Corporate Boards Theory, Law and Practice

Corporation: An ingenious device for obtaining individual profit without individual

responsibility Ambrose Bierce, in Devils Dictionary

The truth of the matter is that you always know the

right thing to do. The hard part is doing it.
- General H. Norman Schwarzkopf

11/5/2014

Corporate Board
Subject to the corporate law, the corporate board

is the supreme authority for governing the

company, and is answerable to the shareholders
who appoint them. They are required to run the
company and its business in the best interests of
the company.
Founded on the basis that a group of respectable
and trustworthy people, including perhaps the
dominant shareholding group, should look after
the interests the non-participating or absentee
shareholders of the company.
Corporate board as fiduciary the responsibility
of the board collectively and the directors
individually to protect and promote the interests of
those whose funds, faculties and facilities they
are entrusted to manage to optimal advantage

Corporate Boards
Franklin Gevurtz (2004) offers four possible

reasons that may justify the concept of board

1. The need for central management
2. The superiority of decision making by groups of
people rather than a single individual
3. The need for mediating and adjudicating body
to resolve conflicting claims, and
4. The need to monitor executive management
and minimise agency costs.

Corporate control and corporate

boards
Berle and Means derived five types of corporate

control
1. Absolute control through complete ownership
2. Control through a straightforward majority in the
companies voting stock
3. Control through legal devices namely
Pyramiding, issuing non-voting stocks, issuing
some controlling shares with excessive voting
powers, or creating a voting trust
4. Minority control but still could dominate
5. Management control, where the ownership is
widely spread.

Triple dimensions of board role

Contributing dimension - where directors bring to

bear their expertise and experience to enhance

the companys wealth-creating capabilities
Counselling dimension - where directors counsel
on the approaches the CEO plans to adopt with
respect to specific initiatives, so that the wealthcreating processes are smooth and within the
companys values
Controlling dimension - where the board
exercises its surveillance functions to ensure
created wealth passes through to the rightful
claimants without undue leakage

Board as steward
Steward one who manages anothers property,

finances or other affairs - fiduciary

Stewardship, trusteeship and righteousness in
relationship between people
Isa Upanishad admonishes the individual not to

covet anothers property

Tenth commandment in the old testament
The foundation of Buddhism, is based on the
righteousness in human behavior
Mahatma Gandhi on Trusteeship

Accountability and Responsibility

The Kings Report One is liable to render an

account when one is accountable and one is

liable to be called to account when one is
responsible
The company and its board collectively, and its
directors individually, are all accountable to the
shareholders, in their long-term sustainable
interest. In the discharge of this duty, they need to
meet and manage the expectations of all relevant
stakeholders, partly on the basis of relative
negotiating equations, and partly on the basis of
acknowledged international best practices
appropriate to the country of its operation.

Residual Claimant Theory

The legal basis for shareholder primacy is

predicted upon this theory which broadly derives

from the principles of private property along with
the rights and risks attached to its ownership
As residual claimants, shareholders have the right
to make discretionary decisions and bear their
consequences.
Shareholder vs stakeholder controversy
Margeret Blair on firm-specific investment
platform creditors under chapter 11 and
employees. Ada Demd and Fred Neubauer
identify six providers of funds, employees,
public, Govet, customers and suppliers.

Board Composition, Structure and

Evaluation
In my Opinion, a mans legs ought to be long

enough to reach the ground! Abraham Lincoln

Board Composition
Board of Directors

Executive

Non-Executive
Managing Director

Independent
Whole time Directors
Non-Independent

Nominee Directors*

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* unless specified otherwise

Constituency
Directors

Others

Board Structure
Boards

Chair/CEO Duality
Lead Director
Interlocks/Multiple
Directorships

Structure

Committees

11

Size
Balance
Diversity

Audit Monitoring and

disclosure
Compensation Exec pay
Nomination Board
Renewal
Governance - Stewardship

Board Structure
Agency Theory Approach overly loaded in favor of

monitoring and assurance mechanisms

independent directors, whistle blower mechanisms etc
Stewardship Theory Approach strongly favor insider
dominated boards, with fewer outsiders and reduced
focus on control
Resource dependence Approach prefer to co-opt
individuals who can provide necessary linkages to
external environment to sub serve their objectives
Firm Complexity as structure determinant
Internal complexities technology, capital investment, labour,

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security of information and process, CEO dominance etc

External Complexities Competitive structure, geographical
and segmental spread of the business, regulatory, stock price
volatility, reputational vulnerability etc

Board Independence
Independence rests on three pillars
1. The balance between executive and non-

executive members including their diversity

Cadbury, Hampel(1998), The combined code of
2000, Higgs review of 2003, OECD principles,
Birla committee, companies Act, Clause 49 of
SEBI.
2. The independence of board chair with chair/CEO
duality, and the concept of lead directors
3. Independence and objectivity of individual
directors
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Board Diversity
Upper Echelon Theory corporate strategy and

performace reflects the values and cognitive base

of top management or dominant coalition within
the corporation. It utilizes characteristics such as
age, gender, tenure, functional and educational
backgroud, socioeconomic roots, minority status,
financial position etc to ones beliefs, networks
and affiliations.
May result in false consensus effect with
homogeneous groups - cohesiveness
Cognitive conflict with heterogeneous groups
Gender issue Tyson report 2003, higgs review
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Board Diversity
Diversity country specific ethnic minorities

(blacks, Hispanics and immigrants in US,

aborigines in Australia, native africans in SA),
religious minorities, economically backward
communities, civil society organizations, social
scientists, academics, former bureaucrats,
journalists, environmentalists, foreign nationals,
etc

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Board Structure
Boards

Chair/CEO Duality
Lead Director
Interlocks/Multiple
Directorships

Structure

Committees

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Size
Balance
Diversity

Audit Monitoring and

disclosure
Compensation Exec pay
Nomination Board
Renewal
Governance - Stewardship

Board Evaluation
Self appraisal on specified measurement criteria

attendance and participation at board and

committee meetings, preparedness level both in
interest and contribution, involvement in company
affairs such as time commitment, familiarity with
environment etc, role as ambassador,
professional and specialist skills in areas of value
to company.
Peer appraisal
For directors, for board and committee chairs and
board, collectively.
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Candour in the cockpit - Deloitte

A recent research into flight safety has thrown

astounding fact many crashes that were named as

pilot errors could actually be traced back to cultural
dynamics in the cockpit: lack of teamwork and
communication, and critically excessive deference to
the captains authority. Black box recordings have
shown that co-pilots or engineers failed to challenge
the captains decisions, even in an emergency
situation.
Look at the board room as the cockpit of a company
is it any mystery then that ineffective boards today
pose the biggest risk to Indian companies?
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If Indian boardrooms had black boxes, the

recordings would be
Directors who sit on a dozen boards and are unable to attend all the

meetings, and contribute little during meetings they do attend.

