Professional Documents
Culture Documents
INTRODUCTION
1.1 Director An Introduction
The
pnncipal
role
of
the
board
of
directors
as
representatives
of
the
shareholders, is to oversee the function of the organization and ensure that it continues to
perate in the best interests of all stakeholders. Given the complexity of today's
rgamzations, that is no simple or straightforward task. Today, board effectiveness is a
key performance dnver of the Indian companies.
With expectations of them continuing to increase, boards can take several actions lo
govern more effectively Indian boards must move away from being a rubber stamp to
emg a strategic asset for the company. They need to set the tone from top in promoting a
transparent culture that promotes effective dialogues among the directors, senior
management, and vanous function and nsk managers. Boards should look beyond the
'
old boy network' and select directors with individual areas of expertise, and
The comparison and analysis regardmg the substantive law govemmg directors duties
covers a wide range of matenal and procedural aspects, notably (i) where and how
directors' duties are addressed m the law
and to whom
addressees of duties, (iii) how the mterest of the company is defined; (iv)
loyalty; (v) the nature of habihty, covenng m particular the extent to which an mdividual
director is Iiable for decisions taken by the board, (vi) further, it describes the type of
habihty flowmg from breaches of the duties, and limitations to the habihty
Day-to-day management of a company is delegated to the directors by its shareholders.
Directors are imtially appomted by the shareholders and can usually themselves appomt
additional directors up to any hrmt set by the articles of association.
The decisions of the directors are taken collectively by the board of directors. A director
cannot act as a director on his own unless only one director has been appomted. Decisions
are either taken by majority vote at board meetmgs or by the signmg by all the directors of
a written resolution.The director's role and his powers are pnmarily defined m the
company's articles and, if he is also an employee, in his service contract.
The mere fact of appomtment does not normally give a director any executive powers.
Most directors are, however, also employees of the company with specific powers
delegated to them. A managmg director usually has extensive powers to take day to-day
decisions on behalf of the company Other directors such as sales directors or finance
directors will have a more limited role.
Directors owe a duty to the company and, if msolvency threatens, to creditors. Certam key
duties of directors have been placed on a statutory footmg under the Compames Act 2006
(the "Act") These duties are owed to the company
Directors are also subject to a number of other statutory requirements and restnctions.
These mclude a duty to keep proper books and records and restrictions on entenng into
certain transactions with the company or acceptmg loans from the company Breach of
these duties and requirements can result m a director bemg disqualified from actmg as a
director and m many cases can lead to the director mcumng personal habihty
Insurance can be obtamed to cover some cases of personal habihty
Bibliography
Patrick Bracher 'RM under the new Companies Act: general insurance' (2009) 3
(2009) 25
Management Today
Chari De Villiers & Chris Van Staden 'Shareholders' corporate environmental disclosure
needs' (2010) 13 South African Joumal of Economic and Management Sciences 437.
Simon
Deakin
'Corporate
governance,
finance
and
growth:
unravelling
the
Mildred Bekink 'An historical overview of the director's duty of care and skill: from the nineteenth
century to the Companies Bill of 2007' (2008) 20 SA Mercantile Law Journal 95.
Natasha Bouwman 'An appraisal of the modification of the director's duty of care and skill' (2009)
Julie Cassidy 'Models for reform: the directors' duty of care in a modem commercial world' (2009)
20 Stellenbosch Law
64
directors'
duties and
5.2 CONCLUSION
LACK OF ENFORCEMENT
This study concludes
rules on
directors' duties, and more in relation to enforcement. In the vast majority of Member States, breaches of
directors'
company continues to operate as a going concern. There are several factors that contribute to what may
be seen as under enforcement of directors' duties. We find that the most important of these factors cannot
easily be addressed by changes to the national law rules concerning directors' duties; rather, the relevant
obstacles are of a structural nature.
First, in most jurisdictions
the most important business decisions are taken by, or with the formal or
regulatory intervention is not so much wrongdoing by the directors that affects the shareholders as a class,
but rather the minority/majority shareholder conflict.
Second. the rules on standing do not seem to be working well. If the board of direct rs in companies
with a one-tier
board
structure
has authority
example the general meeting or, in companies following the two-tier board model, the supervisory board.
Third,
the
institutional
preconditions
may
not
always
be
Member
conducive
In addition,
the perception
positive
of the
in all
States. Shareholders may prefer to remove the incumbent directors and appoint new ones, rather
important initiatives to conclusion in such a limited time frame. Additionally, the constant changing of the
guard" could lead to board confusion and an overall lack of momentum.
secretary 58%,
Question
14. Do you,
as lead
director,have
a significant
role in
communication of
role is communication
issues with the CEO or senior management and other board members.
involved in communication
governance
issues with institutional investors, the media, and the public. The low survey
investors is interesting
with shareholders/investors
with the media and public will likely not change because the lead director should defer
to the CEO/chairman
62
Question 8. What other positions have you held with this company or another public company?
Among respondents, more than half currently servmg as lead director of the
company have previously served as a CEO and more than one-third as chairman. The leadership and
executive skills garnered in these roles make for an easy transition to the lead director post and will help
better position the lead director as an important advisor to the chairman/CEO.
Question 9. Have you advised companies in this industryin any of the following capacities?
Lead directors generally have significant management experience in the corporate world and bring that
experience to the advice they provide. People who are professional advisors, such as lawyers, accountants,
bankers, and consultants, are less likely to be lead directors. The majority of respondents, 55 percent, have
not advised companies in any of these capacities.
Question 10. How many additionalhours per month do you devote to the lead directorrole on
average, beyond the time you spend as a director?
Lead directors are usually spending an additional six to 10 hours on their responsibilities, our
survey respondents say. But the typical director spends about 20 hours a month on average on board
work, according to another recent PwC survey
Question 11. Do you receive additionalcompensation to be lead director?
Companies have no commonality on the level of compensation lead directors should receive. Salaries
vary widely from as low as 5,000 to 150,000 (only 3 percent ofthe cases). The most common figure was
15,000, in 16 percent of the cases.
Question 12. How long is your termas lead director?
Companies show a distinct divergence in the length of service for lead directors, with 45 percent
responding that they have created an indefinite term and 35 percent a one-year term. Clearly, there is
no consensus on which is more effective for a lead director, serving indefinitely or with a term limit.
However, a shorter term can pose difficulties for a lead director's ability to lead. The lead director may
not be able to develop a solid relationship with the CEO/chairman and might have difficulty in bringing
61
Question 4. In addition to your position, which of the following board leadership positions does your
board currently have?
Although there is a great deal of current debate about separating the combined
position of chairman and CEO, the survey group includes two-thirds from companies that still have this
traditional form of organization.
Some companies questioned the benefits of separating these roles and instead chose to adhere to the
dictates of the stock exchanges, which call only for an independent director who presides over executive
sessions. While conceptually weaker than most had hoped for, the lead director role has grown in both
its influence and responsibilities, thereby providing hope that it is a viable alternative to a separate
chairman and CEO. However, if in the long run the lead director role fails to deliver, it is likely that calls
for separating the chairman/CEO position will continue and grow.
Question 5. At how many otherpublic companies are you a director?
Lead directors are apparently sensitive to serving on too many boards, an oft made criticism recently,
with the majority, 60 percent, serving on only one or two other public company boards. Twenty percent of
lead directors are not directors of any other compames.
Question 6. How long has the company had the lead directorposition?
Many companies created the lead director position in response to the new and enhanced standards imposed
in 2012, including demands for greater transparency, accountability, and integrity. In the wake of the new
regulatory and corporate governance environment created by Sarbanes-Oxley, the lead director position
was viewed as an important tool in strengthening the checks and balances between the CEO and board
functions.
