Unit-3 Board of Directors

Concept of Corporate Governance

Corporate governance is the system of rules, practices, and processes by which a company is directed and controlled.
Corporate governance essentially involves balancing the interests of a company's many stakeholders, which can include
shareholders, senior management, customers, suppliers, lenders, the government, and the community. As such,
corporate governance encompasses practically every sphere of management, from action plans and internal controls to
performance measurement and corporate disclosure.
Governance refers to the set of rules, controls, policies, and resolutions put in place to direct corporate behavior. A
board of directors is pivotal in governance, while proxy advisors and shareholders are important stakeholders who can
affect governance.
Communicating a company's corporate governance is a key component of community and investor relations. For
instance, Apple Inc.'s investor relations site profiles its corporate leadership (the executive team and board of directors)
and provides information on its committee charters and governance documents, such as bylaws, stock ownership
guidelines, and articles of incorporation.1

Most successful companies strive to have exemplary corporate governance. For many shareholders, it is not enough for a
company to be profitable; it also must demonstrate good corporate citizenship through environmental awareness,
ethical behavior, and other sound corporate governance practices.
Benefits of Corporate Governance
1. Good corporate governance creates transparent rules and controls, guides leadership, and aligns the interests of
shareholders, directors, management, and employees.
2. It helps build trust with investors, the community, and public officials.
3. Corporate governance can give investors and stakeholders a clear idea of a company's direction and business
integrity.
4. It promotes long-term financial viability, opportunity, and returns.
5. It can facilitate the raising of capital.
6. Good corporate governance can translate to rising share prices.
7. It can reduce the potential for financial loss, waste, risks, and corruption.
8. It is a game plan for resilience and long-term success.
Corporate Governance and the Board of Directors
The board of directors is the primary direct stakeholder influencing corporate governance. Directors are elected by
shareholders or appointed by other board members and charged with representing the interests of the company's
shareholders.
The board is tasked with making important decisions, such as corporate officer appointments, executive compensation,
and dividend policy. In some instances, board obligations stretch beyond financial optimization, as when shareholder
resolutions call for certain social or environmental concerns to be prioritized.
Boards are often made up of a mix of insiders and independent members. Insiders are generally major shareholders,
founders, and executives. Independent directors do not share the ties that insiders have. They are typically chosen for
their experience managing or directing other large companies. Independents are considered helpful for
governance because they dilute the concentration of power and help align shareholder interests with those of the
insiders.
The board of directors must ensure that the company's corporate governance policies incorporate corporate strategy,
risk management, accountability, transparency, and ethical business practices.
The Principles of Corporate Governance
While there can be as many principles as a company believes make sense, some of the most common ones are:
1. Fairness: The board of directors must treat shareholders, employees, vendors, and communities fairly and with
equal consideration.
2. Transparency: The board should provide timely, accurate, and clear information about such things as financial
performance, conflicts of interest, and risks to shareholders and other stakeholders.
3. Risk Management: The board and management must determine risks of all kinds and how best to control them.
They must act on those recommendations to manage risks and inform all relevant parties about the existence and
status of risks.
4. Responsibility: The board is responsible for the oversight of corporate matters and management activities. It must
be aware of and support the successful, ongoing performance of the company. Part of its responsibility is to recruit
and hire a chief executive officer (CEO). It must act in the best interests of a company and its investors.
5. Accountability: The board must explain the purpose of a company's activities and the results of its conduct. It and
company leadership are accountable for the assessment of a company's capacity, potential, and performance. It
must communicate issues of importance to shareholders.
Types of Directors and concept of Key Managerial Personnel (KMP)
Types of Directors
Residential Director
As per the Act, every company needs to appoint a director who has been in India and stayed for not less than 182 days in
a previous calendar year. Such a director will be a residential director.
Independent Director
Independent directors are non-executive directors of a company and help the company to improve corporate credibility
and enhance the governance standards. In other words, an independent director is a non-executive director without a
relationship with a company which might influence the independence of his judgment.
The tenure of the independent directors is five consecutive years; however, they shall be entitled to reappointment by
passing a special resolution with the disclosure in the Board’s report. Every listed public company must have at least one-
third of a total number of directors as independent directors. Following unlisted public companies need to appoint at the
least two independent directors:
 Public Companies with Paid-up Capital of Rs.10 Crores or more,
 Public Companies with Turnover of Rs.100 Crores or more,
 Public Companies with total outstanding loans, deposits, and debenture of Rs.50 Crores or more.
