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Imperial Journal of Interdisciplinary Research (IJIR)

Vol-2, Issue-5, 2016

ISSN: 2454-1362,

The Role of Board of Directors in

Corporate Governance
Sumaira Jan1 & Mohi-ud-Din Sangmi2
Faculty member, Jammu & Kashmir Higher Education Department.
Alamdar Colony - B, (near Masjid Muhammadia), Lane no.: 03, (Friends Lane), Botashah
Mohalla, Lal Bazar, Srinagar, Kashmir, Jammu & Kashmir, India.Pin-code: 190023.
Professor, Department of Business and Financial Studies, University of Kashmir,
Hazratbal, Srinagar, Jammu & Kashmir, 190006, India.
Abstract: The series of corporate failures due to 1. Introduction
mis-governance and subsequent regulatory Corporate Governance is concerned with the
changes brought corporate governance into functioning of Board of Directors (BODs) its
limelight. The corporate board of directors assists structure, styles, process, their relationships and
in corporate governance by supervising executive roles, activities etc. Therefore, Boards of directors
management and makes strategic decisions for the (BODs) is considered as a crucial part of the
company. The board is generally supposed to Corporate Governance. Directors are appointed by
govern the corporation on behalf of the the shareholders of the company, who set overall
shareholders, effectively acting as trustees for policy for the company, and the board appoints one
stockholder interests. Directors are elected by or more of them as managing directors/whole time
shareholders, and may even be shareholders or directors/ executive directors to be approved by the
company employees themselves. The Board of shareholders. They are a link between the people
Directors can play an important role in making who provide capital (the shareholders) and the
sure that an outward looking approach including people who use that capital to create value (the
transparency, integrity, and win-win relationship managers). The boards primary role is to monitor
is valued within a company and that these values management on behalf of the shareholders. Board
are flourished at the company-wide perspective. of directors is the important element of Corporate
Board members also have a responsibility to Governance. As Tricker says, Corporate
ensure that appropriate risk management systems Governance addresses the issues facing Boards of
are in place. The roles and responsibilities of a Directors. In this view, the main responsibility of
Board of Directors vary, depending on the nature governing a company is upon the Board of
and type of business entity and the laws applying to Directors and, therefore, attention must be paid to
the entity. Similarly, the establishment of board their roles and responsibilities. The roles of the
committees is a means to channel the functions of a Board of Directors and shareholders are interactive
board into segregated and specialized groups of and, therefore, the quality of governance depends
directors that focus on specific subject of the upon the level of interface set up by them. The
organization. boards are accountable in many ways to the
In this paper an attempt is made to review the shareholders and stakeholders in a company. The
working of Corporate Governance so far as the directors are required to attain a balance between
structure, size, composition and the functioning of competing interests of shareholders, customers,
Corporate Governance is concerned. Moreover, it lenders, promoters and directors. Preferably, the
also evaluate the role of various board committees board should be the heart and soul of a company.
viz., audit committee, compensation committee etc Whether or not, the company grows or declines,
to ensure good Corporate Governance in the depends upon the sense of purpose and direction,
Indian Corporate. the values, the will to generate stakeholders
satisfaction and the drive to achieve them.
Key Words: Corporate Governance, Board of Section 2(13) of the Indian Companies Act 1956
Directors, Structure, Size, composition of BODs, defines a director as follows, A director includes
Board Committees any person occupying the position of director by
whatever name called. The important factor to
determine whether a person is or is not a director is
to refer to the nature of the office and its duties. It
does not matter by what name he is called. If he

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Imperial Journal of Interdisciplinary Research (IJIR)
Vol-2, Issue-5, 2016
ISSN: 2454-1362,