Question 7. How long have you been lead directorof this company?
In most cases, lead directors are likely to be trusted advisors, having intimate familiarity with the
major issues the company faces, the CEO' s preferences, and management styles because of the lead
director serving on the board three years or more.
60
CHAPTER-V
FINDINGSAND CONCLUSION
5.1 FINDINGS
Question 1. How long have you been a directorof this company?
Veteran directors of the company are the overwhelming choice to be the lead director; 83 percent of the
respondents have served for five or more years as a director.
Question 2. Which of the following positions on the boarddo you currentlyhold?
For purposes of the survey, a lead director was defined as also including a presiding director (13
percent) or independent board chairman (25 percent). A large majority, 62 percent, are known as lead
directors. The term presiding director may not adequately describe the level of responsibilities associated
with the position because the presiding director does not merely preside; but the term is still in use,
albeit on a comparatively smaller scale. Of note is the 25 percent of responders who hold the
position of independent board chairman. As the roles and responsibilities continue to be debated, it will be
interesting to see if the occurrence of independent board chairman increases or decreases in relation to the
use of lead director. There are questions whether lead directors are considered "the equivalent of board
chairmen by the board or shareowners, even when such directors are provided with comparable
authorities."
Question 3. Whatis the size of the company'sboard?
The size of a company's board can have a distinct impact on its effectiveness, with too large or too
small a board posing its own unique challenges. When a board is too small, it "runs the risk of being
insufficiently diverse in the range of backgrounds, experiences, skill sets, and perspectives." In the
inverse,
a board that is too large can impact the quality of discussion and hinder individual
accountability.14 Among respondents, boards predominantly have nine to 12 directors, with almost 70
percent falling into this range.
59
SUMMARY
There are both costs and benefits to each of the review mechanisms for directors' conflicts identified
above. It can be efficient to have the review undertaken by disinterested or independent directors.
Alternatively, the review could be undertaken by shareholders in asmall private company with few
shareholders. As we have seen, the choice between independent directors and shareholders turns, to a
substantial degree, upon the ownershipstructure of the particular company concerned. It is also possible
for review of directors' conflicts to be undertaken by courts or regulators although once again there are costs
associated with such review.
58
Is free from any interest and any business or other relationship which could, or could reasonably
be perceived to, materially interfere with the director's ability to act in the best interests of the company
REVIEWBY SHAREHOLDERS
As is the case with review of directors' conflicts by independent directors, the emphasis placed on review
by shareholders of such conflicts differs between countries. For example, the emphasis on review by
independent directors in the United States means there is less emphasis placed on shareholder review in that
country.
There are problems with shareholder review of directors' conflicts. First, in the case of companies with
many shareholders, it can be costly to have decisions made by shareholders.
Second, shareholders with only a small investment have little incentive to become informed and vote on a
matter regarding a director's conflict. Shareholders with a small investment suffer a collective action
problem when voting which undermines their effectiveness as a
small shareholder in a public company will not expend the time and effort to evaluate a particular
director's conflict because the shareholder's costs of becoming informed and voting typically outweigh any
expected benefits. This is because the shareholder's vote would have only a small effect on the outcome
and the shareholder would have difficulty identifying any significant benefit in voting.
REVIEWBY COURTS
It is possible to envisage a role for courts in reviewing directors' conflicts. There may be a narrow or broad
role. A narrow role is where the court determines whether a director has made appropriate disclosure to
either shareholders or disinterested directors. A broader role is where the court reviews the fairness of a
particular transaction in which a director is interested. Such a role is given to the court under the
Delaware companies law. Section 144 of the Delaware General Corporation Law provides that a contract
in which a director is interested is valid if the contract "is fair as to the corporation as of the time it is
It is possible for independent or disinterested directors to operate as a mechanism for regulating directors'
conflicts. A director who is in a position of conflict of interest and duty must disclose the conflict to
disinterested directors who then review it to decide whether or not the company and/or director should
proceed with the transaction in which the director is interested.
First, some countries place significant emphasis on independent directors. This is particularly true of the
United States where it has been said that the law invests in disinterested directors "a considerable
measure of discretion to assess the merits of conflict transactions".
The second point to note is that a distinction must be drawn between non executive directors and
independent directors. Definitions of who is an independent director differ from country to country. The
Investment and Financial Services Association, which represents the largest institutional investors, has
proposed the following definition. An independent director is a non-executive director who:
Has not within the last three years been employed in an executive capacity by the company or
another group member or been a director after ceasing to hold any such employment;
Is not a significant supplier or customer of the company or another group member or an officer of or
Has no significant contractual relationship with the company or another group member other
56
allegation in the complaint that the named accused are directors of the company itself would usher in the
element of their acting for and on behalf of the company and of their being incharge of the company.
A person
normally
having business
or commercial
dealings
with a company,
and the
nature and extent of its business and its Memorandum or Articles of Association. Other than that, he may
not be aware of the arrangements
Therefore, when a cheque issued to him by the company is dishonoured, he is expected only to be aware
generally of who are incharge of the affairs of the company. It is not reasonable to expect him to know
whether the person who signed the cheque was instructed to do so or whether he
has been deprived of his authority to do so when he actually signed the cheque. Those are
matters peculiarly within the knowledge of the company and those in charge of it. So, all that a payee of a
cheque that is dishonoured can be expected to allege is that the persons named in the complaint are in
charge of its affairs. The Directors are prima facie in that position."
To conclude, the Supreme Court in K.K. Ahuja fine-tuned the principles relating to director and officer
liability for dishonour of cheques and built upon the policy laid down in the previous case of S.M.S.
Pharma. However, there continue to be some open issues as discussed above, and the Court has left
complainants with a somewhat insurmountable burden of averment as outsiders to the company.
55
A controlling
shareholder
can very well be someone who regularly instructs the Board and the senior
management.
such
controlling
shareholder
factual
shareholder
averments,
showing
in his
how in-
business of the company. The complainant might not have access to such materials if they are not in the
public domain.
"controlling
shareholder."
The decision in KK Ahuja fails to take into account such practical business
scenarios. The Court could have provided some more guidance, like examples of factual averments that
will be required, when a complainant wants to hold corporate officers, who are not managing directors or
signatories of the bounced cheques, liable under Section 141 (1) of the NI Act. The standard of averment that
the Court in KK Ahuja
suggests,
Delhi) MANU/SC/071112007):
in paragraph
Poddar
v. State
(NCT of
"the complaint should contain averments as to how and in what manner the
accused was responsible for the conduct of the business of the company, or otherwise responsible for its
functioning", is general and vague, especially in scenarios described above.
Why cannot the complainant
then such officers can prove that they were not in-fact in-charge of the company's business at the time of
the commission of the crime? It would be much easier for the directors to deny responsibility than for an
outsider to aver responsibility on part of internal corporate officers at the trial stage. This view although a
minority one, found voice in a two judge bench decision of the Supreme Court in N. Rangachari
v.
Bharat Sanchar Nigam Ltd (2007) II CCR 191 (SC), which held the following in obiter:
"A person in the commercial world having a transaction with a company is entitled to presume that the
directors of the company are incharge of the affairs of the company. If any restrictions
are placed by the memorandum
on their powers
at the time when the offence was committed was incharge of and was responsible to the company for the
conduct of the business of the company, shall also be deemed to be guilty of the offence along with the
company. It appears to us that an
54
Pharma"(MANU/SC/0622/2005)),
logic in requiring
such specific
Court's
Khergamvala
on
The
Negotiable Instruments Act 514 525(2008)], is that the liability under Section 141(1) is raised by legal fiction, such that
even though a person is not personally liable, he will be held liable vicariously and hence a clear case
connecting the accused with the commission of the crime, as required under Section 141 (1) has to be
spelled out in the complaint through specific factual averments. However, the obvious disadvantage the
complainant suffers when he has to specifically aver that a certain director or officer was in-charge is that,
being an outsider, he might not know exactly how the internal business of the accused company is
organized i.e., who are its principal executive officer bearers and who are only involved in business
policy making. This is easy when dealing with the Managing Director and the signatories of the cheque,
but beyond that the picture becomes fuzzy.