Small Shareholders Directors
A listed company, could upon the notice of a minimum of 1000 small shareholders or 10% of the total number of the
small shareholder, whichever is lower, shall have a director which would be elected by small shareholders.
Women Director
A company, whether be it a private company or a public company, would be required to appoint a minimum of
one woman director in case it satisfies any of the following criteria:
 The company is a listed company and its securities are listed on the stock exchange.
 The paid-up capital of such a company is Rs.100 crore or more with a turnover of Rs.300 crores or more.
Additional Director
A person could be appointed as an additional director and can occupy the post until the next Annual General Meeting. In
absence of the AGM, such term would conclude on the date on which such AGM should have been held.
Alternate Director
Alternate director refers to personnel appointed by the Board, to fill in for a director who might be absent from the
country, for more than 3 months.
Nominee Directors
Nominee directors could be appointed by a specific class of shareholders, banks or lending financial institutions, third
parties through contracts, or by the Union Government in case of oppression or mismanagement.
Executive Director
An executive director is the full-time working director of the company. They look after the affairs of the company and
have a higher responsibility towards the company. They need to be diligent and careful in all their dealings.
Non-executive Director
A non-executive director is a non-working director and is not involved in the everyday working of the company. They
might participate in the planning or policy-making process and challenge the executive directors to come up with
decisions that are in the best interest of the company.
Managing Director
A managing director means a director entrusted with the substantial powers of management of the company by virtue
of the articles of a company, agreement with the company, resolution passed in the company general meeting or by the
board of directors.
Key Managerial Personnel
Key Managerial Personnel refers to a group of people who are in charge of maintaining the operations of the company.
Accounting Standard 18(AS-18) states that Key Managerial Personnel (KMP) are people who have authority and
responsibility for planning, directing and controlling the activities of the reporting enterprise. Chief Executive Office,
Cheif Financial Officer, Company Secretary, Whole Time Director are the Key Managerial Personnel.
The term ‘personnel’ refers to a group of people working together, instead of one person. The Key Managerial Personnel
are the decision makers. They are accountable for the smooth functioning of company operations.
The members of the Board of Directors do not necessarily get involved in the day to day operations of the company.
Their job is to supervise the company as a whole, not micromanage. The Board of Directors sets goals and objectives for
the company. The key managerial personnel is the one who actually works on these goals and objectives to be achieved.
Under Section 2 of the Companies Act 2013, Key Managerial Personnel in reference to a company are as follows:
 Chief Executive Officer/Managing Director
 Company Secretary
 Whole Time Director
  Chief Financial Officer
Chief Executive Officer/Managing Director
The managing director or chief executive officer is responsible for running the whole company. Also, the managing
director has authority over all operations and has the most power in a managerial hierarchy.
He is also responsible for innovating and growing the company to a larger scale. In many countries, a managing director
is also called a Chief Executive Officer (CEO).
Company Secretary
A company secretary is a senior level employee in a company who is responsible for the looking after the efficient
administration of the company. The company secretary takes care of all the compliances with statutory and regulatory
requirements.
He also ensures that the targets and instructions of the board are successfully implemented. However, in some
countries, a company secretary is also called a corporate secretary.
Whole Time Director
A Whole Time Director is simply a director who devotes the whole of his working hours to the company. He is different
from independent directors in the sense that he has a significant stake in the company and is part of the daily operation.
A managing director may also be a whole time director.
Chief Financial Officer
Chief Financial Officer (CFO) is a senior level executive responsible for handling the financial status of the company. The
CFO keeps tabs on cash flow operations, does financial planning, and creates contingency plans for possible financial
crises.
Appointment of Key Managerial Personnel
Section 203 of the Companies Act 2013 has the provisions for the appointment of key managerial personnel. The Board
appoints them. Also, the Board of Directors is responsible to fill any vacancies in the KMP within a period of six months.
It is mandatory for any listed company and any company with a paid up capital of more than or equal to 10 lakhs to
appoint a whole time KMP. Further, a company with at least 5 lakhs paid-up capital is required to employ a full-time
company secretary(who is also a KMP).
Roles and Responsibilities of Key Management Personnel
The KMPs are basically are basically responsible for taking the most important decisions and managing all the
employees. They are also liable if they do not follow compliances laid down by the Companies Act 2013.
