BUSINESS AND CORPORATE LAWS

Project on Board of Directors are eyes,

ears, nose and forehead of any company. Describe in detail your views about the same with a further listing as to how do they perform and discharge their duties under the Companies Act 1956.
Submitted by:
Aanchal goel (10609001)

Submitted to: Prof. G. K. Agarwal Course code: M6CGM06

Abhinav dhingra (10609002) Abhishek kumar (10609003) Abhishek sood (10609004) Aditi uniyal (10609005) Akanksha rai sinha (10609006) Akshay misra (10609007) Anchal verma (10609008) Anjai verma (10609009) Ankit kumar verma (10609010) Ankit tiwari (10609011)

Directors duties, responsibilities and rights

Duties of directors Directors duties arise from the following sources:
y y y y

y y

the common law statutes the memorandum and articles of association of the company service agreements specifically entered between the director and the company resolutions passed at members or directors meetings the rules of a regulatory body, if any

Common law duties: A director's fiduciary duty 'Every director is bound at common law by a separate and distinct fiduciary duty to the company (the term fiduciary being derived from the Latin fiduciarius meaning of trust). Directors owe their fiduciary duty to the company as a corporate being in its own right and not to the members individually, not even to a member who is a majority shareholder. Even if a director occupies his position on the board by virtue of another position he holds (for instance, where he is appointed by a major shareholder or is entitled to a seat on the board by virtue of an executive position in the company), a directors fiduciary duties rest upon him as an individual. The fiduciary duty is likewise not owed directly to creditors, employees or other stakeholders of the company, although there is a range of circumstances in which a director may, by virtue of the neglect of his fiduciary duty to the company, be held personally liable to the companys

stakeholders.' In this fiduciary capacity, a director assumes two roles, as an "agent" acting on behalf of the company, and as a trustee who controls company assets. These roles give rise to the following directors duties:
y y

to act in good faith towards the company to act only within their powers and use their powers only for purposes which benefit the organisation. Directors who act outside their powers bind the company to the transaction but may be held personally liable if a loss results not to use for personal gain any information acquired in their capacity as a director to act in the best interests of the company and to avoid a conflict between personal and company interests to exercise independent judgment in decision-making. A director who is appointed to represent an interest group, for example employees, is nevertheless obliged to act in the best interests of the company as a whole

Conflict of interests A conflict may sometimes arise between a directors personal circumstances and that of the company. The law is unequivocal as to the course of action a director who has a conflict of interests must follow and a director may never prefer his interests over that of the company he is entrusted to direct. A director who does so may be liable to account to the company in respect of any profits he makes as a result of such a transaction. Directors may often sit on the boards of several companies and conflicts may also arise between the divergent interests of these companies, thus presenting a problem to the individual who

sits on the boards of both companies. It is important to note that where a director is simultaneously a director of a holding company and its subsidiary, he owes a separate and distinct fiduciary duty to both entities as legal individuals in their own right. A director must guard against a conflict of interests developing in a situation where he is a director of both the holding company and a subsidiary. Should a conflict arise which prevents him from discharging his duty to both companies properly, he should consider resigning from either or both boards. Duty of care and skill The degree of care and skill required is determined objectively by considering how a reasonable person with similar knowledge and experience would have acted, and then comparing this to the directors actions. Each case is considered individually taking into account the nature of the business and the directors specific obligations. As indicated earlier, no distinction is made between executive and non-executive directors. Statutory Duties: A director's duties in terms of the Companies Act Directors have to comply with a number of obligations in terms of the Companies Act. These are dealt with in Annexure A. Duties in terms of the memorandum and articles of association The memorandum of association determines the scope of the companys objects and powers, while the articles of association is a contract between members themselves and between members and the company. The articles therefore contain the internal rules by which a company is governed. The Companies Act provides a

standard set of articles that many companies use as a basis but may amend to meet their specific needs. The memorandum and articles are integral to the company and directors should familiarise themselves with their contents since they invariably impose duties on directors.

Directors and shareholders Decision making authority Whilst shareholders retain ultimate responsibility for the company and have the power to remove or not to re-appoint directors, they in effect delegate the day-to-day running of the company to the directors who in turn appoint and supervise management. The board of directors must manage the company within the limits of legislation and the memorandum and articles. The board may delegate certain powers to managers and at the same time impose appropriate restrictions and conditions which can be varied or revoked at any time. The directors have a duty to monitor management's performance and ensure that management work within their delegated power. In the absence of specific cause for suspicion, directors are generally entitled to trust management to perform their duties honestly and to accept and rely on the judgment, information and advice of management when reaching their own decisions. Directors should not lose sight of the fact, however, that they remain ultimately liable, both jointly as a board and individually, for the well being of the company.