As per S.M.S. Pharma (which the Supreme Court heavily relied upon in KK Ahuja):
"The liability arises from being in charge of and responsible for conduct of business of the company at
the relevant time when the offence was committed and not on the basis of merely holding a designation or
office in a company. Conversely, a person not holding any office or designation in a Company may be
liable if he satisfies the main requirement of being in charge of and responsible for conduct of business
of a Company at the relevant time. Liability depends on the role one plays in the affairs of a Company
and not on designation or status." (Emphasis Added)
Imagine a family based company having a majority shareholder holding more than 50% of the stock. The
company is nevertheless, run by a team of non-familial professional managers. Can such a majority
shareholder be held liable if, the managers of the company, which he controls, issue a cheque, which, is
dishonoured by the banks. In KK Ahuja one of the people listed by the Supreme Court in paragraph
14 as persons responsible to the company for the conduct of the business of the company is:
"(e) any person in accordance with whose directions or instructions the Board of directors of the company is
accustomed to act;"
53
cheque) was committed with their consent or connivance or due to their negligence. However, in such
circumstances, specific averments must be made in the complaint as to how and in what manner the accused
was guilty of consent and connivance or negligence.
This brings us to an interesting issue, albeit beyond the scope of the present case- say a non-executive
director who is a financial expert and a past banker sits on the Board of a company,
certain cheques, which have been dishonored
being a non-executive
the business of the company, nor is he in-charge of the business of the company. Hence, in the absence
of special circumstances,
under Section 141(1). However, the scope of Section 141(2) is wide open. In case such a director votes in
favor of a resolution, which provides for payment of a certain sum of money, from one of the several bank
accounts of the company, to a supplier/contractor
consent be construed from his "yes" vote? I would argue that the case then depends upon how the
executive director went about doing his job. Did he ask relevant questions, did he try to inquire if the
company had sufficient funds in that particular account, especially if he had reason to believe otherwise?
Does the fact that he is a financial expert make him more readily liable under Section 141(2) of the NI
Act than the other directors?
In fact,
in U.S. the
Delaware
chancery
court
in re Emerging
former investment banker with relevant experience in the particular industry be held to a higher standard of
inquiry than non-expert directors when he failed to apply his "specialized financial expertise", when
evaluating a going-private transaction. The case was
especially the non-executive
uniformly
held
to
have
taught
directors,
the management or outside professionals, especially when they were themselves experts in the relevant
field.
One might wonder why the complainant needs to specifically aver in a complaint under Section 13 8 and
141 of the NI Act, that at the time when the offence was committed, the person accused was in-
charge of, and responsible for the conduct of the business, since in the absence of such an averment, as
held by the Supreme Court in the three judge decision of S.MS. Pharmaceuticals Ltd. v. Neeta Bhalla
and Anr ("S.M.S.
52
Degree
verment
of A
Reason
A director or an officer of No need to make a specific Because the very fact that the
company
who signed
averment that he was m the dishonouredcheque was the cheque on behalf of the
charge
of
and
was signed by him on behalf of company
responsible to the company, the
company, would give for
the conduct of the rise to responsibility under
business of the company or Sub-section
(2)
of make any
specific Section 141.
allegation
about consent, connivance or negligence.
Director,
Secretary
or
An averment
in
the complaint that he was in charge
Manager
or a person
of,
and
was responsible to the company, for the conduct
referred
to in clauses
of the business of the company is necessary.
(Such officers
( e) and (f) of Section 5 of
can also be made liable under Section 141 (2) by making
necessary averments
relating
to consent and connivance
Companies Act
or negligence).
The Supreme Court also held that other officers of the company, apart from those tabularized
be made liable under Section
141(1) of the NI Act. Such officers can however be made liable under
above, cannot
The above list is exhaustive since the Supreme Court held that other employees of the company cannot
be said to be persons
to the company
company.
The Supreme Court, relying on past precedents, held that the words "person in charge of the business of
the company" refer to a person, who is in overall control of the day-to-day business of the company. The
Supreme Court further held that, since the question as to who is in "overall control" is a fact specific
one, specific averment in the complaint is required. This the Court felt necessary since a person may be a
Director and thus belong to the group of officers who are involved in policy-making for the company, yet he
may not be in-charge of the business of the company.
Consequently, the Supreme Court provides a two-pronged test-the
where to prove that a person is responsible
of the business
of the
company, one needs to merely check if the accused person falls in any one of the listed categories. The
second prong is a fact-based test, where through specific averments the complainant
the particular accused was in-fact in overall control of the day-to-day business of the company. Both the
prongs need to be complied with. Hence, if a person does not satisfy the first prong, i.e., if he is not one of
the above-mentioned officers as listed by the Supreme Court, then he is neither required to meet the second
prong nor can he be held liable under Section
141(1).
However, if the accused falls under one of the categories listed by the Supreme Court, i.e., he is under
statute, the Companies Act 1956, a person responsible to the company for the conduct of the business of
the company, then the judgment provides for a sliding scale of averment that needs to be made in the
complaint, depending upon the particular category of the officer.
50
DGM moved to quash the proceedings against him on the ground that as DGM of the Company he was
not in-charge of the conduct of the day-to-day business of the Company. This petition was allowed by
the Delhi High Court, which was then challenged before the Supreme Court in K.K. Ahuja.
The Supreme Court ruled in dicta that, "[] .... to be vicariously liable under Sub-section
( 1) of Section 141, a person should fulfill the 'legal requirement' of being a person in law (under the statute
governing companies) responsible to the company for the conduct of the business of the company and also
fulfill the 'factual requirement' of being a person in charge of the business of the company." In other words,
any corporate officer accused under Section 141(1) of the NI Act has to: (1) be a person responsible to the
company for the conduct of the business of the company under the provisions of the Companies Act,
1956 and (2) be in-fact also a person in-charge of the business of the company. REQUIREMENTS
TO
The Court, relying on Sections 5 and 291 read with clauses (24), (26), (30), (31) and (45) of Section 2 of
the Companies Act, 1956, lists the categories of persons who under the Companies Act can be considered as
persons who are responsible to the company for the conduct of the business of the company. They are:
(a) the managing director/s; (b) the whole-time director/s; ( c) the manager;
(d) the secretary;
( e) any person in accordance with whose directions or instructions the Board of directors of the company is
accustomed to act;
(t) any person charged by the Board with the responsibility of complying with that provision (and who
has given his consent in that behalf to the Board); and
(g) where any company does not have any of the officers specified in clauses (a) to (c), any director or
directors who may be specified by the Board in this behalf or where no director is so specified, all the
directors.
49
4.2 DISQUALIFICATIONS
OF THE DIRECTOR
This has three objectives. First, we consider some theoretical issues associated with the regulation of
directors' conflicts of interest. Second, we provide a brief overview of the legal framework for regulating
directors' conflicts. Third, we present the results of an empirical study of directors' conflicts in India. It is
a study of the disclosure by the largest companies of financial benefits between these companies and their
directors. The purpose is to provide some insight into the types of matters which potentially
involve
directors' conflicts.
Our objective in this section is to examine a number of the issues associated with different institutional
mechanisms which regulate directors' conflicts. We commence by examining the role of market forces in
regulating directors' conflicts. We then examine the role of disinterested directors, shareholders and courts.