Boards which are comprised overwhelmingly of an old-boys network
and gets paid handsomely to remain silent
Selective or incomplete information provided to the board on critical
issues facing the company
Independent directors who are viewed by management either as
rubber stamps or super-cops, rather than significant contributors to
SHV.
Info on threats, risks and their monitoring is not systematically
communicated to the board
Directors who are independent but unable to provide insights because
they lack the requisite experience or understanding of the business

The existing regulations, rules and codes are like aircrafts flight manual. It
outlines the way things ought to be done.
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Rubber stamp check the box or strategic asset? Evolution of board and the
level of effectiveness.

Rubber Stamp

Check the Box

Strategic Asset

Directors are friends of

CEOs

Directors do not provide

meaningful contribution to
the business

Effective team build on

trust and capability,
strategic in nature

Communication is a one
way street

Board fulfill regulatory

expectations via a checkthe box approach to CG

Hold themselves
accountable performance
oriented culture at the board
level

Meetings are not organized

and managed effectively

IDs dont have significant

leadership roles within
board

IDs provide both oversight

and insight

Management provides very

selective information to the
full board

Directors bring value in the

form of new ideas,
networks, perspectives,
formal and informal advice

Management views outside

directors as Watchdogs

Outside directors work

closely with the mgmt team,
even outside the boardroom

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Board meetings are

planned, organised and
conducted effectively

ABCs of boardroom performance

Attitude tone at the top effective board

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governance as competitive differentiator.

Behavior IDs Play the role of an advisor,
demand for information, ask tough questions,
build relationships with executives and
management, ask for performance evaluations
Capability make sure that directors understand
their roles: that their job not only involves
monitoring financial performance, ensuring
compliance and attend to SH interest but also
shaping long term strategy and understanding the
threats and opportunities critical to success.

Effective board members in promoter

driven businesses:
Provide independent, third party perspective on

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important issues
Act as devils advocate in key discussions
Fill competency gaps thru expertise and experience
Encourage promoters to obtain different perspectives
from academia, governance and industry experts
May provide valuable inputs on strategy, succession
planning and leadership assessment, compensation
and risk management
Understand the value they bring to the board
Dont overlook but oversee.. Being risk intelligent.

A review of academic research in the Asian region

shows that in the presence of controlling
shareholders, strong CG practices have a positive
impact on firm value. The literature provides
evidence that strong CG practices and the
appointment of INEDs on the board can increase
firm value and decrease the cost of capital, thereby
reducing financial costs. On a country level, the
evidence is that these practices can also increase
foreign investment in local companies and , therefore
help the development of capital markets CFA
Institute Centre for Financial market Integrity

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Board Governance Framework

Board of Directors

Corporate
Secretary
Reporting &
Disclosure

Governance
System and
Controls

Key Areas of Responsibility

Board
Meetings

Board Operations

Chairman

Achievement of strategic objectives and value creation

Fulfil responsibilities and duties in law and prescribed functions

Strategy
Corporate Policies & Procedures
Board Governance Instruments
Monitoring and Evaluation

Board Committees
Audit
Committee

Information and Communication

Shareholders

CEO & Management

Remuneration
Committee

Other
Committees

Executive
Committee

Internal Controls
& Assurance

Combined Assurance Model

Internal Audit

External Audit

Other Assurance
Providers

Management
Source: KPMG

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Directors as fiduciaries
Members of company boards are fiduciaries who

must act in the best interest of the company and

its shareholders and are accountable to the
shareholder body as a whole. As fiduciaries,
directors owe a duty of care and diligence to, and
must act in the best interests of, the company.

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Derived from: ICGN Global Corporate Governance Principles

Effective board behavior

a) The board has independent leadership;

b) That the chair works to create and maintain a

culture of openness and constructive challenge

which allows a diversity of views to be
expressed;
c) That there is a sufficient mix of relevant skills,
competence, and diversity of perspectives
within the board to generate appropriate
challenge and discussion;

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Effective board behavior

d) That the independent element of the board is
sufficiently objective in relation to the executives
and dominant shareholders to provide robust
challenge without undermining the spirit of
collective endeavor on the board;
e) That the non-executive element of the board
have enough knowledge of the business and
sources of information about its operations to
understand the company sufficiently to contribute
effectively to its development;

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Effective board behavior

f) That the board is provided with enough
information about the performance of the
company and matters to be discussed at the
board, and enough time to consider it properly;
and
g) That the board is conscious of its accountability
to shareholders for its actions.

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Duties of the board

The boards duties and responsibilities and key

functions, for which they are accountable,

include:
a) Reviewing, approving and guiding corporate
strategy, major plans of action, risk policy,
annual budgets and business plans; setting
performance objectives; monitoring
implementation and corporate performance; and
overseeing major capital expenditures,
acquisitions and divestitures.