performs the functions of a director, he would be 2. Objectives of the Study

termed as a director in the eyes of the law, even
though he may be named differently. A director 1) To evaluate the role of Board of Directors
may, therefore, be defined as a person having for ensuring good Corporate governance;
control over the direction, conduct, management or 2) To study the structure, size and
superintendence of the affairs of a company. composition of board of directors as per
Again, any person in accordance with whose Indian regulations;
directions or instructions, the board of directors of 3) To study the role of various Board
a company is accustomed to act is deemed to be a Committees to ensure good Corporate
director of the company. As per the Companies Governance in the Indian Corporate;
Bill, 2009 Section 2(1)(zi): director means a 4) To draft the powers of board of Directors
director appointed to the Board of a company, and in the Indian Corporate.
includes a deemed director. Section 2(6) of the
Indian Companies Act 1956 states that directors are
collectively referred to as Board of Directors or 3. Literature Review
simply the Board. As per the Companies Bill,
2009 Section 2(1)(j): Board of Directors or By taking a sample of 92 Spanish firms,
Board, in relation to a company, means the which involved the analysis of 276 observations for
collective body of the directors of the company. the time period 2004-06, Maria and Sanchez (2009)
determine the effectiveness of Spanish corporate
A director may be a full time working director, governance by analyzing the impact of five board
namely managing or whole time director covered characteristics on technical efficiency viz., board
by a service contract. Managing and whole time size, board independence, board reputation, board
directors are in charge of the day-to-day conduct of diversity and board activity. The results of this
the affairs of a company and are together with other empirical study shows that business technical
team members collectively known as efficiency increases with a heterogeneous boards,
management of the company. A company may with a limited number of directorships per director
also have non-executive directors who do not have and with a limited activity specified in a reduced
anything to do with the day-to-day management of number of annual board meetings with a higher
the company. They may attend board meetings and number of specialized committees. Spanish data
meetings of committees of the board in which they as per this research paper is quite interesting
are members. As per clause 49 of the listing because boards are dominated by executive
agreement, there is one more category of directors directors, and as a result they are able to pursue
called Independent Directors. An Independent their own interests by limiting the effectiveness of
Director is defined as a non-executive director monitoring resources. This paper reviews that in
who is free from any business or other relationship relation to efficiency, a diverse board may
which could materially interfere with the exercise if constitute a better monitor of managers, because
his independent judgement. Another category of board diversity increases board independence.
directors recognized in certain provisions of the Similarly, the establishment of board committees is
Indian Companies Act 1956 are Shadow a means to channel the functions of a board into
Directors. These so called deemed directors segregated and specialized groups of directors that
acquire their status by virtue of their giving will focus on specific subject of the organization.
instructions (other than professional advices) Thus, a greater number of committees would imply
according to which appointed directors are greater involvement of the board, members, which
accustomed to act. Board of directors is there for would lead to greater effectiveness of the board and
governance of the company and it performs the further when boards develop hierarchal structures,
strategy making role. Hence, it should have a right several agency problems such as free-riding and
mix of outsiders and people from the management co-ordinations costs have been alleviated. Bebchuk
so that people who execute the decisions have a say and Weisbach (2009) elucidate that the public and
in decision making in parallel ensuring that the private decision-makers suggested that the only
stakeholders interests are protected. way through which we can make boards work
better is to have independent boards. Directors
independence is associated with improved
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Imperial Journal of Interdisciplinary Research (IJIR)
Vol-2, Issue-5, 2016
ISSN: 2454-1362,

