BOARD

STRUCTURE, ROLE AND

RESPONSIBILITIES OF
DIRECTORS
 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 by whatever name called. The important factor to
determine whether a person is or is not a director is to refer to
the nature of the office and its duties. It does not matter by what
name he is called, if he performs the functions of a director.
• Section 2(6) of the Companies Act states that directors are
collectively referred to ‘Board of Directors’ or simply the
‘board’.
• Types of Directors

• Executive Directors: He is appointed as a director by

shareholders & also act as employees of the organization.

• Non Executive Director: He is an outside director. As per the Birla

Report, he does not have any monetary relationship with the
company except receiving the remuneration.

• Nominee Director: Appointed by the major shareholders or financial

institutions like banks, mutual funds.
• Representative Director: They are similar to the nominee director.
They safeguard the interest of the stakeholder groups like employees.

• Alternate Directors: Appointed as per the article of association to act

as substitutes in absence of original director.

• Shadow Director: He influence the decisions of the board without

formally being present on the board. It is more common in family
owned companies.
Legal Position of a Director

• They have been described variously as agents, trustees, or

managing partners of the company.

• The legal position of the directors as agents and trustees

emanate from the fact that a company being an artificial
person cannot act in its own person.

• It has become a well-settled fact now that directors are not

only agents but also act as trustees as a result of several
court decisions in India and England.
Duties and Responsibilities of Directors

• The directors have certain duties to discharge. These are: (i)

fiduciary duties (ii) duties of care, skill and diligence; (iii)
duties to attend board meetings; (iv) and duties not to
delegate their functions except to the extent authorized by
the Act or the constitution of the company and to disclose
his interest.

•  A fiduciary is a person who acts on behalf of another person,

or persons to manage assets. Essentially, a fiduciary is a person
or organization that owes to another the duties of good faith
and trust.
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.
Articles of Association is a document which prescribes the rules
and bye-laws for the general management of the company and
for the attainment of its object as given in the memorandum It is
a document of paramount significance in the life of a company as
it contains the regulations for the internal administration of the
company’s affairs.
Powers of the Board

The Board of Directors of a company which includes all the

directors elected by shareholders to represent their interests is
vested with the powers of management which are:
(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) make loans.
Liabilities of Directors

• Directors of a company may be held liable under the

following situations:

• Directors of a company may be liable to third parties in

connection with the issue of a prospectus, which does not
contain the particulars required under the Companies Act or
which contains material misrepresentations;

• Directors may also incur personal liability under the Act

 Liabilities of Directors (contd.)

• on their failure to repay application money if minimum

subscription has not been subscribed;
• on an irregular allotment of shares to an allottee (and likewise to
the company) if loss or damage is sustained;
• on their failure to repay application money if the application for
the securities to be dealt in on a recognized Stock Exchange is
not made or refused ;and
• on 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.
The Directors’ Liability to the Company

• Ultra vires Acts: Directors are personally liable to the

company in matters of illegal acts.

• Negligence: A director may be held liable for negligence in

the exercise of his duties.

• Breach of Trust: They are liable to the company for any

material loss on account of the breach of trust.

• Misfeasance: Directors are liable to the company for

misfeasance, i.e, willful misconduct.
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:
• 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.
• 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.
Disabilities of Directors (Contd.)

• No person shall hold office at the same time as director in

more than 15 companies.

• A company shall not without obtaining the previous

approval of the Central Government in that behalf, directly
or indirectly make any loan to:

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;
Disabilities of Directors (Contd.)

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.)

• 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.
• A director shall not assign his office. If he does, the
assignment shall be void.
Effectiveness of the Board of Directors

• The realistic functions of the board are:

• Confirming management decisions on company matters;
• Providing constructive advice to the executives on business
outlook, new governmental legislation, wage policy etc.;
• Selecting the chief executives and confirming the selection
of the other executives in the company made by chief
executives; and
• Reviewing the results of current operations.
RESPONSIBILITIES OF DIRECTORS

• An efficient and independent board should be conscious of

protecting the interests of all stakeholders and not be
concerned too much with the current price of the stock.
• Another important function of the director is to set priorities
and to ensure that these are acted upon.
• A director is also expected to have the courage of conviction
to disagree.
• Directors have great responsibility in the matter of
employment and dismissal of the CEO
RESPONSIBILITIES OF DIRECTORS (Contd.)