Directorand Officer Liability for Dishonour of Cheques
(The following post has been contributed by Avirup Bose. Avirup is an Indian lawyer, who has
graduated from NUJS Kolkata and has an LL.M from the Harvard Law School)
On July 6, a Division Bench of the Supreme Court passed a judgment in K.K. Ahuja v. VK.
Vora(MANU/SC/1111/2009, per R.V. Raveendran, J.) ("K.K. Ahuja"), where it considered the particular
question as to who can be said to be persons "in-charge of, and was responsible to the company for the
business of the company" under Section 141 of the Negotiable Instruments Act, 1881 ("NI Act"). Section
141 of the NI Act provides that when a company's cheque is dishonoured under Section 13 8 of the
NI Act, then those who were in-charge of the conduct of the business of the company, at the time the
offence was committed, would be constructively liable.
K.K. Ahuja, the appellant, had filed two criminal complaints, under Section 138 of the NI Act, against M/S
MotorolSpeciality Oils Ltd. (the "Company"), and eight of its officers (Chairman, four Directors, VP
Finance, General Manager and Deputy General Manager ("DGM") respectively), in the Court of the
Metropolitan Magistrate, Delhi, averring that at the time of the commission of the offence, all the eight
officers were in-charge of and responsible for the conduct of the day-to-day business of the Company and
thus deemed to be guilty under Section 138, read with, Section 141 of the NI Act. Next, the accused
48
The MCA has also directed the Registrar of Companies that none of the above directors shall
be held liable for any act of omission or commission by the company or by any officer of
the company
which constitute
a breach or violation
of any provision
of the CA1956
which occurred without his knowledge attributable through board process and without his
consent or connivance or where he has acted diligently in the board process. The MCA did
however
Consequently,
all the directors of a company may be liable for any violation of CA 1956
unless they prove that they acted diligently and violation took place without their consent I
knowledge I connivance.
It is pertinent to note that s.201 of the CAI 956 restricts a company to indemnify its
directors. According to s.201 of the CA1956 a company can indemnify its directors of any
liability incurred by him in defending civil or criminal proceedings only if he is acquitted
or discharged. Except as aforesaid, s.20 I of the CA 1956 renders void all the provisions in
the company's constitution or in any agreement indemnifying a director against any liability
that would attach to him in respect of any breach of duty or trust or negligence. It is noted
that if premium of D&O policy to protect the directors is paid by a company, then also
directors will be covered by s.201 of the CA1956 and may not be entitled to benefit of D&O
policy.
47
The CA 1956 has not codified the law relating to duties of directors but in all cases all directors must
ensure compliance with the provisions of the CA1956 and other applicable laws. Further, under the
CAI 956 the directors of Indian companies are subject to common law duties. Thus, a director has fiduciary
duty towards the company.
As per s.5 of the CA1956, for violation of the provisions of the CA1956 the managing director/ whole
time director (director who is in whole time employment of the company) I manager (who is so
appointment in accordance with the provisions of the CA 1956) and the company secretary, if any, are
responsible in first instance. In the absence of aforesaid categories of officers, prosecutions should
be against all other directors of the company unless the directors have authorised any other person to
make compliance with that provisions of the CAI 956 and such person has accepted any such
authorisation. The Master Circular No. 1/2011 dated 29 July 2011 of the Ministry of Corporate Affairs,
Government of India ("MCA") consolidating the provisions relating to prosecution of directors under the
CA 1956 has clarified that Registrar of Companies should take extra care in examining the cases where
following directors are also identified as 'officer who is in default' under s.5 of the CA1956:
For listed compames (companies of which shares are listed at Indian stock exchange), Securities and
Exchange Board of India requires nomination of certain Directors designated as Independent Directors.
For public sector undertakings, respective Government nominates directors on behalf of the respective
Government.Various public sector financial institutions, financial institutions and banks having participation
in equity of a company also nominate directors to the board of such companies.
Directors nominated by the Government under s.408 of the CA1956.
46
F) EXECUTIVE DIRECTORS
Whole-time Director or Executive Director includes a director in the whole-time employment of the
company.
G) INDEPENDENT DIRECTORS
who-
(a) apart from receiving director's remuneration, does not have any material pecuniary
relationships or transactions with the company, its promoters, its directors, its senior management or its
holding company, its subsidiaries and associates which may affect the independence of the director; (b) is
not related to promoters or persons occupying management positions at the Board level or at one level
below the Board; ( c) has not been an executive of the company in the immediately preceding three financial
years; (d) is not a partner or an executive or was not partner or an executive during the preceding three
years, of any of the following:- (i) the statutory audit firm or the internal audit firm that is associated
with the company; (ii) the legal firm(s) and consulting firm(s) that have a material association with the
company. (e) is not a material supplier, service provider or customer or a lessor or lessee of the company
which may effect the independence of the director; and (f) is not a substantial shareholder of the company,
i.e. owning two percent Independent director as per Clause
49 of the Listing agreement shall mean non-executive director of the or more of the block of voting
shares.
45
A) MANAGING DIRECTORS
A managing director is someone who is responsible for the daily operations of a company, organization, or
corporate division. In some regions of the world, the term is equivalent to "chief executive officer," the
person who is the executive head of a company. In other places, managing directors primarily work as
the heads of individual business units within a company rather than heading up the company as a whole.
Whether managing an entire organization or just a part of one, these professionals have a number of key
duties.
B) INSIDE DIRECTORS
A board member who is an employee, officer or stakeholder in the company. Inside directors - and outside
directors, for that matter - have a fiduciary duty to the company of which board they sit on, and are
expected to always act in the best interests of the company. Because of their specialized knowledge
about the inner workings of the company, a strong board of inside directors is a key element in its success.
C) OUTSIDE DIRECTORS
Any member of a company's board of directors who is not an employee or stakeholder in the company.
Outside directors are paid an annual retainer fee in the form of cash, benefits and/or stock options.
Corporate governance standards require public companies to have a certain number or percentage of
outside directors on their boards as they are more likley to provide unbiased opinions.
D) PROFESSIONAL DIRECTORS
Any director possessing professional qualifications and do not have any pecuniary interest in the company
are called as "Professional Directors". In big size companies, sometimes the Board appoints professionals
of different fields as directors to utilise their expertise in the management of the company.
E) NOMINEE DIRECTORS
The banks and financial institutions which grant financial assistance to a company generally impose a
condition as to appointment of their representative on the Board of the concerned
nominated persons are called as nominee directors.
44
company.
These
secondary data
THE VARIOUS TYPES OF DIRECTORS ARE :
a. MANAGING DIRECTORS
INSIDE DIRECTORS
c. OUTSIDE DIRECTORS
d. PROFESSIONAL DIRECTORS
e. NOMINEE DIRECTORS
f.
EXECUTIVE DIRECTORS
g.
INDEPENDENT DIRECTORS
43
visibility of the path ahead. If the transition is smooth, expected and well prepared for then
42
against any loss incurred by it. The Act has codified and set high standards for a director's duty
and liability towards the company. The general penalty prescribed
The role of the board changes as the company grows and the management team becomes
more diverse, with a wide range of experts who can contribute to strategy in
different ways.
A company passes through several stages in its life cycle. In the first stage 'Start up' strategy
is developed and implemented by the founder and a close team. At this stage it is not often
clear who is doing what. The team will switch from their shareholder role, to their executive
role and then their board role quickly whenever the need anses. Usually, whichever role
the founder plays most can be said to be the place in the
organisation where the strategy is developed.