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Duties of the board

b)Overseeing the integrity of the companys
accounting and financial reporting systems,
including the independent audit, and that
appropriate systems of control are in place; in
particular, financial and operational control, and
compliance with the law and relevant standards.
c) Ensuring a formal and transparent board
nomination and election process.
d) Selecting, remunerating, monitoring and, when
necessary, replacing key executives and
overseeing succession planning.
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Duties of the board

e) Aligning key executive and board remuneration
with the longer term interests of the company and
its shareholders.
f) Overseeing a formal risk management process,
including holding an overall risk assessment at
least annually;
g) Monitoring and managing potential conflicts of
interest of management, board members,
shareholders, external advisors and other service
providers, including misuse of corporate assets
and related party transactions.
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Duties of the board

h) Monitoring the effectiveness of the companys
governance practices and making changes as
needed to align the companys governance
system with current best practices.
i) Carrying out an objective process of selfevaluation, consistently seeking to enhance
board behavior and effectiveness.
j) Overseeing the process of disclosure and
communications,
and being available for dialogue with shareholders.
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Composition and structure of the board

Skills and experience
Time commitment
Independence independent judgment without

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external influence. Independent directors are

directors who apart from receiving directors
remuneration do not have any other material
pecuniary relationship or transactions with the
company, its promoters, its managements or its
subsidiaries, which in the judgment of the board
may affect their independence or judgment.
Further all pecuniary relationship or transactions
of the NEDs should be disclosed in the annual
report.

Composition and structure of the board

Not all NEDs are independent. Among the factors

which can impact the independence of nonexecutive directors are the following:
a) Former employment with the company, unless
there is an appropriate period of years between the
end of the executive role and joining the board;
b) Personal, business or financial relationships
between the directors and the company, its key
executives or large shareholders;
c) Length of tenure; and
d) The receipt of incentive pay which aligns the
directors interests with those of the executives
rather than the shareholders.
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Composition and structure of the

board
Composition of board committees

Every company should establish separate board

subcommittees for audit, remuneration and
governance or nomination matters. Companies
should also give due consideration to establish a
separate and independent risk committee. The remit,
composition, accountability and working procedures
of all board subcommittees should be well-defined
and disclosed.

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Composition and structure of the

board
The members of these key board committees

should be solely non-executive directors, and in

the case of the audit and remuneration
committees, solely independent directors. All
members of the nominations committee should be
independent from management and at least a
majority independent from dominant owners.
Role of INEDs
Board size

36

Board composition across the globe

Dutch / German - two tier

Japan two tier - loyal employees

Asia diversified Business groups / crossholding
India founding families
China communist party officials
US wide and diverse
EU fewer larger SHs cross holdings
British / Swiss single tier mgmt dominated

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Role of the chair

This role will be most effectively carried out where

the chair of the board is neither the CEO nor a

former CEO. Furthermore, the chair should be
independent on the date of appointment as chair
and should not participate in executive
remuneration plans. If the chair is not
independent, the company should adopt an
appropriate structure to mitigate the problems
arising from this. Where the chair is not
independent, the company should explain the
reasons why this leadership structure is
appropriate, and keep the structure under review.
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Role of the chair

The chair of the board should neither be the CEO

39

nor a former CEO and should be independent on

the date of appointment of chair and should not
compensate on executive compensation plans.
The chair should be available to shareholders for
dialogue on key matters of the companys
governance and where shareholders have
particular concerns. Such meetings may need to
be held with the deputy chair or lead independent
director either as an alternative or additionally. All
board members should make themselves
available for meetings with shareholders when an
appropriate request is made.

Lead independent director

Where the chair is the CEO or former CEO or is

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otherwise not independent on appointment,

companies should appoint an independent deputy
chair or lead independent director.
The lead independent director in such a context
will have a key role in agreeing the agenda for
board meetings and should have powers to call
board meetings and otherwise act as a
spokesperson for the independent element of the
board.
The lead independent is also a crucial conduit for
shareholders to raise issues of particular concern
and should make him- or her-self available to
shareholders appropriately in order to fulfill this

Board and director development and

evaluation
A board should have in place a formal process of

induction for each new director so that they are

well-informed about the company early in their
tenure and are able to perform effectively from as
early as possible.
Every board of directors should evaluate
rigorously its own performance, the performance
of its committees and the performance of
individual directors on a regular basis.
It should consider engaging an outside consultant
to assist in the process.
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Related party transactions and

conflicts
Related party transactions, SATYAM ($1.6bn as

against mere $225mn Fontanella-khan,2009)

conflicts of interest, FT is also the promoter of
MCX. Therefore, approving trade by IBMA in
MCX clearly indicates that FT was aware of
conflict of interest and has violated government
directives in this regard.

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Provisions Cited in Companies Act-2013 for Better Governance

New Provisions for Better Governance:
Requirement to constitute Remuneration and Nomination Committee and
Stakeholders.
Grievances Committee.
Granting of More powers to Audit Committee.
Specific clause pertaining to duties of directors.
Mode of appointment of Independent Directors and their tenure.
Code of Conduct for Independent Directors.
Rotation of Auditors and restriction on Auditor's for providing non-audit
services.
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Provisions Cited in Companies Act-2013 for Better Governance

New Provisions for Better Governance:
Disclosure and approval of Related parties Transactions.
Mandatory Auditing Standards.
Enabling Shareholders Associations / Group of Shareholders for taking
class action its & reimbursement of the expenses out of Investor
Education and Protection Fund.
Constitution of National Financial Reporting Authority, an independent
body to take action against the Auditors in case of professional
misconduct.
Requirement to spend on CSR activities.
44

Introduction of CSR Provisions in the Companies Bill 2013

Corporate Social Responsibility (CSR) Obligations have been introduced under Clause 135
of the Companies Bill, 2013. Under the new law, the CSR spending would be the
responsibility of companies. The Bill seeks to make CSR spending compulsory for

companies that meet certain criteria. The companies will have to mandatorily spend 2% of
their average net profit for CSR activities.

CSR Provisions in Companies Bill 2013: Every company having;

1.

Net worth of Rs. 500 Crore or more, or

2.

Turnover of Rs. 1000 Crore or more or

3.

Net profit of Rs. 5 Crore or more

During any financial year shall constitute a Corporate Social Responsibility Committee of the
Board consisting of 3 or more directors, out of which at least 1 director shall be an
independent director. The Board's report under clause 134(3) shall disclose the composition
45of the Corporate Social Responsibility Committee.