The growth and development of the company depend on the effectiveness of the KMPs at their jobs. The main
responsibilities and functions of the KMP are:
 As per Section 170 of the Companies Act, the details about the securities held by the KMPs in the company or its
holdings and subsidiaries must be disclosed and thus recorded in the Registrar.
 KMPs have a right to voice their opinion especially in meetings of the Audit Committee. However, they don’t have a
voting right.
 According to Section 189, Companies Act, KMPs should disclose their interests in other companies and associations,
at least within 30 days of the start of the employment period.
Board Meetings and its Importance
Board meetings are meetings at the highest level, i.e. a meeting where board members or their representatives are
present. A company is not an actual entity but a legal one so it cannot take actions and make decisions. The board of
directors act as agents through which the company takes actions as well as makes decisions.
The board of directors is the supreme authority in a company and they have the powers to take all major actions and
decisions for the company. The board is also responsible for managing the affairs of the whole company.
For the effective functioning and management, it is imperative that board meetings be held at frequent intervals. For
this, Section 173 of Companies Act, 2013 provides – In the case of a Public Limited Company, the first board meeting has
to be held within the first 30 days, since the incorporation date. Additionally, a minimum of 4 board meetings must be
held in a span of one year. Also, there cannot be a gap of more than 120 days between two meetings.
In the case of small companies or one person company, at least two meetings must be conducted, one in each half of the
financial year. Additionally, the gap between the two meetings must be at least 90 days. In a situation where the meeting
is held at a short notice, at least one independent director must be attending the meeting.
Notice of Board Meeting
The notice of Board Meeting refers to a document that is sent to all directors of the company. This document informs the
members about the venue, date, time, and agenda of the meeting. All types of companies are required to give notice at
least 7 days before the actual day of the meeting.
Quorum for the Board Meeting
The quorum for the Board Meeting refers to the minimum number of members of the Board to conduct a valid Board
Meeting. According to Section 174 of Companies Act, 2013, the minimum number of members of the board required for
a meeting is 1/3rd of a total number of directors.
At any rate, a minimum of two directors must be present. However, in the case of One Person Company, the rules of
Section 174, do not apply.
Participation in Board Meeting
All directors are encouraged to actively attend board meetings and in case that’s not possible at least attend the
meetings through a video conference. This is so that all directors can take part in the decision-making process.
Requirements for Conducting a Valid Board Meeting
 Right Convening Authority
The board meeting must be held under the direction of proper authority. Usually, the company secretary (CS) is there to
authorize the board meeting. In case the company secretary is unavailable, the predetermined authorized person shall
act as the authority to conduct the board meeting.
 Adequate Quorum
The proper requirements of the quorum or the minimum number of Directors required to conduct a Board meeting
must be present for it to be considered a valid board meeting.
 Proper Notice
Proper notice is one of the major requirements to be fulfilled when planning a board meeting. Formal notice has to be
served to all members before conducting a board meeting.
 Proper Presiding Officer
The meeting must always be conducted in the presence of a chairman of the board.
 Proper Agenda
Every board meeting has a set agenda that must be followed. The agenda refers to the topic of discussion of the board
meeting. No other business, which is not mentioned in the meeting must be considered.
Importance of Board meetings
1. Align the board of directors and senior management team around the company's mission, vision, and goals. By
discussing and agreeing key priorities, everyone can work together to achieve the same objectives.
2. Provide a forum for discussing and refining the company's strategic plans. Board members bring different
perspectives and experiences to the table, which can help improve the quality of the company's strategic decision-
making.
3. Allow the board of directors to oversee the company's performance, operations, and risk management. This
oversight ensures the company is operating in accordance with its legal and ethical obligations and that it is
managing its risks effectively.
4. Provide a platform for senior management to be held accountable for their actions and decisions. This
accountability helps ensure that the company is being managed in the best interests of its shareholders and other
stakeholders.
5. Facilitate communication between the board of directors and senior management team. This communication helps
ensure that everyone is aware of important developments and issues that impact the company's performance.
6. Provide a structured process for making important decisions that impact the company's future. By bringing
together key stakeholders and decision-makers, board meetings can help ensure that decisions are made in an
informed and thoughtful manner.
7. Offer an opportunity to discuss succession planning for senior management and board members. This planning
helps ensure that the company has the leadership it needs to succeed in the future.