As the company enters the second stage 'Growth' more people join and the roles start to be
defined with greater clarity. Skilled or qualified staff start to offer their inputs to strategy and
the board needs to be explicit about the sharing of the roles to ensure that efforts are
coordinated so that people feel engaged. Failure to separate and define roles will lead to
dissent and disorder. Failure to share opportunities to contribute will disenfranchise
management. The board need to be especially vigilant that the founder does not continue
to dominate the process although they may still design the process so that the founder has the
final say.
Eventually growth will start to slow down. This is a stage at which a company needs to focus
efforts on internal effectiveness, systems and processes. It is also a stage during which the
strategy development, in good companies, is formally delegated to the now strong and
experienced management team and the board moves into the more traditional role of
understanding, testing and endorsing strategy. Much will depend on the decision of the founder
to remain as an executive (usually CEO) or to move to a non executive role (often Chairman
but not necessarily always so).
If the transition is an abrupt or unexpected slowing of growth and represents a deviation
from agreed plans it is not uncommon for a board, at this stage, to step in and remove the
CEO or undertake other actions to restructure management so as to gain better
41
However, the exact process will be clear once the rules are
finalized.
OTHERDIRECTORS
The non-independent directors are under an obligation to make disclosure for buying,
selling or disposing of any property, leasing of any property, appointment of an agent and
appointment in place of profit in the company or in associate/subsidiary.8 In view of the
fiduciary position held by directors, explicit provisions prescribing directors duties have
been added to the new Act. These include keeping away from situations in which they have
conflicting interest with that of the company, duty to make good in monetary terms any
undue gain/advantage on the part of the directors etc., similar to what was there in the old
Act.
There are also certain general duties, such as acting in good faith for the benefit of the
company and to ensure that the company is filing its financials, annual return and payment
of debentures in time. These amendments, though not substantial, have tried to shift the
onus on the director for the loss/liability suffered by the company due to their lack of
discipline by increasing the penalty and clearly codifying the role and duties.
The Act has focused on corporate compliance and a director will not be re appointed
if the company has failed to file its annual returns for three continuous years. Reappointment in such cases, in that company or any other company, can happen only after
five years from the date of the failure to file accounts. However, if the company chooses
to re-appoint a director even after its failure to file the accounts shall be penalized.
Additionally, the practice of directors absenting themselves from meetings and sending
proxy has been placed under check. Any director who was absent from the board meetings
for the previous twelve months, whether he sought leave or not, will have to vacate his
office. If the director continues to function as a director even after he knows that he is
disqualified to hold the office shall be imprisoned for up to one year or punishable
with fine.
The Act prohibits directors from buying, selling, leasing or disposing of any property,
appointment of an agent and appointment in place of profit in the company or
associate/subsidiary and, in all such cases, they are mandated to make a disclosure for these
transactions. In case of non-disclosure by a director, he will indemnify the company
40
companies doing business in India will now have to appoint at least one resident director or
Indian national to act as director to comply with this qualification.
INDEPENDENT DIRECTORS
The role
of independent
directors is
"Code for
the interest
of the
no partiality towards
Independent
directors
shareholders.
In
disqualifications
are expected
order
to
to be completely
implement
for appointment
this,
the
as an independent
unrelated
Act
to the company
has
prescribed
or its
certain
relationship
or
or be involved
in any relationship
or transaction
These detailed criterions for eligibility of independent director were missing in the old Act
and appear to have been introduced to bring objectivity to the functioning of the Board.
Independent
directors
remuneration
Independent
their independence.
Every listed company and unlisted companies with paid-up capital of INR 1,000 million will
now be required to appoint one woman director within one year and three years of
notification of Section 149(1), respectively. This requirement is introduced to facilitate the
presence of women in the Board room. India is already making progress in gender issues
and this is a welcome
companies.
The section also stipulates that at least one director of the company should stay in India for
182 days or more in the previous calendar year. This will ensure that the Board shall continue
to monitor
of the company
on a regular basis
and shall be
responsible
for acts and deeds of the company. Their continued presence will not delay
statutory action steps and will be a step forward towards meeting the timely corporate
compliance
requirements.
This requirement
was missing
companies starting business in India typically appoint foreign directors as the directors of
the Indian subsidiary. With the implementation of this prerequisite, foreign
38
CHAPTER - III
ROLE OF DIRECTOR AS MAJOR PLAYER
3.1 ROLE OF A DIRECTOR
The Companies Act, 2013 ("Act") is enacted to gradually replace the old Act of
1956, with the objective to bring more accountability and good corporate governance.
The Ministry of Corporate Affairs has notified ninety-eight sections of the Act which
have come into effect from September 12, 2013 and repealed the corresponding sections of
the 1956 Act. The Act appears to place a higher degree of responsibility on the Board
members for good corporate compliance. A clear understanding of these obligations and
responsibilities will be critical for current and prospective Board members. In the Act, the
sections related to role, duties and removal of directors are yet to be implemented but it will
happen soon and, therefore, merits attention. In the context of the Board of a
company, the legislators have focused on the role of independent directors and have codified
the duties of directors, which were missing in the old Act.
This newsletter describes selective changes introduced by the Act regarding different
directors and their significance.
1. BOARD FORMATION
The .1956 Act prescribes minimum 2 directors for private and 3 directors for a public
company. This criterion is retained in the Act, but the maximum directors on the Board have
been raised from 12 to 15 and the Act has also dispensed with the approval from Central
Government for raising the number of directors above the prescribed limit. The
Act
requires the Board to devise mechanisms to ensure compliance with the applicable
laws which should be effective and adequate. The Board may consist of several
categories of directors including whole-time directors, managing directors, independent
directors, nominee directors 1 and women directors.
Under the Act, there is a mandatory requirement that one-third of the Board should
consist of independent directors for listed companies and public companies with a paid-up
capital of INR 1,000 millionor debt of INR 2,000 million
37
General Resources
Collaboration I Partnerships
Fiduciary Responsibilities
Fundraising
Leadership
Legal Responsibilities
36
Strategic Planning
Surveys and Reports
Links to Internet Resources
Occasionally consider allowing time for the board members to interview the executive
director about what is on his/her mind.
9) Always choose one interestingitem and set it up for a discussion.
If you are nervous about turning your board loose and are not sure where the discussion
might go, then let a couple of trusted board members know in advance about the planned
discussion.Tell them your perspective and what you need from the board's conversation on
this issue.
10) Select a theme for each meeting.
This allows ample time for in-depth analysis of that topic.For particularly important
issues, the theme can be repeated over the course of several meetings until the issue has
been adequately addressed."
11) Create"mission moments" in every boardmeeting.
Give your trustees a personal experience of your mission in action.
Use a
testimonial or a story about someone touched by your organization. This could be the
most powerful subject of the entire meeting.
12) Breakinto groups.
Instead of reporting to board members about an upcoming challenge, present the issue as a
question and ask them to discuss it in small groups. Then the board chair can facilitate the
full group discussion afterwards.
encouraging shy people, those who typically avoid speaking to the full board, to
participate.
35
Let the board create its own order of business by consensus at the beginning of the meeting.
That way everyone is immediately
accomplished in the meeting. They are not just meeting for routine reporting and discussing;
action needs to be taken on real issues now.
their talent and energy, and will give them more interesting work.
4) Look at trends within routine reports.
Identify larger, big-picture issues that are reflected within routine reports. For example,
along with the financial report, consider a discussion of long-run implications of
certain revenue or cost trends.
5) Plan big.
Bring big-picture strategic planning issues into regular board meetings.
For example,
you could take the standard strategic planning issues focusing on organizational strengths,
weaknesses, opportunities and threats (SWOT analysis).
Divide the four subjects over four board meetings and at each meeting, take your
board through a discussion or update of one of these issues.
6) Look at your board meetings as cheerleading sessions.