DEFINITIONS

Director

Board of Directors
Or
Board

Director appointed by board of

company Section 2(34)
Collective body of director s of the
company Section 2(10)

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46

ROLES OF DIRECTOR

Managing Director

Key Managerial Personnel

Whole time Director

Officer who is in Default

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47

MANAGING DIRECTOR

Managing Director
Director
By
Articles

Agreements

Shareholdings

+
Entrusted with substantial powers of management

+
Occupying position of managing director by whatever name
called

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48

MANAGER

Manager
Individual

Subject to
Direction of the BoD

Superintendence
Control

Having Management of whole of affairs of the Company

and
Includes director occupying position of manager by whatever name called

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49

KEY MANAGERIAL PERSONNEL

Key Managerial
Personnel
OR

CEO

Company
Secretary

CFO

Managing Director

Whole time Director

OR
Such other officer as may be
prescribed

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50

OFFICER IN DEFAULT

&

KMPs

Whole time Director

If no KMPs
Directors appointed as OD

Any Person Authorized by

Board or KMPs

Or

All Directors if no one appointed

Any Person who advices,

directs or instructs BoD

Every Director who is aware of

Contravention

For Issue or transfer of Shares

Share Transfer Agent

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Registrar to Issue

Merchant Banker

51

BOARD FRAMEWORK

The Act now prescribes the duties of the directors towards the company

Matters to be considered in the Board Meeting provided for in detail

Act provides for constitution of the Audit committee by every listed company
or other prescribed class of company

Constitution of Nomination and Remuneration Committee by listed and other

prescribed class of the companies
Stakeholders Relationship Committee for companies which consist of more
than 1000 shareholders, debenture-holders, deposit-holders and other
security holders at any time during a FY

52

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BOARD FRAMEWORK

Directors also covered under Officers in Default

Public and private companies cannot give any loan or provide any security or
guarantee in connection with a loan to a Director or any interested person,
except by way of passing a special resolution

Voting in electronic mode allowed

AGM- Listed Company AGM to be reported to ROC

53

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ADDITIONAL/ALTERNATE/NOMINEE DIRECTOR
NOTIFIED - (SECTION 161)
Person who fails to get appointed as a director in a general meeting cannot be
appointed as an Additional Director

Alternate director can only be appointed in case director leaves India for period
of not less than 3 months

Subject to Articles, Board can appoint director nominated by any institution in

pursuance of any law or agreement has been specified in the law specifically

Person to be appointed as Alternate Director shall be a person other than one

holding any alternate directorship for any other Director in the Company

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54

WOMAN DIRECTOR & SMALL

SHAREHOLDER DIRECTOR

At least 1 woman director

for

prescribed

class

or

classes of companies. 2nd

As per the Draft Rules: Listed Companies, and

every other public company with paid up capital
> Rs 100 cr; or turnover > Rs 300 cr.

proviso to Section 149(1)

Companies with prescribed

number
of
small
shareholders or paid up
capital
and
listed
Companies
to
have
1
director elected by Small
Shareholders
Section - 151

11/5/2014

As per Draft Rules: A listed company may suo

moto or upon the notice of > 500 or 1/10th of the
total number of small shareholders, whichever is
lower, elect a small shareholders director from
amongst the small shareholders)

55

DIRECTORS OTHER REQUIREMENTS

Amount to be deposited along with notice

of nomination of any person to the office
of director has been increased from Rs
500 to Rs 100000 or such higher amount
as may be prescribed

(As

per

Draft

Rules:

Rules

prescribe for manner of notice of

candidature

of

person

directorship)

RESIDENT DIRECTOR (Section 149 (2)

At least 1 director to be a person who has
stayed in India for atleast 182 days in the
previous calendar year

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56

for

NUMBER OF DIRECTORS (SECTION 149)

Board of Directors consisting individuals as directors.

Private Company : 2 Directors

Public Company : 3 Directors

One Person Company : 1 Director

Maximum number :15 (earlier 12)

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57

NUMBER OF DIRECTORSHIPS
(SECTION 165)

Director in maximum 20 companies

Directorship to include alternate directorship

Of these 20 companies, cannot be a Director in more than 10
public companies (including private companies which are
holding or subsidiary companies of public companies)
No. of members specify lesser number by passing special
resolution
Penalty for contravention: Minimum Rs. 5,000, and Maximum Rs.
25,000 for every day during which the default continues

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APPOINTMENT OF DIRECTOR
(SECTION 152)

Appointment of Managing Director, Whole Time Director or Manager to be

approved by special resolution in a General Meeting

Appointment to be Voted individually (Notified). Section 162

Consent for appointment to be filed by directors of private company to

the ROC

When appointment not in accordance with Schedule V, approval of

Central Government also required
Independent directors not to be included in the total number of directors
while calculating retiring directors i.e. 2/3rd of the total number of
directors

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59

APPOINTMENT OF DIRECTOR
(SECTION 152)

Until the director duly appointed as per provisions in the OPC,

individual being member shall be deemed to be its first director

Whole Time Director shall not be appointed for more than 5 years

Provisions to apply to Private Companies as well

In case of default the Company, such individual or director to be

punishable with imprisonment upto 6 months or with fine which shall
not be less than fifty thousand rupees but which may extend to five
hundred rupees for every day after the first during which the default
continues.
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DISQUALIFICATION & REMOVAL

NEW DISQUALIFICATIONS FOR DIRECTORS
SECTION 164
Conviction for offence dealing with Related Party Transaction anytime
during previous 5 years

Not having obtained Director Identification Number

Conviction for any offence and sentenced for an imprisonment extending

to 7 years or more

No power to central government to exempt the application of particular

disqualification on any person

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DISQUALIFICATION & REMOVAL

VACATION OF OFFICE OF DIRECTOR SECTION 167
When Director fails to attend all Board Meetings for consecutive period
of 12 months. This even when the leave of absence has been granted
When Director is disqualified by an order of court or Tribunal under any
Act not only the Companies Act.
When all directors have vacated the office:
the promoter shall appoint minimum number of members
Central Government may appoint Directors till company makes
appointment in General Meeting

