Determine the strategy options

Select the best option

 Delegate authority
and Set Structure

Delegate authority to management

Monitor and implement the business

plan

Ensure the internal control is effective

Communicating with senior management

 Shareholders interest with
Stakeholders

Ensure effective communications between

shareholders and stakeholders

Monitor relations with shareholders and

relevant stakeholders by gathering and
evaluation of appropriate information

Promote the goodwill and support from

shareholders
RESPONSIBILITIES OF DIRECTORS
Directors are responsible for ensuring that
proper books of account are kept

Must act in favour of company and not

otherwise

Directors must keep above the interests of

employees of the company

Directors must look after the affairs of the

company
 Calling Directors’ Meeting

A director, or the secretary at the request of a

director, may call a directors' meeting.

A secretary may not call a meeting unless

requested to do so by a director or the
directors.
Each director must be given reasonable notice
of the meeting, stating its date, time and
place.
Commonly, seven days is given but what is
'reasonable' depends in the last resort on the
circumstances.
 Financial Statements

Ensure auditing of accounts on time

Follow the rules and regulations

Be answerable for the outsiders

EFFECTIVENESS OF BOARD OF
DIRECTORS
Effectiveness of the Board of Directors

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.
 Effectiveness of the Board of Directors
(contd.)
The realistic functions of the board may, therefore, be
enumerated as follows:
(a) Confirming management decisions on major changes
in objectives, policies, and those transactions which
will have 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 policies
are still in the process of formation;
 Effectiveness of the Board of Directors
(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.

THE BOARD VS. CORPORATE GOVERNANCE

• BoDs assume a high degree of obligation to the

company and its shareholders
• Thus there is need for a strategic board with broad
governing responsibilities supported by quality
directors, their competence, their commitment and
willingness to perform
• And not the one that acts in response to the demands
of the CEO
 CHANGING PARADIGM IN GOVERNANCE
THROUGH 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 WITH THE INTRODUCTION
OF NEWER CONCEPTS ON GOVERNING.
NEED FOR NEW CULTURE OF GOVERNANCE
THROUGH PROFESSIONAL BOARDS1

• SOX followed by various other nations of the World

became complaint with such laws that suited each
country in the globalized environment.
• Independent directors, audit committees, nominating
committees, compensation committees are all in
place under suitable legislation.
• Still 8 years later deficiencies surfaced during recent
global melt down.
NEED FOR NEW CULTURE OF GOVERNANCE
THROUGH PROFESSIONAL BOARDS1

• Even in our own country, scams of global

magnitude surfaced in global companies like
Satyam .
• Insufficient board members’ involvement with the
company’s affairs appears to have lead to some
of the chronic deficiencies observed in the
current corporate boards.
NEED FOR NEW CULTURE OF GOVERNANCE
THROUGH PROFESSIONAL BOARDS1

• It has been observed that the following areas

have emerged as problem areas:
1. Boards are often too large
2. Members frequently lack sufficient expertise
in relevant industry
3. Only few members devoted sufficient time
needed to understand the complexities of the
globalized operations.

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

2010,pp.36-42
THANK YOU