As you can see, board meetings are critical to corporate governance. They help align the board of directors and senior
management around the company's mission, vision, and goals, facilitate strategic planning and decision-making, provide
oversight and accountability, and support effective communication and succession planning. By leveraging the benefits
of board meetings, companies can enhance their performance and position themselves for long-term success.
Liabilities of Board of Directors
Liabilities of Directors Towards the Company
Directors have a fiduciary relationship with the company. They are expected to act in the best interest of the company
and its stakeholders. Key liabilities of directors towards the Company under the Companies Act, 2013 include:
Breach of Fiduciary Duty: Directors must act with honesty, integrity and in good faith. Breaching these duties can lead to
personal liability, especially if the company suffers a loss due to their actions.
Ultra Vires Acts: Actions taken beyond the scope of authority granted by the company’s memorandum and articles of
association can render directors personally liable.
Negligence: Directors are expected to perform their duties with due diligence. Failure to do so can result in liability for
any resulting damages to the company.
Malafide Acts: Engaging in dishonest or fraudulent activities can lead to directors being held liable for any losses
incurred by the company.
Liability to Third Parties
Directors also bear liability towards third parties, particularly in cases involving:
Issue of Prospectus: Misrepresentations or omissions in a prospectus can lead to personal liability for directors.
Allotment of Shares: Directors must ensure compliance with legal requirements during share allotment. Non-
compliance can result in liabilities to the allottees or other third parties.
Fraudulent Trading: Directors involved in fraudulent trading practices can be held personally liable to creditors or third
parties affected by such actions.
Breach of Warranty and Statutory Duties
Directors are bound by the powers vested in them by the company’s articles of association and the Companies Act.
Engaging in activities beyond these powers can result in:
Breach of Warranty: Directors may face personal liability for entering into transactions beyond their authorised powers,
causing losses to third parties.
Statutory Duties: The Act imposes various statutory duties on directors, with penalties for non-compliance. These
include duties related to filing financial statements, maintaining proper records and more.
Liability for Acts of Other Directors
Directors may be held liable for the acts of their co-directors if they were aware of such actions and did not act to
prevent them. However, liability of directors under the Companies Act, 2013 is generally limited to those who actively
participate or consent to the wrongful acts.
Criminal Liability
The Act also outlines criminal liabilities for directors, which include:
 Cheque Dishonour: Directors can be criminally liable for issuing cheques that are dishonoured.
 Violation of Other Laws: Directors must ensure the company complies with all applicable laws. Ignorance or
negligence of laws like labour laws, environmental laws, etc., can lead to criminal charges.
 Offences Under the Income Tax Act: Violations of tax laws can also result in criminal liability for directors.
Liabilities of Non-executive/Independent Directors
The Act provides some protection to non-executive and independent directors by limiting their liability to acts of
omission or commission by the company that occurred with their knowledge, attributable through board processes and
with their consent or connivance or where they have not acted diligently.
Independent Directors- Role and Responsibilities
An independent director is a director other than managing director or whole-time director or nominee director. In other
words, an independent director is a non-executive director of the company who brings objectivity and independence in
the decision-making by the Board of Directors of the company. The Board of Directors acts as the brain of the company
and when the brain functions optimally, the corporation is said to function efficiently.
Section 149(6) of the Act highlights the criteria for independence before the appointment of a person as an independent
director with respect to the relationship with promoters, holding company, subsidiary company, associate companies,
transaction through relatives, shareholding in the company, appointment of a firm of auditors and many others. The
appointment of independent directors of the company shall be approved at the shareholders’ meetings. Further such
appointments shall be formalized through a letter of appointment highlighting terms of appointment, the expectation of
the Board from the appointed director, the fiduciary duties that come with such appointment along with accompanying
liabilities, and many more. Having stated the above, the provisions relating to Independent Directors have been found in
Section 149, Section 150 of the Companies Act, 2013, and Schedule IV read with Rules 4 and Rule 5 of the Companies
(Appointment and Qualification of Directors) Rules, 2014.
An independent director is not subject to the retirement of directors by rotation rather independent director shall hold
office for 5 consecutive years on the Board of the company and is eligible for reappointment on the passing of a special
resolution by the company. Independent directors shall not hold office for more than two consecutive terms and shall be
eligible for reappointment after a cooling-off period of 3 years.
The remuneration which shall be paid to the independent director is sitting fees along with entitlement to the
reimbursement of expenses for participation in the Board and other Committee meetings and profits related
commission as approved by members of the company.