decisions with respect to CEO turnover, executive Switzer, Lorne N. and Yu, Cao (2011) empirically
compensation decisions, and the incidence of fraud, test the hypothesis that the closer alignment of
and on the opportunistic timing of stock option board of director members interests with
grants. In this research paper, authors through shareholder interests improves the economic
some light on Executive compensation and affirm profitability of firms. The hypothesis is tested by
that public firms are managed by executives, not examining the relationship between the economic
directors or shareholders; as a result Executives value added of firms, reflected by the spread
decisions are also affected by the incentives between operating earnings in excess of the cost of
provided to them by their executive compensation capital (ER) and firm grades based on the Clarkson
arrangements. Consequently, under the optimal Center for Business Ethics and Board Effectiveness
contracting view, the design of pay arrangements is (CC (BE2)) Index of Shareholder Confidence for
presumed to be efficient. Adams, Hermalin and Canadian firms from 2002-2006. The authors find
Weisbach, (2009) inform that due to increased that high shareholder confidence index values are
pressure from institutional shareholders, more generally associated with higher ER, although the
government regulations, greater threats of relationship is not monotonic for higher graded
litigation, and new exchange requirements, boards boards. This suggests that while highly graded
have become more independent and diligent. boards are generally beneficial, there may be
Hence, boards are more willing to monitor, which diminishing returns to efforts to design optimal
raises the possibility they hire externally for the boards in the sense of their alignment with
CEO position; and more monitoring directly raises shareholder interests.
the chance of CEO dismissal, less job security and
in response of that CEOs work harder and thus, The new rules of NYSE for corporate governance
demand greater pay in compensation. Hence, a require the audit committee to discuss and review
consequence of more independent boards over time the firms risk assessment and strategies; further,
could be upward pressure on CEO compensation. additional requirements are also put for the
Further, these authors indicate that the role of board composition and the financial knowledge of the
of directors has been the topic of research these directors sitting on the board and on the audit
days particularly due to the well-publicized failures committee. Dionne and Triki (2005) in the
and subsequent regulatory changes. Authors research paper investigate whether these new rules
mention that directors serve as a source of advice as well as those set by Sarbanes Oxley act lead to
and counsel, serve as some sort of discipline, and hedging decisions that are of more benefit to
act in crisis situations. As per the directors view shareholders. The goal of this research was to
point, some believe that they have multifarious jobs study the effect of the board and the audit
to do in the organization like they set strategy, committee independence and financial knowledge
corporate policies, overall direction, mission, on the firms risk management activity. The
vision; while others believe that their job is to authors explore that the new requirements
oversee, monitor top management, CEO; concerning the audit committee size and
succession, hiring/firing CEO and top independence motivate firms to seek more hedging,
management; or serving as a watchdog for whereas the requirement of a majority of unrelated
shareholders, dividends. Consequently, boards directors on the board has no effect on the
have become larger, more independent, have more corporate risk management activity. The authors
committees, meet more often, and generally have document that financially educated directors seem
more responsibility and risk. But, authors caution to encourage corporate hedging while financially
that directors with more directorships are more active directors and those with an accounting
likely to have attendance problems at board background play no active role in such policy. The
meetings, which suggests that busy directors spend empirical findings also show that having directors
less time at each firm and as such additional with a university education on the board is an
directorships may hurt firm performance. Further important determinant of the hedging level.
having bankers on boards can be a double-edged
sword as bankers can improve a firms access to Al-Mudhaki and Joshi (2004) examine the
capital market, but sometimes this improved access composition, focus and functions of audit
works to the benefit of the bank rather than the firm committees, the effects of meetings and the criteria
doing the borrowing. used in the selection of members by Indian listed

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Imperial Journal of Interdisciplinary Research (IJIR)
Vol-2, Issue-5, 2016
ISSN: 2454-1362,