• One of the toughest challenges confronted by boards arises

while approving acquisitions.
• An efficient board should be able to anticipate business
events that would spell success or lead to disaster if proper
measures are not adopted in time.
• The directors have a duty to act bona fide for the benefit of
the company as a whole.
• In recent times, those who advocate reform of laws
governing corporate practices stress the importance of
reformulation of the concepts behind these laws.
ROLES OF DIRECTORS

• Commitment to the company

• Steer discussion properly
• make clear stand on issues
• ensure the appointment of efficient CEO
• challenges posed by the decisions on acquisition
• anticipate the business event
• long term focus and shareholder interest
• promote the overall interest of the
• Company
Types of Board Structure

All Executive Board: It does not have outside director. Every member
is an employees of the company. Sometimes, this hampers better
corporate governance.

Majority Executive Board: Executive directors are in majority where

as outside directors are in minority. Non executive directors take care
of the stakeholders’ interest and also bring expertise, knowledge and
experience.
Majority Outside Board: It is mode common in the companies listed in
the New York Stock Exchange. Most of the outside directors are
stakeholders like shareholders, customers, suppliers, banks and
financial institution.

Two-tier Supervisory Board: It has two boards – non executive

supervisory and executive board. The supervisory board monitors the
performance of the executive board. Supervisory board even appoints
the CEO of the firm. This was proposed by the European Community
and later adopted by the Germany.
• Types of Board Structure

• Advisory Board: Companies having overseas businesses take a help of advisory board to
ensure good corporate governance. Parent company select an experienced employees from
foreign companies to advise on various issues of the company.
• Issues in Designing a board

• The Board Size

• The role of chairman and CEO
• Duality in subsidiary company board
• Board Style

• Rubber stamp board

• Representative board
• Country club board
• Professional board
• Corporate Governance is needed for maximizing the
shareholder’s value for three reason.
• In most of the countries labour laws are strong enough to
protect the workers but on the other hand, there is very little
in terms of the implementation of the law and of corporate
practices that protects the rights of creditors and shareholders.
• There is much to recommend in law, procedures and practices
to make companies more attuned to the need for servicing
properly debt and equity.
• Managers have to look after the right of shareholders to
dividends and capital gains, because if they do not do so, over
time, they face the real risk of take over.
• Rights of the share holders.
• Transfer and registration of share
• obtaining timely information about the company.
• participate in voting in shareholder meetings , electing
members of the board and sharing the profits of the
corporation.
• Information pertaining to the take over, sale of assets or
division of the company.
• Rights of the share holders.
• ensure that the financial analysis of the company is available
on the company’s website, stock exchange.
• It is a right of share holder to participate in the voting
procedure of the company.
• AGM should be arranged in such a place that it becomes
convenient to the shareholders to attend it and if shareholder
could not remain present than he should be given facility to
vote through postal ballot.
• Responsibility of the share holders.
• to ensure quality and efficiency of directors and auditors,
shareholders must actively involve in their appointment.
• It is responsibility of the shareholders to get the following
information in case of appointment of a new director.
• Brief resume of director
• Person’s expertise
• Names of the companies wherein person holds directorship
and membership of committee.
• Independent Director.
• He is non executive director.
• Any employees who had worked with the company at any
point in time, supplier, customer, or vendor is disqualified to
be independent director.
• Independent Director’s contribution.
• He is responsible for reviewing the performance of executive
manager.
• He has to take a lead to resolve the board room conflicts.
• As per SEBI, company should have minimum 50 per cent of
independent director in board OR if the board is headed by
Non executive director than at least one third of the board
should consist independent directors.