Get ready to fire up your board members and put them into action. For these meetings,
switch your view to seeing the board as the team that is out on the field, with the role of
the staff being there to encourage and congratulate them: How would you stage such a
session? Identify who would need to speak in order to rev up the energy of your board.
7) Use consent agendas.
A list of items can be mailed out in advance and approved in one vote. Any member can
ask that a consent agenda item be moved back into the regular agenda for discussion. Try
handling committee reports in this manner by providing written reports in the place of
lengthy oral reports.
34
33
of public
companies, if a Director or his or her relative holds an office of profit without the consent of
the company, and with such Director's knowledge, such Director shall be deemed to have
vacated his or her office.
In addition to these reasons for the Director's office becoming
become vacant, he shall be punishable with a fine up to five thousand rupees (Rs. 5,000/-)
for every day that he or she continues to function and act as such.
RESIGNATION
The Companies Act is silent with respect to resignation of Directors. However, in a majority
of cases, the Articles provide for Directors to resign. Even in cases where the Articles are
silent, there is no absolute bar on Director's
submission
of such resignation
resigning,
of the necessary
resignation with the Registrar of Companies (whether or not the Board formally accepts the
same, unless the Articles provide otherwise). The filing of such resignation related
form
The only exception to the above rule is in the case of Managing, Whole-time and Executive
Directors who are employees of the company, and where the terms of their respective
service contracts will ordinarily refer to resignations, notice periods and I or compensation
in lieu thereof.
32
RETIREMENT OF DIRECTOS
In any public company or a private company that is a subsidiary of a public company,
one-third of the Directors must retire at every AGM. However, every retiring Director is
eligible for re-appointment.
If the vacancy is not filled and the meeting has not expressly
resolved to fill such vacancy, he or she shall be deemed to have been re appointed until
the next election meeting, unless he or she is not otherwise disqualified or is unwilling to so
act as a Director or no resolution for such appointment has been put to the meeting and lost.
REMOVAL OF DIRECTORS
A Director can be removed by an ordinary resolution of the general meeting after a special
notice has been given, before the expiry of his term of office. However,
applicable to Directors appointed by proportional
representation
this is not
or the Directors
VACATION OF OFFICE
The office of a Director of a public company, or of a private company which is a
subsidiary of a public company, becomes vacant ifhe or she:
1. Becomes subject to any of the three (3) disqualifications mentioned above (with regard to
disqualifications
for a Managing
or a Whole-time
office;
2. Fails to obtain within any time period as may be specified in the Articles (two months in
case of a public company),
of the requirements
DIRECTOR IDENTIFICATION
NUMBERS
All Directors of Indian companies are required to obtain Director Identification Numbers
("DINs"). Primarily, DINs are required to authenticate any electronic filings made by the
company.
Additional disqualifications in case of a public company
In addition to the requirements mentioned above, the Companies Act further provides
that a person shall not be eligible to be appointed as a Director of any other public
company for a period of five (5) years from the date on which the public company, in which
he or she is a Director, has failed to file annual accounts and annual returns or has failed
to repay its deposits or interest thereon or redeem its debentures on the due date or pay
dividends declared.
Additional disqualification in case of a "pure" private company
A private company that is not a subsidiary of a public company can, by its
Articles, provides that a person shall be disqualified for appointment as a Director on any
grounds in addition to those specified in the Companies Act.
Additional disqualifications for Managing and Whole-time Directos
An individual cannot be appointed as a Managing or a Whole-time Director of a company
if he or she:
1. is an undischarged insolvent, or has at any time been adjudged an insolvent;
2. suspends, or has at any time suspended, payment to his or her creditors, or makes, or
has at any time made, a composition with them; or
3. is, or has at any time been, convicted by a court of an offence involving moral
turpitude.
These requirements are not only more stringent than the requirements for an ordinary
Director, but are also of an absolute and mandatory nature.
30
2. He or she should not have been detained or convicted for any period under the
Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974.
3. He or she should have completed twenty-five (25) years of age, but be less that the age of
seventy (70) years. However, this age limit is not applicable
approved by a special resolution
if the appointment
in general meeting
is
or the
person
remuneration from one or more companies subject to the ceiling specified in Section III of
Part II of Schedule XIII.
5. He or she should be a resident of India. 'Resident' includes a person who has been staying
in India for a continuous period of not less than twelve (12) months immediately preceding
the date of his or her appointment as a managerial person and who has come to stay in India
for taking up employment in India or for carrying on business or vocation in India.
However, this condition is not applicable for companies in the Special Economic
Zone, as notified by Department of Commerce from time to time.
RESTRICTIONS ON NUMBER OF DIRECTORSHIPS
The Companies Act prevents a Director from being a Director, at the same time, in more
than fifteen (15) companies. For the purposes of establishing this maximum number of
companies in which a person can be a Director, the following companies are excluded:
1. A "pure" private company;
2. An association not carrying on its business for profit, or one that prohibits the payment of
any dividends; and
3. A company in which he or she is only appointed as an Alternate Director.
Failure of the Director to comply with these regulations will result in a fine of fifty
thousand rupees (Rs. 50,000/-) for every company that he or she is a Director of, after the
first fifteen (15) so determined.
29
as a Manager, a
conditions:
1. He or she should not have been sentenced to imprisonment
28
If the vacancy is not filled it may be filled as a casual vacancy as per 262 of the
are
REMUNERATION
In the case of a public company or a private company which is a subsidiary of a public
company, the remuneration payable is subject to the provisions of the Companies Act, and
may be determined
so provide, by a special
for Directors.
of Directors
CONDITIONS
FOR
APPOINTMENT
OF
MANAGING
WHOLE-TIME
DIRECTORS; DISQUALIFICATIONS
The Companies Act, under Schedule XIII, also prescribes certain other conditions that are to
be fulfilled for the appointment of a Managing or a Whole-time Director or
27
Appointment of a Director
The Articles of Incorporation must provide for the addition of Directors.
director as per the relevant clauses in the Articles of Association and must give his consent
to be .a director in written form which the company must register with itself.
Number by filing E-Form DIN 1 with the Ministry of Corporate Affairs, Government
oflndia.
Removal of a Director
A company may, by ordinary resolution, remove a director before the expiry of his period of
office provided he does not hold office for life (irrespective of the age of retirement for
directors mentioned in the Articles of Association)
If on receipt of the notice, the director responds to the notice in writing, the company
must (unless the representations are received by it too late for it to do so):
Intimate all its members of the existence of the written representation to the
the director has the right to have the written representation read out at the meeting of
members.
another director to replace him by the members at the meeting at which he is removed,
provided special notice of the intended appointment has been given to all members
A director so appointed shall hold office until the date up to which his predecessor
26
the need to foster the company's business relationships with suppliers, customers and
others;
the impact of the company's operations on the community and the environment;
the desirability
a reputation
Directors must exercise reasonable care, skill and diligence in having regard to this nonexhaustive list of factors, which may sometimes conflict with each other, but the overriding
consideration is the success of the company. This duty is subject to the existing
common law duty to creditors which will override almost all other interests if the
company is, or is at risk of becoming insolvent.
25
Managing directors
24
The directors act as a board but the board may (if the articles permit, as they generally
will) delegate powers to a committee of board members or to an individual director.
Non-executive directors
23
22
In most jurisdictions, the law provides for a variety of remedies in the event of a breach by
the directors of their duties:
Injunction or declaration
Damages or compensation
Account of profits
Summary dismissal
THE FUTURE
Historically, directors' duties have been owed almost exclusively to the company and its
members, and the board was expected to exercise its powers for the financial benefit of
the company. However, more recently there have been attempts to "soften" the position, and
provide for more scope for directors to act as good corporate citizens. For example, in the
United
Kingdom,
the Companies
Act
2006 requires
directors
of companies "to
promote the success of the company for the benefit of its members as a whole" and sets
out the following six factors regarding a director's duty to promote
success:
The need to foster the company's business relationships with suppliers, customers and
others
The impact of the company's operations on the community and the environment
The desirability
a reputation
21
Directors must not, without the informed consent of the company, use for their own profit
the company's assets, opportunities,
than the prohibition against the transactions with the company, and attempts to circumvent it
using provisions in the articles have met with limited success.