Role, duties and liabilities of independent director
The role and responsibilities of the independent director are enshrined in Section 149(8) read with Schedule IV of the
Companies Act, 2013. Schedule IV and SEBI (Listing Obligations and Disclosure Requirement) Regulations 2015 impose
huge powers and responsibilities in the hands of Independent Directors. Independent directors review the performance
of non-independent directors and the Board of directors as a whole, review the performance of a listed entity taking into
account the views of executive directors and non-executive directors, and assess the quality, quantity, and timeliness of
the flow of information between the management of the listed entity and the board of directors which is necessary for
the board to effectively and reasonably perform their duties. There are instances where Independent Directors have
asked the board for massive changes in the company including the change of promoter chairman of the company. Hence
the powers and responsibilities are widespread. India seems to be the only country to have this kind of extraordinary
importance and role definition for an independent director under the law.
One of the major roles and functions of an Independent Director is to determine appropriate levels of remuneration of
executive director, key managerial personnel, and senior management, and recommend removal of such officers of the
company. Independent directors further act as a moderator and arbitrators in the interest of the company in the
situation of conflict between management and shareholder’s interest. One of the key duties of an independent director
is to report concerns about unethical behavior, actual or suspected fraud or violation of the company’s code of conduct
or ethics policy, and keep themselves well informed about the company and the external environment in which it
operates. The liability of independent directors is very limited unlike executive directors. The independent director is
only liable in respect of such acts of omission or commission by the company which has occurred with his knowledge,
attributable through Board process, and with his consent or connivance, and the independent director had not acted
diligently. Further, the expertise of an independent director is required for key issues such as choice of long term
accounting policy, choice of implementing cyber security program and many more.
An independent director is the final custodian of the sustainability of the company in matters such as corporate
governance, greater productivity, major efficiencies, and many more. Independent directors are on audit committees
and such audit companies deliberates on finances of the company such as loans taken by the company, key findings in
balance sheet, performance of companies in the financial year, and many more. Hence, the Board of Director is a
collective responsibility of the company of which independent director is a critical part of it.
Critical analysis of the role and responsibilities of independent director
The above mentioned discussion highlights the theoretical aspect of the role and responsibilities of independent
directors which is completely divorced from the practical realities. In the real world, the independent directors are
subdued due to various factors. The author shall highlight the problems and solutions to address submissive behavior of
independent directors in Board meetings.
The roles and responsibilities of independent directors have enhanced multifold and at the same time liability has
become more severe. Hence, overall risks are high for independent directors. Laws are getting complex and there is fear
in the mind of professionals and experts to take the position of independent director. A major point to ponder is
whether the seat of independent director is onerous and there are more risks than reward in position. Usually,
independent directors are found under the clout and influence of promoter(s) of the company as independent directors
are appointed by promoters who control the affairs of the company. Thereafter, independent directors become integral
part of the Board as a non-executive director and the burning issue that arises is how independent is independent
director in discharging his responsibilities and duties.
In some instances, the independent directors take an independent view of the board which results in promoters turning
unhappy with independent directors, thereafter reappointment of those independent directors becomes uncertain and
they are not generally reappointed. This happened in the very famous case where Nusli Wadia was sacked as
independent director as he was not ready to work according to the promoters’ lines. It is opined that the concept of
independent director has taken a fall from grace as the independent director usually takes its decision for the majority
shareholders and minority shareholders are at the receiving end of the stick. The minority shareholders literally have no
voice in such situations.
Another major reason for subdued behavior of independent directors in Board meetings is the performance evaluation
mechanism of independent directors. The performance evaluation of an independent director shall be done by the
entire Board of Directors excluding the Director being evaluated. On the basis of the report of performance evaluation, it
shall be determined whether to extend or continue the term of appointment of the independent director. Thus the onus
of reappointment of independent directors are at the whims of the Board and the major motivation for independent
directors is to remain in good books of the Board and enjoy the perks. This has led to the situation of “Puppet
Independent Directors” who shall be unable to perform his/ her duties diligently.
It is also found that independent directors are prime witness to swindling of money by the promoters, independent
directors are also consenting party to conflict of interest, and independent directors lack behavioral skills inside
boardrooms. If independent directors are not independent in their working, then independent directors’ responsibilities
and liabilities would be identical to those of promoters’ and other directors.