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62

DISQUALIFICATION & REMOVAL

REMOVAL OF DIRECTOR- SECTION 169

Notice of Removal can be given only by the following:

In Company Having Share Capital:

Member(s) having not less than 1/10th of the total voting power or
holding shares the aggregate value of which is not less than Rs. 5 lakh
In any other Company:
Member(s) having not less than 1/10th of the total voting power
In case of default, company and every director or employee who is
responsible for such contravention to be punishable with fine which shall
not be less than Rs. 50,000 but which may extend to Rs. 5 Lac

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INDEPENDENT DIRECTOR

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64

INDEPENDENT DIRECTOR
SECTION 149
Every listed public Company to have at least one-third of the total number
of directors as Independent Directors (ID)

Central Government to prescribe the minimum number of Independent

Directors in case of any class or classes of public Companies.
(As per Draft Rules: Public Companies having paid up share capital of Rs.
100 cr or more, Public Companies having turnover of Rs. 300 cr or more,
Public Companies which have, in aggregate, outstanding loans or
borrowings or debentures or deposits, exceeding Rs. 200 cr)

Every existing company to have IDs within one year from commencement of
the Act or from the date of notification of the Rules (whichever is first)

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65

INDEPENDENT DIRECTOR
As per the draft rules :
BOARD TO ENSURE - Appropriate balance of skills, experience and knowledge in
one or more fields of finance, law, management, sales, marketing, administration,
research, corporate governance, technical operations other disciplines related to the
companys business AND DISCLOSE IN BOARD REPORT

DATA BANK with details of the person eligible and willing to be appointed as
independent director to be prepared by any body, institutions as authorized by CG
(as may be notified by CG).

Responsibility of due diligence for appointment of independent directors to be

on company.

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APPOINTMENT OF DIRECTOR
(SECTION 152) . NOTIFIED
Appointment of Managing Director, Whole Time Director or Manager to be
approved by special resolution in a General Meeting

Appointment to be Voted individually (Notified). Section 162

Consent for appointment to be filed by directors of private company to

the ROC

When appointment not in accordance with Schedule V, approval of

Central Government also required
Independent directors not to be included in the total number of directors
while calculating retiring directors i.e. 2/3rd of the total number of
directors

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67

APPOINTMENT OF DIRECTOR
(SECTION 152) . NOTIFIED
Until the director duly appointed as per provisions in the OPC,
individual being member shall be deemed to be its first director

Whole Time Director shall not be appointed for more than 5 years

Provisions to apply to Private Companies as well

In case of default the Company, such individual or director to be

punishable with imprisonment upto 6 months or with fine which shall
not be less than fifty thousand rupees but which may extend to five
hundred rupees for every day after the first during which the default
continues.
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68

SITTING FEE OF DIRECTORS

SECTION 197

A Director may receive remuneration by way of fee for attending meetings of the board or
committee

Independent director shall not be entitled to any stock options

Reimbursement of expenses for participation in the board and other meetings and profit related
commission as may be approved by the members
As per the draft rulesAmount of sitting fees payable to a director for attending meetings of the Board or committees to
be a maximum of Rs.1 lakh per meeting of the Board or committee
Board may decide different sitting fee payable to independent and non-independent directors
other than whole-time directors

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69

DECISION MAKING BY DIRECTORS

DECISION MAKING BY DIRECTORS

Board meeting
Resolution by circulation

Committee meetings

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70

BOARD MEETING SECTION 173

First Board Meeting to be held within 30 days of incorporation.

Notice of Board meeting shall be given to all directors, whether he is in India or

outside India by hand delivery or by post or by electronic means.
At least one independent director to be present at a Board Meeting called at shorter
notice to transact urgent business.
In case of absence of independent directors from board meeting, decisions taken at
meeting shall be circulated to all the directors and shall be final if ratified by a
independent director.
Director can participate in the Board meeting through video conferencing or other
audio visual mode as may be prescribed.

Draft Rules provide for the procedure and manner of such process

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71

BOARD MEETINGS: VIDEO CONFERENCING

The procedure of conduction of Board Meetings through Video Conferencing is

specifically provided for, with major responsibilities casted upon the Chairman of the
Company and Company Secretary.
An important provision provides that every director who attended the meeting,
whether personally or through video conferencing or other audio visual means,
shall confirm or give his comments, about the accuracy of recording of the
proceedings of that particular meeting in the draft minutes, within seven days after
receipt of the draft minutes failing which his approval shall be presumed.
This provision is very important as far as the liability of Directors is concerned.
MATTERS NOT TO BE DEALT IN MEETING THROUGH VIDEO
CONFERENCING
To approve the annual financial statements; and
To approve the boards report.

72

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BOARD MEETING SECTION 173

At least 4 Board meetings should be held each year, with a gap of not more
than 120 days between two Board meetings

No requirement of holding the Board Meeting in every quarter

For One Person Company (OPC), small company and dormant company at
least 1 Board meeting must be held in each half of a calendar year with a gap
of not less than 90 days between two Board Meetings
In case of only One Director in OPC, requirement of holding meeting will not
apply
Resolution by circulation shall be approved if consented by majority of
Directors instead of the requirement of consent of all Directors present in
India or by majority of them (as was provided in the Companies Act 1956)

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73

MATTERS TO BE DISCUSSED IN
BOARD MEETINGS ONLY (SECTION 179)
To issue securities whether in India or outside.