20
As fiduciaries, the directors may not put themselves in a position where their interests
and duties conflict with the duties that they owe to the company. The law takes tJJe p)ew
tJJ;;tgooo f;;)tJJ mvst 220! 022)ybe 0022e, bot mvst be mt1miest}yseen to be done,
and zealously
patrols the conduct of directors in this regard; and will not allow directors to escape
liability by asserting that his decision was in fact well founded. Traditionally, the law has
divided conflicts of duty and interest into three sub-categories.
TRANSACTIONS WITH THE COMPANY
By definition, where a director enters into a transaction with a company, there is a conflict
between the director's interestand his duty to the company (to ensure that the company gets
as much as it can out of the transaction). This rule is so strictly enforced that, even where
the conflict of interest or conflict of duty is purely hypothetical, the directors can be
forced to disgorge all personal gains arising from it.
"A corporate body can only act by agents, and it is, of course, the duty of those agents so
to act as best to promote the interests of the corporation whose affairs they are conducting.
Such agents have duties to discharge of a fiduciary nature towards their principal. And it is
a rule of universal application that no one, having such duties to discharge, shall be
allowed to enter into engagements in which he has, or can have, a personal interest
conflicting or which possibly may conflict, with the interests of those whom he is bound
to protect... So strictly is this principle adhered to that no question is allowed to be raised
as to the fairness or unfairness of the contract entered into ... "
However, in many jurisdictions the members of the company are permitted to ratify
transactions which would otherwise fall foul of this principle. It is also largely accepted
in most jurisdictions that this principle can be overridden in the company's constitution.
In many countries, there is also a statutory duty to declare interests in relation to any
transactions, and the director can be fined for failing to make disclosure.[38]
19
directors
exercise
control
and
management
over
the
organization,
but
organizations are run for the benefit of the shareholders, the law imposes strict duties on
directOrs in relation to the exercise of their duties. The duties imposed on directors
are fiduciary duties, similar to those that the law imposes on those in similar positions of
trust, agents and trustees.
The duties apply to each director separately, while the powers apply to the board jointly.
Also, the duties are owed to the company itself, and not to any other entity. This does not
mean that directors can never stand in a fiduciary relationship to the individual
shareholders; they may well have such a duty in certain circumstances.
"PROPERPURPOSE"
Directors must exercise their powers for a proper purpose. While in many instances
an improper purpose is readily evident, such as a director looking to feather his or her own
nest or divert an investment opportunity to a relative, such breaches usually involve a
breach of the director's duty to act in good faith. Greater difficulties arise where the
director, while acting in good faith, is serving a purpose that is not regarded by the law
as proper.
"UNFETTERED DISCRETION"
Directors cannot, without the consent of the company, fetter their discretion in relation
to the exercise of their powers, and cannot bind themselves to vote in a particular way at
future board meetings. This is so even if there is no improper motive or purpose, and no
personal advantage to the director.
This does not mean, however, that the board cannot agree to the company entering into a
contract which binds the company to a certain course, even if certain actions in that course
will require further board approval. The company remains bound, but the directors retain
the discretion to vote against taking the future actions (although that may involve a breach
by the company of the contract that the board previously approved).
18
represent
the
interests
of
the
owners
of
the
company the
choose
and perspective
watchful eye on the inside directors and on the way the organization
directors
shareholders
disputes between
is run. Outside
inside directors,
or between
objective and present little risk of conflict of interest. On the other hand, they might
lack familiarity with the specific issues connected to the organization's governance.
PROCESS
The process for running a board, sometimes called the board process, includes the
selection of board members, the setting of clear board objectives, the dissemination of
documents or board package to the board members, the collaborative creation of
an agenda for the meeting, the creation and follow-up of assigned action items, and the
assessment of the board process through standardized assessments of board members,
owners, and CEOs. The science of this process has been slow to develop due to the
secretive nature of the way most companies run their boards, however some
standardization is beginning to develop. Some who are pushing for this standardization in
the USA are the National Association of Corporate Directors, McKinsey Consulting
and The Board Group.
NON-CORPORATE BOARDS
The role and responsibilities of a board of directors vary depending on the nature and type
of business entity and the laws applying to the entity. For example, the nature of the
business entity may be one that is traded on a public market (public company), not traded
on a public market (a private, limited or closely held company), owned by family
members (a family business), or exempt from income taxes (a non-profit, not for profit, or
tax-exempt entity). There are numerous types of business entities available throughout the
world such as a corporation, limited liability company, cooperative, business trust,
partnership, private limited company, and public limited company.
Much of what has been written about boards of directors relates to boards of directors of
business entities actively traded on public markets. More recently, however, material is
becoming available for boards of private and closely held businesses including family
businesses.
16
Directors
The directors of an organization are the persons who are members of its board. Several
specific terms
B. Outside Director
A. INSIDE DIRECTOR
An
inside director is
a director who
ts
A Chief Executive Officer (CEO) who may also be Chairman of the Board
Other executives of the organization, such as its Chief Financial Officer (CFO)
is
of a company or organization.
board of managers, board of regents, board of trustees, and board of visitors. It is often
simply referred to as "the board".
A board's activities are determined by the powers, duties, and responsibilities delegated
to it or conferred on it by an authority outside itself. These matters are typically detailed in
the organization's bylaws. The bylaws commonly also specify the number of members of
the board, how they are to be chosen, and when they are to meet.
In an organization
with voting
members,
the board
acts on behalf
of, and is
board. In a stock corporation, the board is elected by the shareholders and is the highest
authority in the management
of the corporation.
In a non-stock
corporation with no
general voting membership, the board is the supreme governing body of the institution; its
members are sometimes chosen by the board itself.
Typical duties of boards of directors include:
appointing,
supporting
and reviewing
the performance
of the chief
executive;
14
and
CHAPTER II
DIRECTOR - INTRODUCTION
2.1 DIRECTOR
"A company is a legal entity and does not have any physical existence. It can act only
through natural persons to run its affairs. The person, acting on its behalf, is called
Director. A Director is any person, occupying the position of Director, by whatever name
called. They are professional men, hired by the company to direct its affairs. But, they are
not the servants of the company. They are rather the officers of the company.
The definition of Director given in this clause is an inclusive definition. It includes any
person who occupies the position of a director is known as Director whether or not
designated as Director. It is not the name by which a person is called but the position he
occupies and the functions and duties which he discharges that determine whether in fact
he is a Director or not. So long as a person is duly, appointed by the company to control
the company's business and, authorized by the Articles to contract in the company's name
and, on its behalf, he functions as a Director.
The Articles of a company may, therefore, designate its Directors as governors, members
of the governing council or, the board of management, or give them any other
title, but so far as the law is concerned, they are simple Directors.
Directors are responsible for managing the company's day-to-day business and may, or
may not, be shareholders. Directors owe duties to
shareholders, and to others dealing with the company.
13
the
company, to
its
>
>
>
>
>
12
A company can enter mto contract with the director who rs mterested but such
To prepare and place before the AGM, along with the balance sheet and profit and
loss account, a report on the company affairs mcludmg the report of the Board of
Directors,
wmdmgup;
11
SMEs and E-commerce, hence the respondents would be able to provide new mformanon
for this study
The interview questions were formulated to gather information from the impact of the
Tomatsky and Fleischer's model on SMEs' adoption and implementation of commerce.