companies. They find that only 56.2% of Companies or the Public Companies, the role and
companies have established an Audit committee so responsibility of the Directors or the Board of
far despite the fact that it is now mandatory. Of Directors depend upon the regulations in the
these companies which have Audit committees, Articles of the Company and the provisions of the
68.3% have between three and six members on Companies Act, 1956. When it comes to listed
Audit Committees. However, only 14.6% of Public Companies, other provisions like the SEBI
companies have independent non-executive guidelines, regulations, provisions in the listing
directors while 90.2% have non-executive directors agreement etc. deserve consideration. Private
on the committee. This shows a lack of Limited Companies or the closely held Companies
independent representation on the committees. As are actually run by the directors and we know as to
far as the functions of Audit committees are how Annual General Meetings (AGMs) are
concerned the authors state that they are quite conducted in these companies in reality. It may not
diverse and are classified in three areas: financial be the case when it comes to listed Public
statements and reporting, audit planning, and companies in view of various guidelines,
internal control and evaluation. The review of note regulations and the provisions of listing agreement
disclosure and scope of external audit work are entered into with the Stock Exchange. Directors or
other important functions performed by Audit the Board of Directors has a very big role to play in
Committees. The most important areas of focus as any Company and they conduct the day-to-day
the authors explain are compliance with the affairs of the company and it may not be possible
standards and regulatory bodies, probing material for the AGM to give directions to the Company
items and undisclosed liabilities. As per the from time to time though every company should
Section 292A of the Indian Companies Act, act as per the provisions of the companies act 1956
companies having paid-up share capital of at least and certain decisions can only be taken by the
fifty million rupees (approximately US$1 million) shareholders in the AGM.
shall set up an Audit Committee. The authors
mention that the main criteria used for membership Let us examine the role of Board
of an Audit Committee are: experience and of directors (BoDs) in terms of Companies Act and
knowledge of business, experience of holding other legal provisions. Company is a legal
similar positions and accounting and finance personality and Board of Director acts as its body
expertise. The survey reveals that the majority of and mind. Under Section 291 of the Companies
companies Audit Committee meetings are held Act, BoD is authorized to do what the company is
monthly or quarterly. However, MANOVA authorized to do, unless barred by restrictions on
analysis reveals that the frequency of Audit their power by the provisions of the Companies
committee meetings has an effect on the internal Act. It is well settled that directors, while
control functions. The study concludes that the exercising their powers, do not act as agents for the
concept of an Audit Committee is not new in India majority or even all the members and so the
but their formation is slow and their composition members cannot by a resolution passed by a
lacks independence; its functions are still majority of even unanimously, supersede the
concentrated in the traditional areas of accounting directors power and instruct them how they shall
and their role is not changing fast enough to make exercise their power. The powers of management
the corporate governance more effective. are vested in directors and they and they alone can
exercise these powers. The only way in which the
4. The Board of Directors Roles and General Body of a company can overrule the BoDs
is altering the Articles and refusing to re-elect
Responsibilities the directors, whose actions they disapprove. The
shareholders cannot themselves usurp the powers,
The Boards key purpose is to ensure the which by Articles are vested in the directors. Thus
companys prosperity by collectively directing the the relationship of BoDs with the shareholders is
companys affairs, whilst meeting the appropriate more of a federation than that one of subordinate
interests of its shareholders and stakeholders. In and superior. The Board of Directors can be
India, there are many judgements on the role of greatly helped by focusing on four key areas: (i) by
directors and the responsibility of directors/ Board establishing vision, mission and values; (ii) by
of Directors in any Company. In Private Limited setting strategy and structure; (iii) by delegating

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Imperial Journal of Interdisciplinary Research (IJIR)
Vol-2, Issue-5, 2016
ISSN: 2454-1362,

authority and responsibility to management; and, were given those powers by the
(iv) by exercising accountability to shareholders shareholders.
and be responsible to relevant stakeholders. 8) Directors must act in good faith in what they
honestly believe to be the best interests of
In India, it is common to find family-owned the company, and not for any collateral
concerns being run by promoters as their personal purpose. This means that, particularly in the
fiefdoms. Though their investments may be event of a conflict of interest between the
meager, they manage the firms, holding positions company's interests and their own, the
of CEOs, managing directors, Chairman and directors must always favour the company.
members of the Board of Directors. In such a set- 9) Board of Directors should provide counsel
up, the board acts more like a rubberstamp, rather and oversight on the selection, evaluation,
than shouldering large responsibilities. For better development and compensation of senior
governance, the board should function as follows: management.
10) Board of Directors should monitor corporate
1) The Board should meet regularly, retain full performance against strategic business plans,
and effective control over the company and including overseeing operating results on a
monitor the executive management. regular basis to evaluate whether the
2) Directors should exhibit total commitment to business is being properly managed.
the company. An efficient and independent 11) Directors should ensure that processes are in
board should be conscious of protecting the place for maintaining the integrity of the
interests of all stakeholders and should company by way of the financial statements,
attend and actively participates in the compliance with laws and ethics, and
meetings. integrity of relationships with customers,
3) Another important function of the directors suppliers and other stakeholders.
is that they should steer discussions 12) Board of Directors should ensure that the
properly. They should set priorities and company is in compliance with all
ensure that these are acted upon. applicable statutory and legal requirements.
4) A director is expected to have the courage of
conviction to disagree. Directors should 5. Role of the Chairman
also be alert to any deteriorating situations in
functional areas of finance, stock market,
sales, personnel, and especially those
The Chairmans role includes managing the
relating to moral issues.
boards business and acting as its facilitator and
5) Directors have great responsibility in the
guide. This includes;
matter of employment and dismissal of the
CEO. The Board as a whole, should recruit 1) Determining Board composition and
the best CEO they can hire, based on organization;
antecedents and market reports, evaluate 2) Clarifying board and management
objectively on a continuing basis his or her responsibilities;
implementing effectively or otherwise the 3) Planning and managing Board and Board
strategic planning devised by the board. Committee meetings;
6) An efficient board should be able to 4) Developing the effectiveness of the Board
anticipate business events that would spell
success or lead to disaster if proper measures
are not adopted in time. The directors
6. Role of Independent Directors
should be alert to such ensuing situations
and be ready with the strategy to meet them
so that either way the company stands to The revised clause 49 stipulates that in
gain. companies which have executive chairmen, at least
7) The directors should always exercise their 50 per cent of the board is required to have
powers for a 'proper purpose' that is, in independent directors. For companies with non-
furtherance of the reason for which they executive chairmen one-third of the board must
comprise independent directors. An Independent

