Corporate Board : Duties, Responsibilities and Liabilities
Corporate
Governance is concerned with the functioning of Board of Directors (BODs) –its
structure, styles, process, their relationships and roles, activities etc. As
Tricker (2019) says, “Corporate Governance addresses the issues facing Boards of
Directors”.
A
director of the company must act in accordance with AOA. A director of a
company shall act in good faith in order to promote the objects of the company
for the benefit of its members/ shareholders as a whole, and in the best
interests of the company, its employees, the shareholders, the community and
for the protection of environment.
A
director of a company shall exercise his duties with due and reasonable care,
skill and diligence and shall exercise independent judgment.
A
director of a company shall not involve in a situation in which he may have a
direct or indirect interest that conflicts, or possibly may conflict, with the
interest of the company.
A
director of a company shall not achieve or attempt to achieve any undue gain or
advantage either to himself or to his relatives, partners, or associates.
A
Director must ensure that all the affairs of Company are being done in best
possible way and without compromising on legal Compliance of the Company and at
same time which are not prejudicial for the interest of Company.
Thus
Corporate Board duties can be summarized as follows:
1. Provide
continuity for the organization
2. Select and appoint a chief executive
3. Govern the organization by broad policies and objectives
4. Acquire sufficient resources for the organization's operations
5. Account to the stockholders (in the case of a for-profit) or public
(in the case of a nonprofit) for the products and services of the organization
and expenditures
Let
us look at these items in a deeper manner:
1. Provide
continuity for the organization by setting up a corporation or legal
existence, and to represent the organization's point of view through
interpretation of its products and services, and advocacy for them
2. Select and appoint a chief executive to whom responsibility
for the administration of the organization is delegated, including:
-
to review and evaluate his/her performance regularly on the basis of a specific
job description, including executive relations with the board, leadership in
the organization, in product/service/program planning and implementation, and
in management of the organization and its personnel
-
to offer administrative guidance and determine whether to retain or dismiss the
executive
3. Govern
the organization by broad policies and objectives, formulated and agreed
upon by the chief executive and employees, including to assign priorities and
ensure the organization's capacity to carry out products/services/programs by
continually reviewing its work
4. Acquire sufficient resources for the organization's operations
and to finance the products/services/programs adequately
5. Account to the stockholders (in the case of a for-profit) or public
(in the case of a nonprofit) for the products and services of the organization
and expenditures of its funds, including:
-
to provide for fiscal accountability, approve the budget, and formulate
policies related to contracts from public or private resources
-
to accept responsibility for all conditions and policies attached to new,
innovative, or experimental products/services/programs.
Directors owe a fiduciary dutyto the company and are expected to show the utmost care, diligence and skill in
the exercise of their power and decision-making. They are expected to execute
their duties in a manner that does not conflict with their personal interests
and must disclose to the board their direct and indirect interests in any
business dealing concerning the company. If there is a conflicting personal
interest, they are mandated to refrain from participating in such a
decision-making process. However, in the case of private companies, the
interested director may participate in the meeting after disclosure of his or
her interest. Specific duties of care are prescribed for directors in cases of
related-party transactions (RPTs). Further, IDs have to adhere to the Code,
which also prescribes certain duties of care or prudence.
Directors
can be executive or non-executive. The managing director (MD) (who is an
executive director) is entrusted with substantial management powers under the
company’s AOA, other agreements, or resolutions passed by the shareholders or
the board. Executive directors employed by the company are responsible for
discharging duties as per their terms of employment and are usually assigned
duties related to finance, human resources and legal compliance. Non-executive
directors participate in the board’s decision-making process and discharge
other duties that may be entrusted upon them.
IDs
take part in the decision-making process at the board, the audit committee, the
NRC and the corporate social responsibility (CSR) committee meetings. They
bring about ‘independence’ to the decision-making process and generally ensure
the company’s compliance with the corporate governance norms.
Owing
to the varied roles of the directors, the Companies Act 2013 follows the concept of
‘officer who is in default’ as persons responsible for the breach of the
provisions of the Companies Act.
RESPONSIBILITY
The Board of Directors focuses on four key
areas:
- by establishing vision, mission and values;
- by setting strategy and structure;
- by delegating authority and responsibility to
management; and,
- by exercising accountability to shareholders and be
responsible to relevant stakeholders.
Thus there are some responsibilities which board of directors has
to shoulder:
•
Determining the company’s strategic objectives and policies.
•
Monitoring progress towards achieving the objectives and policies.
•
Appointing senior management.
•
Accounting for the company’s activities to relevant parties, e.g.
shareholders.
It covers observing
transparency and disclosing every material fact or report to be disclosed.
Other key functions include monitoring the effectiveness of company’s
governance practice, setting performance objectives, aligning board
remuneration and other key executive with interest of the company and
shareholders etc..based on the principles layed out in Listing agreement clause
49(1).