To grant loans or give guarantee or provide security in respect of loans;

To approve financial statement and the directors report;

To diversify the business of the company;

To approve amalgamation, merger or reconstruction;

To take over a company or acquire a controlling or substantial stake in
another company

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74

MATTERS TO BE DISCUSSED IN
BOARD MEETINGS ONLY (SECTION 179)

Other matters prescribed in Draft RulesTo make political contributions; to fill a casual vacancy in the Board; to enter into a joint
venture or technical or financial collaboration or any collaboration agreement;
To commence a new business; to shift the location of a plant or factory or the registered
office;
To appoint or remove key managerial personnel (KMP) and senior management
personnel one level below the KMP;
To appoint internal auditors;
To adopt common seal;

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75

MATTERS TO BE DISCUSSED IN
BOARD MEETINGS ONLY (SECTION 179)

To take note of the disclosure of directors interest and shareholding;

To sell investments held by the company (other than trade investments),
constituting five percent or more of the paid up share capital and free
reserves of the investee company;
To accept public deposits and related matters and;

To approve quarterly, half yearly and annual financial statements.

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76

MEETINGS AND RELATED MATER

General Meetings
Quorum
Proxies
Statement to be annexed with notice
Postal ballot
Resolution requiring special notice &
closure of register of members

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77

GENERAL MEETINGS

OPC not required to hold AGM

First AGM to be held within 9 months from

closure of first FY

AGM to be held on between business hours

i.e. 9 AM to 6 PM

Notice of GM may be sent through electronic mode

To be sent to all Directors
21 clear days notice to be given
In case of AGM Shorter notice can be given by consent
of 95% of members who are entitled to vote (like for
EGM)

Secretarial Standards mandated

Report of AGM, prepared in prescribed manner, to
be filed with RoC

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78

REPORT ON AGM
(Sec 121)

Every Listed Public Company to prepare a Report on each AGM.

Report to contain confirmation that the meeting was convened, held and
conducted as per the provisions of the Act / Rules.

The company to file the Report with the Registrar within 30 days of the conclusion
of the AGM.

Proceedings at the AGM of a listed co. thus becomes a public document.

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79

QUORUM FOR MEETINGS

Public Company
5 members personally
present
15 members personally
present

> 1000 members but

5000 members

30 members personally
present

> 5000 members

Private Company

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1000 members

2 members personally
present

80

PROXIES (SECTION 105)

Single person not to be proxy for more than 50 members

Proxy cannot vote by show of hands

Member of Private Limited company cannot appoint more than 1

proxy to attend on same occasion

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81

POSTAL BALLOT SECT 110

Postal ballot applicable to all companies

Postal Ballot resolutions to be prescribed by CG. (Other than

any businesses in which directors/auditors have the right to be
heard at the meeting and ordinary business)

To maintain minutes

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82

COMMITTEE OF BOARD

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83

NOMINATION AND RENUMERATION

COMMITTEE SECTION 178

1.

For listed and other prescribed class of Companies

As per Draft Rules: Nomination and Remuneration Committee of
the Board for every listed company, and every other public
company having paid up capital of >Rs. 100 cr; or which have
outstanding loans or borrowings or debentures or deposits > Rs
200 cr

Shall consist of 3 or more non-executive directors out of which not

less than one half shall be IDs
2.

3.

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The Committee to formulate the criteria for:

Determining qualifications, positive attributes and independence
of directors;
Recommending to the board a policy relating to remuneration for
directors, KMP and other employee.

84

SHAREHOLDERS GRIEVENCE
COMMITTEE SECTION 178

Committee shall
consider and
resolve the
grievances of
security holders of
the company

For companies >

1000 shareholders,
debenture-holders,
deposit-holders

and other security

holders at any time
during a FY

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Chairperson : nonexecutive director

and other members
as may be decided
by the Board

85

AUDIT COMMITTEE SECTION 177

Every listed company and such other class of company shall constitute an
Audit committee. (As per Draft Rules: Audit Committee of the Board for every
listed company , and every other public company having paid up capital of Rs.
100 cr or more; or which have, in aggregate, outstanding loans or borrowings
or debentures or deposits exceeding Rs. 200 cr)

Committee shall consist of minimum three director with the independent

director forming majority

Auditors and KMP have right to be heard in the meeting of committee

Boards report to disclose

1. Composition of the audit committee and
2. Any recommendation which has not been accepted by the board.

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86

AUDIT COMMITTEE.VIGIL
MECHANISM
Every listed company or such class of companies
shall establish a vigil mechanism
As per Draft Rules: Companies which accept
deposits from public and Companies which have
borrowed money from banks and public financial
institutions > Rs 50 Cr
Mechanism facilitates directors and employees to
report genuine concerns

Adequate safeguards against victimisation of

persons who use such mechanism

Whistle
Blower (a
non
mandatory
item as per
Cl 49) is
now made
mandatory,
in the name
of Vigil
Mechanism

Provision for direct access to the chairperson of

the audit committee

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87

DUTIES OF DIRECTORS

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88

DUTIES OF DIRECTORS
- SECTION 166
A director to act in accordance with the articles of the company

A director to act in good faith in order to promote the objects of the company for the benefit of
its members as a whole, and in the best interest of the company, its employees, the
shareholders, the community and for the protection of environment.

A director to exercise his duties with due and reasonable care, skill and diligence and shall
exercise independent judgment

A director not to get involved in a situation he may have direct or indirect interest that conflicts,
or possibly may conflict, with the interest of the company

A director not to achieve or attempt to achieve any undue gain or advantage either to himself or
to his relatives, partners, or associates

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89

RISK MANAGEMENT

Evaluation of internal financial controls and

risk management systems
The Boards report to contain a statement
indicating development and implementation of
risk management policy. Section 134 (3)(n)
Board Report to contain statement indicating the
manner in which formal annual evaluation has
been made by the Board of its own performance
and that of its committees and individual
directors. Section 134 (3)(p)
(As per Draft Rules: This is applicable for every
listed company and public company having paid
up share capital of Rs. 25cr or more, calculated
as at the end of the preceding FY)

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90

RISK MANAGEMENT

Section 138(1)
Prescribed class of companies shall conduct the internal
audit of the functions and activities of the company.
As per Draft Rules: Every listed company, every public
company with paid up share capital > Rs 10 cr, and having
any outstanding loans or borrowings from banks or public
financial institutions > Rs. 25 cr or which has accepted
deposits of > Rs. 25 cr at any point of time during the last
financial year)
IDs to satisfy themselves about integrity
of
information and robust risk management system

