The Board of Directors is necessary for defining purposes,shaping cultures,setting strategies and having a long-term perspective. they help in managing conflicts and guide the overall organization.
Board's Role
providing entrepreneurial leadership within prudent/effective controls along with developing a collective vision. particularly:
Section 2 (10): Board of Directors/Board
Section 2 (24): Company Secretary
Section 2 (43): Director
Section 2 (47): Independent Director
Section 2 (54): Managing Director
DIRECTORS UNDER COMPANIES ACT,2013
- Executive Director (ED):board member+having day-to-day responsibilities.they perform operational/strategic functions,usually paid a salary and protected by employment law.
- per rule 2(1)(k) of co. rules 2014 "ED"=Whole Time Director (WTD) under Section 2(94) of the act.
- examples: production/finance/managing/whole time directors.
- Non-ED:not employed and don't have day-to-day responsibilities.usually appointed for professional expertise & outside perspective but may/may not be independent directors.
- nowhere described in the act itself but one who is "not an ED".
- usually paid sitting fees for attending meetings.
- Shadow director:not formally appointed but sometimes under whose directions/instructions,directors are accustomed to acting. adopted from English law.
- legally, a de facto director and held equally liable for obligations.
- not expressly mentioned but referenced such as in definition of "officer".
- Woman Director:sustainable value to stakeholders
- act recognised the importance of gender diversity and mandated appointment of woman in the board of listed and specified co.
- rule 3 of co. rules 2014 prescribes the classes.
- Regulation 17(1)(a) of SEBI(LODR) mandates 1 woman director in all listed+1 woman independent director in top 1000 listen entities by 01/04/2020.
- Resident Director:Section 149(3)-at least 1 director staying in India for not less than 182 days during FY. in case of newly incorporated co. timeline to apply proportionately.
- Independent Director:as referred to in Section 149 of co.act, 2013.Regulation 17(1)(b) of SEBI(LODR) dictates constitution of independent directors based upon ED/non-ED chair.
- Nominee Director:defined in explanation to Section 149(7) which opines that it is a director nominated by an FI under law,agreement or government appointed to represent its interests.
- Regulation 16(1)(b) and 149(6) specifically exclude nominee directors from being independent.
- Small Shareholders Directors:Section 151 adduces for every listed co. to have one director nominated by small shareholders which are the ones holding not more than shares of value 20,000.
- Rule 7 of co. rules 2014 lays down the T&C for their appointment.
- a listed entity may elect one upon notice of not less than 1000 shareholders/one-tenth of total shareholders,whichever is LOWER.
BOARD STRUCTURE & COMPOSITION
composition highly affects board effectiveness and so should be well structured with a good fusion of knowledge and experience.
DIRECTOR SELECTION & APPOINTMENT
the board must ensure that all directors have a range of skill and/or capability that aligns with the organisation's culture and vision.
Section 178 of co. act:every listed+prescribed class co. shall constitute a Nomination and Remuneration Committee(NRC) consisting of 3/more non EDs out of whom,not less than one halves shall be independent directors.
- chair of co. can be a member but can't chair such a committee.
- Rule 6 of the Companies (Meetings of Board and its Powers) Rules, 2014 provides that the Board of directors of every listed public company and a company covered under rule 4 of the Companies (Appointment and Qualification of Directors) Rules, 2014 shall constitute an ‘Audit Committee’ and a ‘Nomination and Remuneration Committee.
- The committee identifies potential persons and recommends the same to board along with evaluation methods.
- formulate qualification,+ve attributes and independence criteria in conjunction with a remuneration policy.[PART D OF SCHEDULE II OF SEBI(LODR)]
- ensures remuneration is sufficient
- contains retention/motivational factors
- relationship of remuneration to performance
- balance between fixed and incentive pay reflecting short/long term objectives.
- such policies disclosed on website/board's report
- constitution of NRC
- at least 3 directors:all non EDs
- at least 50%=independent and listen entity having outstanding SR equity=2/3rd independent
- chair shall be independent and may be present at AGM
- quorum=2 or 1/3rd, whichever is GREATER including at least 1 independent.