DIRECTORS’ POWERS
The decisions which must be made by a resolution of the members
are:
Most of the companies have not inserted any special article or did not pass any
resolution which says that director does not possess the power to perform
certain actions. But according to the Act, it needs a resolution in general
meeting which specifies this type of power. The following decisions should
be made by the directors but usually also require a resolution of the
shareholders:
- Some loans to directors
- Directors’ fixed term service contracts for more than 2
years
- Substantial property transactions in which directors
have a personal interest
- Issue shares
- Delegation to individual directors:-
The powers noted above are given to the directors collectively.
For this, the board must delegate power to the director concerned. Both the
Model Articles and Table A permit this.
Liabilities of Director in a Company
The Liabilities of
Director of Company are broadly defined in two categories:
1.
Liability
to Stakeholders:
The directors are not personally liable to stakeholders if they
act within the scope of powers vested in them. The general rule in this regard
in that wherever an agent is liable, those directors would be liable, but where
the liability would attach to the principal only, the liability is the
liability of the company. The Director shall also be liable in case of
negligence & fraud by the Company, knowingly making any mis-statement or
sharing false-information with the stakeholder, Failure to repay deposits on
time, payment of dividend out of capital and entering into contract with
related parties.
2. Liability to Company:
The
directors shall be liable to the company for the following:
- Where they have acted
ultra-vires the company: Directors
have powers subject to Companies Act, Memorandum and Articles of
association. Whenever they exceed these limits they are personally liable
for the act being ultra vires. But if acts are intra-vires the company
such acts can be subsequently ratified by the shareholders in the general
meeting, otherwise, if a company suffers a loss on ultra-vires acts of its
directors, the company can claim such loss from the directors.
- When they have acted
negligently: Negligence
may give rise to liability; there need not be fraud. But they will not be
liable where they have acted bonafide and for the benefit of the company.
However, the error of judgement will not be deemed as negligence.
- Where there is a breach of
trust: Directors are the trustees for
the money and property of the company. They hold an office of trust and if
they misuse their powers they will be liable for breach of trust and may
be required indemnify the losses incurred to Company. They also need to
make regular disclosures on their profits, if any, earned in course of the
performance of duties. Director can also be held liable for misconduct,
provided it is not willful.
- Misfeasance: Directors are liable to the company for misfeasance. The word misfeasance covers willful negligence. Mere failure on the part of the director to take necessary steps for recovery of debts due to the company does not constitute misfeasance. If the company is in the course of winding up, the court may, on the application of the liquidator, creditor or contributory examine the conduct of a director for any misfeasance or breach of trust in relation to the company.
How
does the Duties & Responsibilities of Corporate Board change over the life
span of the business?
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 arises.
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
visibility of the path ahead.
If the transition is smooth, expected and well
prepared for then the role of the board is not as overt.
At this point the company needs to
decide if there are additional activities they wish to undertake that would
effectively renew the organisation and continue the growth or if they are happy
to transition to a less volatile mature operating state as the company becomes
‘Sustainable’ or ‘Mature’. This is the stage of life of most large blue
chip organisations.
They undertake enough new developments
to maintain their sustainability but never so many that they revert to the
risky volatile growth phase.
Outcomes are expected to conform to
plans and the board spends as much or more time monitoring strategy
implementation as they do developing strategy.
Finally the organisation will enter the stages
of decline and, if this is not arrested by reinvention, decay.
A good board will be alert for
indications that decline is imminent and will ensure that management are
challenged with the task of developing new strategies for growth to counteract
the tendency of the organisation to drift into these stages.
Companies in decline are often
paradoxically very profitable as investment in new lines of business and growth
projects slows whilst tried and tested products are efficiently produced and
sold.
Many family businesses enjoy this phase
as a means of creating funding for the retirement of the founder.
Other businesses work hard to transcend
the tendency towards decline and decay.
The board may, again, need to become
more active (and possibly even forceful) to ensure that management focus their
efforts appropriately depending on the owners’ desires for the organisation.
Some not-for-profit businesses look
forward to these stages as they will indicate that the mission has been
achieved;
When a cure is found for cancer most
cancer-related charities will focus on transitional arrangements to assist
current sufferers, on providing information about the cure and on closing down
in an honourable manner. A few will move into other disease related work whilst
most will seek to exit the marketplace.
For commercial companies the imperative
will be to either create new business streams or to return capital to the
shareholders whilst meeting obligations to stakeholders. The board must step
into their role as the ultimate endorsers of strategy during these phases.
Additionally
All Public Companies which have in aggregate outstanding loans, debentures and
deposits exceeding 50 crore rupees are required to constitute an Audit
Committee as also the Nomination and Remuneration Committee.
Under Section 178 of the Companies Act 2013, every company which has more than 1000 shareholders, deposit holders or other security holders, shall constitute a Stakeholders Relationship Committee (‘SRC’), with a non-executive director as Chairperson with the objective of grievance redressal of various stakeholders.
Net
worth of not less than Rs.500 crores or more
or
Turnover of not less than Rs. 1000 crores or more
Or
Net Profit of Rs.5crore or more shall constitute a Corporate Social
Responsibility Committee.
Networth, Turnover or Net Profit are
according to Financial year and has been clarified as to imply any of the
three(3) preceding financial years.
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