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financial

91

GOVERNANCE - ENHANCING
STAKEHOLDER PROTECTION

92

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GOVERNANCE
For protection of shareholders concept of Class Action suit inserted

Exit opportunity by the promoters to the dissenting shareholders in case

of variation in the terms of the contracts or in objects of prospectus

Provision for Internal audit of certain companies

Provision for rotation of auditors in listed and in certain other class of

companies
Onus on the Independent Director for the fulfillment of conditions
specified in the Act for the appointment casted on the board to specify in
the explanatory statement for such appointment

93

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GOVERNANCE
Onus to ensure compliance with all applicable laws has been casted on the
board of directors of a company

Along with the members and auditors, even directors are required to be sent
notices of the meeting

Set up of Investor Education and Protection Fund (IEPF) for transfer

amount lying in unpaid dividend accounts of the company to such fund

To minimize risks, certain restrictions has been implied on the board of

company which were earlier not mentioned in the Companies Act, 1956

Establishment of Serious Fraud Investigation Office (SFIO)

94

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RESTRICTIONS FOR DIRECTORS

RESTRICTION ON NON-CASH TRANSACTIONS

INVOLVING DIRECTORS APPLICABLE TO:
(NOTIFIED) SECTION 192
Any Director of a company; or
Director of the Holding Company; or
Any person connected with such person

Director cannot acquire assets for the consideration other than

cash from the company & vice versa without the approval in
general meeting

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95

RESTRICTIONS FOR DIRECTORS

PROHIBITION ON FORWARD DEALING IN SECURITIES

(NOTIFIED) SECTION 194
Director and KMP prohibited w.r.t. to following in a Company, or its
holding, subsidiary or associate Company
Right to call/make for delivery at specified price and within a specified
time, of a specified number of relevant shares /debentures.
Right to call for delivery or make delivery at a specified price and within
a specified time, of specified number of relevant shares/debentures.

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96

RESTRICTIONS FOR DIRECTORS

PROHIBITION ON INSIDER TRADING OF SECURITIES

(NOTIFIED) SECTION 195
Director and KMP shall not enter into act of insider trading concerning

Subscribing, buying, selling, dealing or agreeing to subscribe, buy,

sell or deal in any securities either as principal or agent if such person
is reasonably expected to have access to any non- public price
sensitive information in respect of securities of company

Counseling about, procuring or communicating directly or indirectly

any non- public price sensitive information to any person.

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97

LOAN TO DIRECTORSNOTIFIED SECTION 185

Public and private companies cannot give any loan or provide any security
or guarantee in connection with a loan to a Director or any interested
person, except to MD & WTD under prescribed circumstances
No exemption for giving loan, guarantee or providing security by holding
company to its subsidiary

However, Section 186 (Not yet notified)

empowers the company to give loan or
guarantee or provide security in
connection with the loan to any
person; hence Directors may also be
included here. It prescribes the limit,
sanctioning authority and fulfillment of
other prescribed terms thereof.

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98

RELATED PARTY
NOTIFIED SECTION 2(76)
i. Director or his relative;

ii. A key managerial personnel or his relative

iii. A firm, in which a director, manager or his relative is a partner;

iv. A private company in which a director or manager is member or

director ;
v. A public company in which a director or manager is a director
or holds along with his relatives more than 2%. Of its paid up
capital
vi. Any body corporate whose Board of Directors, managing
director or manager is accustomed to act in accordance with the
advice, directions or instructions of a director or manager;

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99

RELATED PARTY
NOTIFIED SECTION 2(76)
vii. Any person on whose advice, directions or instructions a
director or manager is accustomed to act:
Provided that nothing in sub-clauses (vi) and (vii) shall apply
to the advice, directions or instructions given in a
professional capacity
viii. Any company which isA holding, subsidiary r an associate company of such company
; or
A subsidiary of a holding company to which it is also a subsidiary;
ix. Such other persons as may be prescribed

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100

RELATED PARTY TRANSACTION

SECTION 188

Board approval required for following RPTs

Leasing of property

Disposing of, or
buying, property

Restriction on non cash

transaction

Appointment of any
agents

Appointment of
any related party
to any office or
place of profit

Contract for underwriting

the subscription of
securities or derivatives

Companies with the prescribed Capital require approval

by Special resolution for entering into defined related
party transactions

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101

FRAUD
Criminal liability for fraud for mis- statement in
prospectus- Liability of every person who authorizes
issue of misleading prospectus.
Promoter, director, expert or any other person who
has either assented to be director of the company or
who has authorized the issuance of prospectus, to be
held liable for fraud.
Definition Officer in
Managerial Personnel

Default

includes

Key

In case of frauds, all the professionals and experts

rendering independent services to the Company are
to be held liable.

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102

CLASS ACTION SUITS

(Sec 245)

Suit may be filed by members or depositors or any class of them;

If management or conduct of the affairs of the company are being conducted in a

manner prejudicial to the interest of the company, its members or depositors;

Suit may be filed by more than

100 in number or

more than a percentage of the total number of depositors, whichever is less,

or any depositor or depositors to whom the company owes such percentage of

total deposits of the company.

Damages or compensation or any other suitable action from or against

The company or its directors for any fraudulent, unlawful or wrongful act or
omission.

Any expert or advisor or consultant or any other person for any incorrect or
misleading statement or for any fraudulent, unlawful or wrongful act or conduct.

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103

TRANSPARENCY AND DISCLOSURE

Every listed company to prepare a report on AGM, such report to contain

confirmation that the meeting was convened, held and conducted as per the
provisions of the Act / Rules

Requirement for Enhanced Disclosures in prospectus has been incorporated in

the Act of 2013

Contracts with managing and whole time directors required to be kept at

registered office, which shall be open for inspection by members of the company

Disclosure of interest of all directors

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104

ANNUAL RETURN - Contents

(Sec 92)

Registered
office, principal
business
activities
securities and
shareholding
pattern

Members and
debenture
holders
Promoters,
directors, key
managerial
personnel

Indebtedness
Meetings of
members

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Meeting of
board and
committees
Remuneration
of directors
and KMP
Penalty or
punishment &
details of
compounding

shares held by
or on behalf of
the FIIs

other matters
as may be
prescribed.