Directors power to bind the company 'Normally the powers and duties of directors are left undefined and it is implied that directors possess all powers necessary to enable them to direct the affairs of the company. The articles may sometimes seek to limit these powers or to specify particular duties, in which event these limitations must be strictly complied with. A director may not enter into transactions on behalf of the company which are beyond the powers conferred upon him by the articles, the Act and common law. In some circumstances where directors have acted beyond their powers as directors, the shareholders may subsequently ratify their action by special resolution. Ratification is not possible, however, where the action falls outside the object of the company as defined in the companys memorandum of association. Directors will be liable to the company for any financial losses incurred by it as a result of them having acted outside the scope of their authority. Any member of the company may institute action against any incumbent or previous director where the company has suffered damages due to a breach of trust or a wrongful act by that director. [266]

Loans to directors Loans made either directly or indirectly to directors are prohibited unless:
y y y y y

y y

all members give their consent a special resolution approves a specific loan the loan is to enable a director to perform his or her duties the business of the company is to make loans the loan is to provide assistance to enable the director to participate in a companys share incentive scheme the loan is for directors' housing the loan is made to a director of a subsidiary who is not also a director of the lending company [226]

Indemnifying directors A company may take out insurance to indemnify its directors or officers for negligence, default, breach of duty or breach of trust. [247] This provision was introduced by a 1999 amendment to the Companies Act and it is suggested in King II that directors persuade their companies to take out this insurance. ' In terms of 248, if, in any proceedings for negligence, default, breach of duty or of trust against a director, officer or auditor, it appears to the court that the person has acted honestly and reasonably, the court may relieve him, wholly or partially, of his liability. The burden of proof to show that he acted honestly and reasonably in the context of surrounding circumstances is on the director seeking relief.'

Dissenting Directors Where a director strongly disagrees with a board decision, he has several ways to indicate this dissatisfaction. A dissenting director may:
y y

prepare a memorandum setting out his objections raise these concerns at a formal board meeting, requesting that a meeting be convened if the matter needs urgent attention and the next board meeting is too late to give proper attention to the issue insist on a full hearing at the meeting and request that detailed objections be recorded in the minutes of the meeting seek professional advice if this is appropriate. (King II recommends that the company should have a procedure for the director to be able to do so at the expense of the company).

If the matter is not resolved at a board meeting, the dissenting director could call a general meeting (if authorised by the articles) or rally shareholders to call a general meeting as the shareholders hold the ultimate power in the company. If this is not possible and the director is not prepared to abide by the majority board decision, he may have no alternative but to resign.

Rights of Directors: Directors have the right to:

y

y y y

y y

inspect the companys accounting records, assisted by an accountant [284(3)] claim reimbursement for expenses incurred discharge their duties without interference from co-directors participate in the strategic management of the company and attend and vote at board meetings receive reasonable notice of meetings take independent professional advice at the expense of the company

THE BOARD OF DIRECTORS

Size and composition of the board The minimum number of directors is respectively one for a private, and two for a public company. The maximum number of directors is determined by the companys articles of association. In order not to become unwieldy and ineffective, most boards of public companies are between eight and twelve directors with sixteen being the optimum number recommended for the boards of banks. King II recommends that the positions of chairperson and chief executive officer of the company should be separated, alternatively that the board appoint a lead independent director who will bring a level of autonomy to board discussions. It also recommends that a board have a majority of non-executive directors. These directors should be totally independent from any significant business relationship with the company since their role is to bring to the board independent judgment and broad business experience.

Role and function of the board In terms of King II, the boards role and function is to:
y y y

y y

provide strategic direction to the company retain full and effective control of the company ensure compliance by the company with all laws and regulations communicate with stakeholders in a transparent manner delegate appropriate powers to management and monitor the exercise of that delegated power on an ongoing basis reserve certain powers to itself as a board where this relates to issues which are material to the company, for instance a change in the strategic focus of the companys business have unrestricted access to company information and records agree on a procedure to allow directors to obtain independent professional advice where necessary review the size and composition of the board in terms of the mix of skills and diversity and decide on the optimal composition required to ensure the board's effectiveness identify and monitor key risks and ensure that the company has effective systems of internal control to manage risk within acceptable parameters identify key performance areas for the board and management identify and monitor non-financial aspects relevant to the company and its stakeholders and ensure that the company conducts itself as a responsible corporate citizen record the facts and assumptions which lead it to conclude that the business will be a going concern in the next financial year (and if not, what steps the board is taking to ensure that this status will be achieved)

explain the effect of all resolutions required to be passed at shareholders meetings ensure the chairpersons of the audit and remuneration committees and as many directors as possible attend shareholders meetings to answer questions about the state of the company provide biographies of all directors who are to be appointed at an AGM seek the optimum balance for the company between conformance with the dictates of good governance and performance