- shall meet at least once a year
DUTIES OF DIRECTORS
bound to take precautions and exercise such diligence as a prudent man would in managing affairs. – Trustees of the Orange River Land & Asbestos Company vs King (1892)
duties/responsibilities may be to promote corporate governance or stakeholder interests.
DUTIES UNDER SECTION 166
- acting in accordance with AoA
- act in good faith to promote objects
- employ due and reasonable care,skill and diligence and independent judgement.
- not involved in situations including conflicts with co.interests
- not achieve undue gain/advantage otherwise liable to compensate co.=amt. of gain
- shall not assign office as it is void
- contravention fined 1 lakh to 5 lakhs
- using the following powers only with the shareholder's consent:
- sell/lease/dispose 2/more undertakings
- investing in trust securities the compensation received from M&A
- borrowing that exceeds the aggregate of paid-up/free reserves and securities premium apart from temporary loans from co's bankers in ordinary course.
- remit/give time for repayment of director's debt
- SRs giving details and conditions for use/disposal/investing of sale proceeds.
- nothing above affects buyer's title in good faith and ordinary business
- no exceeding debt incurred valid unless lender proves good faith without his knowledge of limit being exceeded.
INDEPENDENT DIRECTORS (IDs)
for an objective view and an outside perspective and following role:
Section 149(6)/Regulation 16(1)(b) of SEBI(LODR): ID is a director other than MD/WTD/nominee director and is:
- in board's opinion,an integral person having expertise and experience.
- not a promoter OR related to promoters/directors of the co./holding/subsidiary/assct.
- no pecuniary relationship other than remuneration not exceeding 10% of total income during 2 immediately preceding FYs/current FY [inapplicable to govt. co.]
- none of whose relatives:[Rule 5 of co rules,2014]
- holds security/interests not exceeding 50 lakhs/2% PUC during 2 immediately preceding/current FY
- indebted to more than the prescribed amount during 2 immediately preceding/current FY
- given guarantee/provided security for a 3rd person for prescribed amt.
- other pecuniary relationship/transaction of 2% or more of its gross turnover/total income
- who neither himself nor + relatives:
- holds a KMP position/employed in preceding 3 FYs (inapplicable to relative employees)
- is/has been employee/proprietor/partner in 3 immediately preceding FYs of audit/legal firms
- holds 2%/more voting power
- is a CEO/director of NPO receiving 25%/more of receipts from co./employees/promoters/holding co. OR holds 2%/more voting power.
- possessing such other qualifications as prescribed
149(7) declaration of independence at the first meeting and every subsequent one post-change.
Rule 4 of co. (directors appointment/qualifications) rules,2014 reads-following to have at least 2 independent directors
- public co. having PUC of 10cr/more
- turnover of 100 cr/more
- having aggregate,o/s loans,debentures and deposits exceeding 50 cr
- following exempt from above rule
- JVs
- wholly owned subsidiary
- dormant co. (455)
149(8) code for IDs to abide by Schedule IV containing guidelines,roles & functions,duties,appointment,re-appointment,resignation/removal/evaluation.
149(12)/Regulation 25(5) says IDs and non-EDs shall be held liable for acts/omissions occurring with their knowledge/consent/connivance/not acting diligently.their responsibilities arise in absence of WTDs/KMPs and so proceeding should only be initiated with sufficient evidence.
Imp case studies:SEC v. Raval, Civil Action No. 8:10-cv-00101 and Bhopal Gas Tragedy case
OTHER PRACTICES TO ENHANCE BOARD EFFECTIVENESS
- APPOINTMENT OF LEAD ID to keep a keen eye on the chair's objectivity and independence along with the following:
- watch working relationships amongst CEO and chair
- advising chair on relevant matters
- principal liaison between IDs/shareholders and board
- interview board candidates
- assisting in ensuring compliance
- SEPARATION OF ceo/CHAIR'S ROLE
- co. act doesn't legally recognize the chair nor is the co. bound to carry one for a particular timeline.
- 2(18) defines the CEO as one designated as such by co.
- The separation of the above provides the following benefits:
- effective director communication
- shareholders interests
- governance
- long-term outlook
- succession planning
- also legally stated in first proviso to 203(1) for separation of above roles.
- This proviso does not apply to public companies having paid-up share capital of 100 cr/more and annual turnover of 1000 cr/more which are engaged in multiple businesses and have appointed CEO for each such businesses.