105

BOARDS REPORT

Extract of
Annual Return
Directors
Responsibility
Statement
No. of BMs

Declaration by
Independent
Director

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Comments/expl
anation by BOD
on Secretarial
Audit Report

Particulars of
loan/guarantee/
investment

Particulars of
contracts/arran
gements with
related party
Material
changes from
end of FY to
date of Report
Statement on
risk
management
policy

Details of CSR
policy
developed and
implemented
BOD/Committe
es performance
evaluation

Other such
matters

106

BOARDS REPORT:
OTHER MATTERS PRESCRIBED
financial
summary/highligh
ts

Companies ceased
to be Subsidiaries,
JVs or associate
companies;

Details of
directors or KMP

Details relating
to Deposits

Details of significant
and material orders
passed by the
Regulators or courts

change in the
nature of
business,

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107

DIRECTORS RESPONSIBILITY
STATEMENT (Section 134)
DRS to also include the following:

In the case of listed companies, director had laid down internal

financial controls which have been complied with.
The directors had devised systems to ensure compliance with
provisions of applicable laws

PROMOTERS STAKE CHANGES

(Section 93)
Listed companies required to file Return with the Registrar
regarding change in the number of shares held by the
Promoters and top ten shareholders within 15 days of change.

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108

CORPORATE SOCIAL RESPONSIBILITY

PROMOTING WELFARE
INITIATIVES

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109

CORPORATE SOCIAL RESPONSIBILITY

(SECTION - 135)

Every Company having net worth of rupees five hundred crore

or more, or turnover of rupees one thousand crore or more or a
net profit of rupees five crore or more during any financial year
to constitute a Corporate Social Responsibility Committee of
the Board consisting of three or more directors, out of which at
least one director shall be an independent director

The Boards report to disclose the composition of the Corporate

Social Responsibility Committee

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110

CORPORATE SOCIAL RESPONSIBILITY

(SECTION - 135)

Committee shall formulate and recommend to the Board, a CSR Policy

indicating the activity or activities to be undertaken by the Company as
specified in Schedule VII of the Law

Recommend the amount of expenditure to be incurred on the activities above

and

Monitor the Corporate Social Responsibility Policy of the Company from time

to time

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111

CORPORATE SOCIAL RESPONSIBILITY

(SECTION 135)

Based on recommendations from CSR Committee, Board of such Company

to approve the CSR Policy for the Company and disclose contents of such
Policy in its report and on the Companys website

Every year in the Boards Report, details about the policy developed and
implemented by the Company on CSR initiatives taken during the year to be
included

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112

CORPORATE SOCIAL RESPONSIBILITY

(SECTION 135)
Board shall ensure that at least two per cent of average net profits of the Company
made during three immediately preceding financial years is spent in every financial
year on such policy

For spending the amount earmarked for CSR activities the Company shall give
preference to the local area and areas around it where it operates.

If a Company fails to provide or spend such amount, the Board to specify reasons
for not spending the amount in its report

Companies require to comply with CSR shall give additional Information by way of
notes to the Statement of Profit and Loss regarding aggregate expenditure incurred
on corporate social responsibility activities.

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113

Clause 49 on BoD
Independence 50% independent directors if

chairman is an executive director or 33% if the

chairman is a non-executive
Definition of independence no material pecuniary
relationship or transactions with the company, its
promoters, its management or its subsidiary, not
related to board or one level below board and no
prior relationship with the company for the last three
years
Nominee directors of financial institutions
considered independent
Board requirements & Limitations
Meet 4 times in a year (max. 3 months between
114

meetings)

Current status on corporate governance

Comparison of Board structure Indian top 50 Vs U.S. top 50 Key Findings
Parameter

India (Nifty Fifty companies)

US (top 50 out of NYSE 100 index)

Ownership pattern

48% of Indian companies have largest shareholder

holding over 50%

Largest shareholder holds less than 10%

in all cases

Board size

Largest

Board independence

board size 17. smallest 5

Largest

44%

of the top 50 companies have more than 12

directors

66%

58%

All

board size 18. smallest 10

of the top 50 companies have more

than 12 directors

of companies have a board majority of

independent directors

companies have a board majority of

independent directors

have less than 1/3rd of their directors

independent
12%

Executive directors in board

In 35 companies 50% of the directors or more are

executive directors

Boards of 49 companies out of 50 have

less than 25% executive directors

Chairman and CEO

60% have separate Chairman and CEO

Only 20% have separate Chairman and

CEO

Lead independent director

3 companies have lead independent directors

20 companies have lead independent

directors

Board committees

All

companies have audit committees 54% have

fully independent Audit Committees

All

companies have remuneration committees of

these 14 fully independent and 16 have majority
independent committees
33

companies have nomination committees 6 are

fully independent and 3 have majority independent
committees
9

companies have fully independent

audit remuneration and nomination
committees

115

Source: Crisil Report on Corporate Governance

Restoring Integrity and Trust

Boards must re-establish and enforce the standard that risks are to be
undertaken for the benefit of their constituents, not for the personal gain
of management.
George Vojta
Chairman of the Advisory Board of the Yale School of Management Millstein Center for Corporate
Governanance and Performance and Former Vice-Chairman, Bankers Trust Corp.

116

116

Six Critical Questions for

Directors!

117

Do I believe I have all the information?

Have I the necessary skills to make this decision?
Do I have any conflict in this matter?
Objectively, is this a rational business decision?
Can I explain this in a transparent manner?
Is it a responsible discharge of my duties?

117

15 Elements of good CG
Dispersed Ownership

Written board

Transparent

118

Ownership
One Share / one vote
Antitakeover defenses
Meeting notification
Board size
Outside directors
Independent directors

guidelines
Board committees
Disclosure
Accounting standards
Independent Audit
Broad disclosure
Timely disclosure

Sources: McKinsey on Finance