Characteristics of an effective board Although directors act in concert as a board, each director is individually responsible for being as effective as he can be. Directors must ensure that they:
y y

devote adequate time and attention to their duties have a good working knowledge of the company, including its organisational structure, management, internal financial controls and its products or services prepare adequately for board meetings by working through board and agenda papers ensure that management reporting is presented in a clear and easily understood format containing all necessary information about the company that directors need to know actively participate in corporate planning including budgeting, strategic planning and cash flow projections have access to the entire management team and obtain information from them firsthand where necessary

y y

assign specific areas of responsibility to management to ensure individual accountability of each manager oversee the appointment of senior management and appoint only individuals of suitable calibre ensure compliance with relevant legislation and regulations and implement an effective reporting system to monitor such compliance conduct visits to company premises on a regular basis have a good working knowledge of the contents of important company documents such as the memorandum and articles of association, policy manuals, strategic plans, key contracts, the board charter and the terms of reference of board committees

Board charter King II recommends that companies consider introducing a charter to govern the performance and operations of the board. A board charter might incorporate details of:
y

board composition, proportion of independent directors to other directors, directorship terms and retirement age, and limits on the number of directorships held by each director the boards major responsibilities, distinguishing these from management responsibilities director selection criteria including skill sets, diversity and experience, recruitment process, and the orientation and induction process to be followed with new directors board leadership issues including the selection of the chairman, the separation of roles of the CEO and chairman or the appointment of a lead independent director

y y y

y y

director compensation board meeting procedures board performance monitoring and board audits including the assessment of the board and committees' effectiveness and assessment of individual director performance guidance on conflicts of interest the constitution of Board Committees

A Charter and Terms of Reference for a company's board and board committees are considered essential for the proper governance of the company. Whilst the King II Report provides generic examples of such documents, companies are cautioned against simply adopting such generic standards without, in the first instance, interrogating the particular company's corporate governance needs and ensuring that the board and committee structures in place are appropriate in the specific context. Should you require assistance with developing a Board Charter or Committee Terms of Reference, please contact Ramani Naidoo at Edward Nathan on (011) 269-7633.

Board audits Modern companies are highly complex and evolving entities. A directors attention is so often focused on the day-to-day activities of the company that the performance of the board itself may not be questioned until some major event occurs which forces the board to evaluate its effectiveness. The board has a responsibility to ensure that its own performance meets the high standards that it sets for the rest of the company. An analysis of the answers to questions such as those below should

be turned into recommendations for incorporation into a strategic plan. Some suggested areas for board and individual director evaluation follow: Board performance
y

y y

y y y y y

are the key responsibilities noted in the Board charter being carried out? is adequate and timely information received? are meeting agendas appropriate and is adequate meeting time allotted? how well do directors work together, is communication and discussion appropriate and is a sufficient degree of consensus achieved on key issues? are there any holy cows in the boardroom environment which prevent open and frank discussion? is the board composition effective (i.e. is the mix of skills and diversity appropriate; how well do the personalities of directors interact in the boardroom?) is the board's overall level of effectiveness adequate? is the board the right size? are individual roles and responsibilities clearly defined? what criteria are used to select directors? do non-executive directors annually review succession plans for senior management? are the activities of the executive committee (if any) sufficiently contained to prevent the emergence of a "twotier" board?

Board processes
y y

y y

how critically are decisions debated? is sufficient time allowed in meetings for thoughtful discussion in addition to management presentations? can non-executive directors alter the meeting agenda? do non-executive directors meet separately from executives from time to time? is there an environment of openness and trust amongst directors? how effective is the chairman?

Internal information
y y

what internal information do directors receive? how are directors kept up to date on company performance? does the company help directors to prepare for meetings by sending relevant information and analyses ahead of time? do directors routinely speak to senior managers who are not represented on the board?

Non-executive directors
y

is the board constituted such that important stakeholders consider it responsive, representative and legitimate? does the board include a significant percentage of independent, critical, outside directors who add value to the deliberation process? is there an appropriate balance of non-executive and executive directors?

is there a nomination committee to search for and screen suitable candidates? are non-executive directors periodically rotated?

Strategic planning
y

is the organisation bottom-line driven and/or short-term focused? does the board focus on strategic issues, or does it tend to debate operational matters at meetings? is the board actively involved in formulating long-range corporate strategy from the start of the planning cycle? does the board have regular retreats for strategic planning, or is strategy at least a standing agenda item? are business risks and key assumptions about the company and its operating environment clearly identified and regularly challenged?

Compensation and performance appraisal

y y y y

y y

how critically is corporate performance appraised? is good board performance visibly rewarded? is indifferent or poor board performance addressed? does the remuneration committee base director compensation on long-term results? is the performance of each director regularly reviewed? do non-executive directors formally evaluate the chief executive's performance, objectives and personal plans every year? is at least a portion of directors' pay linked to corporate performance? are directors who are no longer making an adequate contribution discouraged from standing for re-election?

Individual director performance

y y y y

y y y

does the director attend board meetings regularly? is the director adequately prepared for meetings? does the director participate actively during meetings? is the director able to communicate and express ideas clearly? is the director willing to listen and acknowledge other viewpoints? does the director understand the business of the company and industry in which it operates? is the director able to work effectively with other directors and management in the best interests of the company? what does the director do well? what should the director do differently? and what is the overall level of contribution of the director?