The questions covered subjects such as level of E-commerce technology sophistication
and use in SMEs, major reasons, factors or people responsible for the adoption and
extent of implementation of E-commerce m SMEs, major reasons or factors facihtatmg or
preventmg from usmg E-commerce, etc. A pilot study was used with two IT consultmg
firms in both countnes. On this base, the questions were revised to improve the
understandability of the questions.
Case Study
Although respondents certainly can contribute significantly to this study, they are not
directly involved m the implementation and adoption of E-commerce. They merely give
opimons and ideas based on their observation and research studies.
Also any important issues which are covered directly in interviews were missed. The
questions of interview can show questions such as 'benefits of E-commerce' or 'what
factors are important', but fell short of addressing 'Its reasons and understand the
problems'
needed.
The ments of case study have also been discussed by other researchers. Benbasat et al.
pointed out that such approach is suitable for investigating "certain types of
problems those m which research and theory are at their early, formative stages, and
sticky, practice-based problems, where the experiences of the actors are important and the
context of action are cntical." The way to conduct a case study, as Poon suggested, is "to
do it the same way as multiple expenments
10
research
quantitative
research.
is
an
unstructured
and
methodology
exploratory
Quantitative
research is aimed to measure data and used some form of statistical analysis.
Several studiesmentioned that the use of qualitative research (e.g. mterview, focus groups or
case studies) is surtable m E-commerce
qualitative
research.
This is because
and
actions withm a research study, thus the nchness and detail data can be exposed m
commerce study
In order to carry this study effectively,
several qualitative
methodologies
have been
taken mto consideration. These methodologies are explamed m the next section below
Interviews
Aakerexplamed
that interview is the most frequent used method to collect pnmary data
and immediate
feedback.
Without the
interviews, it would have been difficult to obtam important facts for this study This ts
one of the ways to get clanfication and explanation from the parties mvolved.
Personal interviews
interviews
were earned
The interviews were conducted by e-mail, thus the result of the findmgs can be obtamed
m accurate and complete outlme. Another reason for usmg e-mail is that it is easy and
faster to gather and analyse the findmgs. However, lack of respond m answenng questions
may occur
as researcher
cannot
probe
interviewees
directly
procedure,
firstly, involved
choosmg
consultants,
analysts,
and wnter
they (1) were familiar and expert with IT and E-commerce; (2) usually had
previous busmess expenence; and (3) are contmuously domg research studies regardmg
LEGAL RESPONSIBILITIES
Bobowick,
Marla
J.
"Rules
for
Board
Members
2007): pi5
Who
Provide
describes potential conflict of mterest issues that may anse when board members have
techmcal expertise, such as lawyers, financial advisors, or funders.
Bryson, Ellen and Andrew Schulz. Top 10 Ways Corporate Foundations Get into
grantmakmg.
15Bobowick,
Marla J "Rules for Board Members Who Provide Professional Services." Exempt, (SeptemberOctober 2007): p.
16Bryson,
Ellen and Andrew Schulz. Top 10 Ways Corporate Foundations Get into Trouble. Washmgton,
DC: Council on Foundations, 2004
17Tesdahl,
D. Benson. The Nonprofit Board's Guide to Bylaws: Creatmg a Framework for Effective
Governance. Washmgton, DC: BoardSource, 2003
8
Reframing
the Work
of Nonprofit
Boards.
subject matter due to recent controversies, the authors have developed the principles in
this book as part of a larger Governance Futures Project. They present an analytical
treatment of three modes of governance and follow with practical initiatives that
boards can adopt. The book is directed pnmanly to trustees and leaders who are
concerned with strategic change for their organizations. With bibliographical references
and an mdex.
Cialdini,
Robert
B. "A Board
Member's
Guide to Influence."
Associations Now vol. 3 (January 2007) p. 57-60i2 A behavioral scientist explams how
to apply the pnnciples of persuasion when you are new to the board, when you are the
new board chair, and when your board is at an impasse. The article is part of a special
volunteer leadership issue of "Associations Now"
Wertheimer,
DC: BoardSource, 2008. viii, 91 i3p. This guide explams the many factors that should be
considered when a person is deciding to accept the responsibility of bemg a board
chair Also delves mto the role of the chair, partnership with the chief executive, and the
importance of excellent communication. Includes numerous sample documents such as a
fundraismg letter to board members, job descriptions for board members, and a letter
requestmg terrmnation. With bibliographical references.
Werther, William B., Jr. and Evan M. Berman. "Leading the Transformation
ahgn the life cycle stages of a nonprofit organization (start-up, growth, and matunty) with
changmg expectations and roles for board members.
11,
Howe, Fisher.
The
your Board:
DC: BoardSource, 2007. x, 63 p9 Focuses on the special relationship between the CEO
and the board. With bibliographical references.
LEADERSHIP
Carver, John. Boards that Make a Difference: A New Design for Leadership
in Nonprofit and Public Organizations. 3rd ed. San Francisco, CA: Jossey-Bass
Publishers, 2006. xxviii, 418 p10
leaders, emphasizing the necessary aspects of governance: makmg policy, articulatmg the
organization's mtssion, and sustammg its vision. Helps boards to concentrate their energies
on the overall purpose of their organization and guides them m workmg with managers to
accomplish that purpose. Presents procedures for evaluatmg the executive staff,
organizmg committees, delegating authority to management, makmg decisions as a board,
and estabhshmg bylaws for the board's self-governance. With bibliographical references
and mdex.
Written in question-and-answer
format,
DC: BoardSource,
provides basic
information
about the
248 p5 Written for board members, this guide to the essential functions of voluntary
boards covers such areas as: the role of nonprofit boards; finding, developing, and
recognizing good board members; the role of the board president; working with
committees; the board's role in fundraising; accountability; and evaluation. With
bibliographic references and index.
Ethical Practice:
Sector. Principles
and
support board members and staff leaders of every charitable organization as they work to
improve their own operations. The Panel on the Nonprofit Sector incorporated a careful
review of more than 50 self-regulation systems, counsel from a diverse committee of
experts, and significant feedback from the field in the development of the principles
outlined in the publication.
Collaboration I Partnerships
DeVita, M. Christine.
Board
Member:
or "smart,"
Brown emphasizes
the
"healthy" aspects of successful boards. An afterword sums up the model, gives more tips,
and provides bibliographic citations.
High Impact
p2 Explains the seven key pomts m building effective boards under the author's "high
impact
governance
model."
role m
executive officer, capitahzes on the assets of the board members, carefully designs its
rmsston and structure, accepts the leadership role m producmg mnovation, takes part m
budget
and
operational
planmng,
and
develops
The
Source
external
relations
using
its
connections.
Exceptional Board
Practices:
white
papers
that
help
explam
in Action.
of Board
how
boards
Washington, DC:
Member
can
articles
apply
and
pnnciples
highhghted in the compamon volume "The Source: Twelve Pnnciples of Governance That
Power Exceptional Boards." The pnnciples cover several areas, such as butldmg
partnerships, focusmg on your mission, strategic plannmg, promotmg transparency, developmg
resources, measunng outcomes, and other topics.
analysts, compnsing the issues of who owes the duties and to whom, which are the
interests of the company; and the content of the duty of care and the duty of loyalty
Further, it describes the type of habihty flowing from breaches of the duties, and
hrmtations to the habihty
Questions of enforcement, i.e. who has the standing to sue and whether a
Duties in the vicuuty of insolvency, in particular to file for insolvency and the
prohibition to engage in wrongful tradmg. Further, whether there are other changes
to directors'
Cross-border issues, notably the influence of the real seat or the incorporation