- Regulation 17(1)(b) provides that effective 01/04/22,top 500 listed will ensure that the chair shall be:
- NON-ED
- unrelated to MD/CEO
- inapplicable to entities not having an identifiable promoter
SUCCESSION PLANNING
family owned businesses with multiple generations still haven't separated ownership from mgmt.it includes scouring potential board members to ensure continuity, succession & renewal.
the NRC should review required skills,identify gaps,develop appointment criteria and inform succession planning.
EDs may be recruited from an external source along with cultivating internal talent and capability like development programmes,partnering and mentoring schemes.
some leading practices include:
- skills matrix
- annual performance evaluations
- establishing/enhancing director qualification standards
- reviewing needs/commitments
- considering election results and investor engagement
- prioritizing independent mindsets through diversity/debate/challenges
case studies:
Marico Limited - A case study in professionalizing the board
Godrej Group - Clear responsibilities for next generation promoters
DIRECTOR TRAINING,DEVELOPMENT AND FAMILIARIATIONS
director orientation/induction for formal training & evaluation.good governance calls for new areas of knowledge and different skills.
training should be required for each board member and complacency used to assess performance for reappointment. requirements set forth in a board policy describing the curriculum for training.
- director induction
- briefing papers
- internal visits
- introductions
- induction kits containing M/AoA/policies and procedures/annual reports,etc.
- role/rights/duties/responsibilities of board along with co. financial, strategic, operational and mgmt. positions.
- director development:ongoing education, seminars and courses offered
- familiarisation programmes for independent directors (IDs) [Regulation 25(7) of SEBI(LODR)/Schedule IV of co.act,2013].
PERFORMANCE EVALUATION OF BOARD/MGMT.
to check whether board members are effectively functioning,individually and collectively.performance measurement against set benchmarks.effective board and committee processes along with maximizing director contributions.
Provisions under the co. act,2013:
- Section 178(2):Nomination and Remuneration Committee role in performance evaluation
- Schedule IV,Part II(2)/VII:IDs role in performance evaluation of board/non-ID and chair
- Schedule IV,part V/VIII:performance evaluation of IDs
- inclusion of performance evaluations in board's report [Rule 8(4) of co.(accounts)rules,2014]
- Regulation 4(2)(f)(ii)(9) states key functions of board including monitoring/reviewing evaluation framework
- Reg 17(10) mandated ID valuation by whole board except the one being evaluated.
- Reg 19(4) read with Part D of Schedule II enumerates NRC role
- included in corporate governance part of annual report
BOARD EVALUATION FRAMEWORK AND PARAMETERS
- evaluation of board as a whole:either from internal/external sources along IDs discussing in their separate meetings depending upon:
- board structure
- dynamics and functioning
- business strategy/governance
- financial reporting process,internal audit/controls
- monitoring
- supporting and advisory
- chair's role
- evaluation of committees on basis of terms of reference
- evaluation of individual directors
- MD/WTD/EDs
- achievement of financial targets
- executing business plans
- leadership qualities
- policy development
- IDs
- issues being raised,discussed and debated
- guidance provided
- methodology of resolution
- effectiveness of directions
- independence criteria
- NON-EDs
- participation/commitment
- deployment of knowledge/expertise
- effective mgmt.relationship
- impact and influence
- evaluation of CHAIR
- all directors contribute
- broad parameters:leadership,relationship & communication,constructive debate,decision making,shareholder confidence and personal attributes.
CS'S ROLE
per Section 2(60) CS included in the definition of officer liable and considered in default of compliances.
- acts as a vital link with authorities and stakeholders
- ensures procedures are followed/reviewed
- provides guidance
- compliance officer/in-house legal counsel
- member of corporate mgmt. team
- conscience keeper of co.
per Section 203(1) read with Rule 8 of co.(managerial personnel appointment/ remuneration)rules,2014; mandatory for every listed co. and co. having PUC of 10cr/more to appoint a whole time KMP/CS.
Regulation 6(1) provides for every listed co. shall appoint a qualified CS as compliance officer.
a CS should report to the chair for board effectiveness and presentation of high-quality info.a KMP should aim for mutual trust with the co. to be the best version of themselves.
also check out the following for reference:
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