Session 11

Directors– Types, duties and

responsibilities
- Prof Deepika Gupta
- IIM Visakhapatnam
Corporate management structure
Shareholders

Elect

Board of Directors Forms

Appoints Executive Committee

CEO & Senior Executives

Who is a director?
• Sec 2(13) of the Companies Act 2013 defines director as : ‘A director
includes any person occupying the position of director, by whatever
name called,
• A director is defined as a person having a control over the direction,
control, management or superintendence of the affairs of the
company
• Representatives elected by shareholders as per law are called
directors
Who is a director?
• Directors can be executive in nature - managing or whole time
director
• They can be non-executive in nature – do not have anything to do
with daily affairs and management of company
• Articles of Association name first set of directors, if not then
subscribers to Memorandum, who are individuals become directors of
company
Appointment of directors
• On initial incorporation of company
• Hold office until directors are duly appointed in the first general
meeting of the company
• Reappointment at expiry of director’s term of office
• To fill in vacancy – when director resigns or retires
• Creation of additional (multiple) directorship
• Rotation of directors – 1/3 liable for retirement, not applicable to
independent directors, small shareholders directors
• Disabilities of directors
Types of director
• Executive director – Member of board who holds executive
management position Eg: Whole time or managing director
• Non-executive director – member of board who does not hold
executive management position
• Alternate director – who can take place of another director if that
director cannot attend meetings
• Nominee director – who has been nominated to board by a major
shareholder etc to represent its interests
Types of director
• Independent director – who has no affiliation or other relationship
with company other than the directorship
• Women director – every listed company to have at least one woman
director
• Shadow (deemed) director – acquire their status by virtue of their
giving instructions other than professional advice.
• Small shareholders director – listed company has one director elected
by small shareholders (holding shares of nominal value of not more
than 20,000 shares)
Rights and duties of directors
• Duty of trust – fiduciary responsibility to shareholders
• Duty of care – exercise reasonable care, diligence and skill
• Duty to attend board meetings
• Wider business and board experience
• Add specialist knowledge skills and know-how to board deliberations
• Being source of external information for board discussions
• Avoid conflict of interest, insider dealing, related party transactions
Qualifications & disqualifications of directors
• Qualifications:
• Must be an individual
• Be competent to enter into contract
• Hold share qualification, if required under AoA

• Disqualifications:
• Cannot be appointed as director if
• of unsound mind
• Undischarged insolvent
• Convicted by court for offence involving moral turpitude
• Disqualified by Court on grounds of fraud or misfeasance etc
Liabilities of directors
• Liable to third parties as per law
• Personal liabilities – matters of illegal acts – ultra vires acts
• Liabilities due to negligence
• Liabilities due to breach of trust and misfeasance
• Liabilities for breach of statutory duties
• Liabilities for act of co-directors if aware or is party to it.
Independent director
• Means a non-executive director other than nominee director
• Who in the opinion of Board is person of integrity and possess relevant
experience and expertise
• Who is or was not promoter of company or its holding, subsidiary etc
• Who is or was not related to promoter or director in the company
• Who has no pecuniary relationship (except director remuneration) with
company or promoter or director. None of his relatives also …
• Possess skills etc in one or more fields of finance, law, management, sales,
marketing, administration, research, corporate governance, technical
operations etc
Duties of independent director
• Companies Act 2013
• Guide to professional conduct
• Facilitative roles for independent judgement on issues of strategy,
performance and key appointments etc
• Satisfy on integrity of financial statements
• Protect rights of minority shareholders
• SEBI circular
• Board to lay down code of conduct to incorporate duties as per Co Act 2013
Liabilities of independent director
• Companies Act 1956
• Not considered as officer in default
• Not liable for actions
• Companies Act 2013
• Provides for liability
• To be limited to acts of omission or commission by company which occurred
with their knowledge, attributable through board processes and with their
consent and connivance etc
Number and tenure of independent director
• If not WTD - for maximum 7 listed companies
• If WTD then only 3 listed companies
• Tenure upto 5 consecutive years and eligible for re-appointment for
another term upto 5 consecutive years by special resolution
• Company to issue formal letter of appointment – as per Co Act 2013
Evaluation of independent directors
• Nomination Committee to lay down criteria etc
• Disclose in Annual report
• Done by entire Board
• Independent directors should hold at least one exclusive meeting in a
year
• Act in good faith – without conflict of interests
Role of directors
• Exhibit total commitment to the company
• Steer discussions properly
• Make clear stand on various issues
• Should play responsible role to ensure efficient CEOs
• Should anticipate business events
• Should understand challenges faced due to M&A decisions
• Should have long term focus and stakeholders interests
• Should promoter overall interests of company
Director development, training and updating
• Formal external training
• In house board development programmes
• Focused courses in corporate governance
• Experiential sponsorship programmes
• Mentoring
• Self-directed learning and continuous self development
• Site visits to different companies
• Board experience
Various Committees on role & functions of
directors & board
• Greenbury Committee
• Hampel Committee
• OECD view
• Birla Committee
• SEC code of CG