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Imperial Journal of Interdisciplinary Research (IJIR)
Vol-2, Issue-5, 2016
ISSN: 2454-1362,

director is a non-executive director on the board the benefit of the company and its
of a company who has integrity, sense of stakeholders. The main function of Audit
accountability, track record of achievements, Committee is to oversee the companys
financial literacy, experience and the independence financial reporting process and the
to balance the interests of various stakeholders, disclosure of its financial information to
ability to think strategically, degree of ensure that the financial statement is
commitment, sense of devotion. correct, sufficient and credible. The Audit
Committee can recommend to the Board,
Independent Directors play an active role in various the appointment, re-appointment and, if
committees to be set up by a company to ensure required, the replacement or removal of
good governance. Listed Companies are required the statutory auditor and the fixation of
to set up audit committees of minimum three audit fees. The members of Audit
directors, on which, two-thirds should be Committee should have formal knowledge
Independent Directors. The audit committee of accounting and financial management
chaired by an Independent Director shall inspect or experience of interpreting financial
the companys financial statements and can also statements.
recommend replacement of the statutory auditor. 2) Remuneration Committee: - The
remuneration Committee shall be held at
Independent directors are responsible for least four times a year on the day
formulating and implementing business strategies preceding the date of every Board
on behalf of shareholders and have to ensure that meeting. The Committees principle
the business activities of the company are functions are to authorize the
compatible with all legal requirements. They have remuneration, business and other benefits
to perform crucial governance functions. The of executive directors, including the CEO,
presence of independent Directors on the Board, and to grant awards under the Courtaulds
capable of challenging the decisions of the Long-Term Incentive Scheme.
management, is widely considered as a means of 3) Nomination Committee: - The
protecting the interests of shareholders and other Nomination Committee shall be held at
stakeholders. least twice in a year. The Committees
functions are to make recommendations to
the Board about the future appointments
7. Role of Board Committees of non-executive directors and of the
chairman and the chief executive, and to
consider recommendations from the chief
The Board of the Company has the following executive to the Board about the future
Committees: appointments of executive directors.
4) Shareholderss/Investors Grievance and
1) Audit Committee: - Section 292A of the Administrative Committee: - The
Companies Act, 1956 requires that every Shareholders/Investors Grievance and
public limited company (whether listed or Administrative Committee meetings shall
unlisted) having a paid-up capital of at be at least held thrice in a month. The
least Rs.5 crore should constitute a Chairman of this Committee shall be a
committee of the board to be known as Non-executive Independent Director.
Audit Committee. The meetings of the This Committee shall approve transfer of
Audit Committee shall at least be held shares, transmission of shares, issue of
four times a year and preferably on the duplicate share certificate, etc. This
day preceding the date of each of Board Committee shall also review the
meeting. Being mandatory under Section queries/complaints received from the
292A of the Companies Act, 1956 and shareholders during the fortnight and
Clause 49 of the listing agreement, the responses given to the shareholders.
audit committee can be of facilitator of In addition to above committees the board
Board to implement, monitor and continue may constitute other committees,
good corporate governance practices for

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Imperial Journal of Interdisciplinary Research (IJIR)
Vol-2, Issue-5, 2016
ISSN: 2454-1362,

depending upon the organizations size Every Company should frame a Board Renewal
and other requirements. Policy of Independent Directors to facilitate their
independence. The policy may provide for
8. Structure, Size and Composition of maximum number of years a person could serve on
Board of Directors the Board as an Independent Director. The role
and office of the Chairman and CEO should be
separated to promote balance of power and to
prevent unfettered decision making power with a
Clause 49 of the listing agreement requires
single individual. Further, there should be a clear
that the board of directors of the company shall
demarcation of the role and responsibilities of
have an optimum combination of executive and
Chairman and Managing Director/Chief Executive
non-executive directors with not less than fifty
Officer (CEO).
percent of the board of directors comprising of
non-executive directors and further that where the
Chairman is a non-executive director, at least one- 9. Powers of the Board of Directors
third of board should comprise of independent
directors and in case he is an executive director, at Under the Indian Companies Act 1956, BoDs
least half of board should comprise of independent has powers to make calls on shareholders in respect
directors. The said Clause also sets out the of money unpaid on their share, power to authorize
principles for determining independent director. the buy-back, power to issue debentures, power to
The said Clause also provides that nominee borrow moneys otherwise than on debentures,
directors appointed by an investing or lending power to invest the funds of the company and
institution shall be deemed to be independent power to take and make loans. There is no doubt
directors. The size of the Board should neither be that BoDs may, by a resolution passed at a meeting,
too small nor too big. Experience indicates that delegate to any committee of Directors, the
smaller boards allow for real strategic discussion. Managing Director, the Manager or any other
At the same time, larger Boards provide the benefit principal officer of the company, the above powers.
of diverse experience and viewpoints. The board However the principal power still vests in BoDs
should strike a balance of executive and non- and the Manager or Managing Director acts only as
executive directors. Every board should consider an agent of the BoDs. Apart from this, BoDs has
whether its size, diversity and demographics make power to form opinion about the solvency of the
it effective. Diversity applies to academic company in respect of buy back shares (Section
qualifications, technical expertise, relevant industry 77A), power to fill up casual vacancies in the office
knowledge, experience, nationality, age and sex. of Directors (Section 262), power to constitute
Diversity adds value, and adds to the bottom line. Audit Committee and specify terms of reference
Gender diversity is an important aspect of board thereof (Section 292A), power to make donation to
diversity and companies should have women political parties [Section 293A(2)], power to accord
representation on the Boards. Every board should sanction for specified contracts in which one or
consider whether its size, diversity and more directors are interested [Section 297(4)],
demographics make it effective. Diversity applies power to receive notice of disclosure of directors
to academic qualifications, technical expertise, interest [Section 299(3)(c)], power to appoint or
relevant industry knowledge, experience, employ a person as Managing Director or Manager
nationality, age and sex. Diversity adds value, and [Section 316(2)], power to invest in shares or
adds to the bottom line. Gender diversity is an debentures of any other body corporate (Section
important aspect of board diversity and companies 372A), power to appoint or employ a person as its
should have women representation on the Boards. Manager [Section 386(2)], power to make a
Boards need to be regularly refreshed with new declaration of solvency, where it is proposed to
expertise, energy and experience. Independent wind up the company voluntarily [Section 488(1)],
directors should not have long tenure. A balance power to approve the text of advertising for
should be sought between continuity in board inviting public deposits [Section 58A r/w Rule
membership, subject to performance and eligibility 4(4)]. Some of the powers can only be exercised by
for re-election and the sourcing of new ideas resolution passed at the meeting with consent of
through the introduction of new board members. the Directors present at the meeting.

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ISSN: 2454-1362,

10. Conclusion [3] Al-Mudhaki, Jawaher and Joshi P.L., The Role and
Functions of Audit Committees in the Indian Corporate
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person, who however, has no physical existence
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only act through directors. The directors are a = 1508146
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[5] Chakrabarti, Rajesh, Yadav, Pradeep K. and
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ISSN: 2454-1362,

[16] Switzer, Lorne N. and Yu, Cao,Shareholder

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