Role of the Board of Directors in Corporate Governance
The article 'Role of the Board of Directors' emphasizes the crucial role of the Board of Directors in a company and how they have the responsibility to maintain the excellent performance and integrity of the company.
The article 'Role of the Board of Directors' emphasizes the crucial role of the Board of Directors in a company and how they have the responsibility to maintain the excellent performance and integrity of the company. The article further discusses the composition of the Board of Directors; their independence and ethics are discussed, along with a few real-life cases.
Introduction
Section 166 of the Companies Act, 2013 basically deals with the role of directors. It mandates the directors to behave honestly, advance the business's goals, and act in the best interest of the company's members, shareholders, employees, and business. The directors must perform their duties with due and reasonable care, skill, and effort, which is highlighted in this section of the Companies Act. Further, the directors cannot abstain from conflicts of interest and refrain from pursuing or attempting to pursue unjust profit or benefit for themselves or those closest to them. The section stipulated that directors cannot delegate their office to any third party and secretly or personally attain profit from their position as directors without the company's approval.
Culture and Values
The long-term delivery of business and economic success has grown important for investors in creating a suitable corporate vision, ethics, and working culture within the company. It is essential to ensure sustainable, robust results in adverse conditions. A performance management and incentive system is crucial to encourage conduct that aligns with the company's strategic model and values. The Board had a duty to clarify this approach to the stakeholders and shareholders. The compensation committee answers to the board, and the shareholders, through an annual report, may be given this responsibility. The company's integrity is entirely generated when the decisions about the value generation, culture, and value system are taken as a responsibility by the board and executive management. Companies' established corporate governance culture needs to develop flexibility to adjust to shifting trends in the corporate world.
Role and Responsibilities
The role of the director consists of four pillars:
First, for planning strategies and structure of the company; it implies developing the system and strategies according to the sophistication of the company's governing. The effectiveness of the Board is significantly influenced by the quality of the structure and steps organised by the Board secretariat and chair, and these include:
Committees
- Evaluation Processes
- Strategy Processes
- Board Education Processes
- CEO and Key Manager Succession Processes
- Regulatory Processes
- Materiality Processes
- Performance Review Processes
The Board strategy is essential to the company in increasing effectiveness, involving co-creation, supervision, and support. The excellent process improves the three dimensions of the system, builds up strategic reflection, and strengthens communication between the management and the Board. The Board crucially evaluates and thrives on the involvement of the Board in self-assessment or external assessment. Successful succession planning aims for transparency, quality organisational socialization, and smooth transitions. A check on self-assessment helps organisations identify and evaluate their key processes.
Second, the Information Architecture of the Company, i.e., the sophisticated information architecture is essential for successful Boards, creating a balance between internal and external information, independent and dependent on executive management, and formal and informal sources. Information should be conveyed to the Board regarding the crucial activities and issues of the company. The Board generally consider information from the management, but it should also include external sources like social media and informal networks.
Formal Internal information includes Board briefings, CEO reports, risks and opportunity maps, and financial analyst views.
Regular Communication between management and the Board and Committee reports are important for efficient information architecture.
Informal Channels of Information, including meetings with employees and Board members, should be structured to allow creativity without disturbing the rights of the management. A well-planned information architecture is the secret to a successful board.
Third, the focus, dedication, diversity, and excellence of the members of the Board. High-quality members, like CEOs, academics, and government officials, must gain the required knowledge to perform their tasks as Board members. Effective Boards requires standard in their performance and have knowledge as individual directors, educate their members, and conduct evaluations along those standards. The diversity found in terms of industry, professional background, gender, personality, and opinion adds up to the quality of the Board. Poor diversity governance can cause communication problems and damage confidence among a broader range of directors. A capable Board will create procedures for effective management. The current composition matrix and a systematic supervision structure for the Board's composition are required, including periodic assessments of the necessary competencies.
Strong Boards must be committed to the organisation's goals and remain focused. Committees should formulate their vision statement and role description to add value to the company's operations and implement a two-to-three-year action plan. They should also be competent in dealing with actual problems and managing ambiguity in decision-making. Dedication to the organisation is also crucial because it incorporates the reasons for a director's decision to become one and extends beyond the designated meeting time.
Fourth, the Board culture significantly impacts governance dynamics, and several board pathologies, including routine, fragmented, disruptive, conflicted, consensual, and group-think tendencies, can shape it. These dynamics can undermine effectiveness and be used to set up a board for defeat. Open, rich, decisive, and flexible board cultures require psychological safety and a stable foundation. Effective governance requires the Board and top management to interact. Key components include encouraging equal participation and mutual respect and minimising rivalries and disagreements among the members. Two advantages of functional board dynamics are reduced overconfidence among directors and reduced conflicts of interest.
To create a thriving board culture and maintain the integrity of the one-voice principle, the role of the chairman is essential. Understanding dysfunctional decision-making and conversation styles is crucial for changing group dynamics. Board discussions about shared values and stewardship levels are becoming more regular, which helps stabilise dynamics and create a more positive atmosphere. The Evaluation of board energy, the contributions of various board members, well-run meetings, polite listening, and frequent sharing of values and long-term viewpoints can be preliminary functions to analyse board dynamics.
Important Case Laws
In Guinness plc v. Saunders, [1989] UKHL 2, a director is prohibited from trying to obtain an unfair advantage for himself, and if found guilty, he must compensate the firm for the equivalent gain. It was decided that the concerned director was prohibited from requesting set-off for any claims he might have against the company and would instead be required to turn over any benefits he may have received from the transaction.
In Bank of Poona Ltd. v. Narayandas, AIR 1961 Bom 252, a director of the company is required to work in good faith of the company to forward the goals that benefit all its members. The decision taken by the director shall be in good faith and necessitates all their efforts be focused on the advantage of the company.
In Official Liquidator v. P.A Tendolkar, 1973 AIR 1104, states while carrying out their duties as directors, directors must use due and reasonable care, skill and diligence. The director might be held responsible for neglecting their duties if carelessness leads to the commission of fraud, which might result in losses for the company.
Shareholder Engagement
The shareholders' evaluation of the board's utility they need access to relevant data, both financial and otherwise, to make an impartial and fair opinion on the company's current position and prospects. The directors are responsible for presenting information to shareholders about the risk management strategy developed by the company, solvency and liquidity, and long-term business sustainability.
The chairman is anticipated to provide an update on the role and performance of the board in the annual reports. He should ensure the board is informed of the opinions given by the shareholders. The majority of shareholders shall consult the chairperson on the crucial matters of strategy and governance, and non-executive directors should be allowed to participate in these discussions.
Risk Management
The Board analyses the kind and degree of risks the company faces when pursuing its strategic goals and the threats to its long-term sustainability. The Board is responsible for the operations that require support from the data system, an effective internal control system, and a risk management procedure.
The Board is also responsible for the negligence of risks company management and the internal systems face while conducting regular evaluations of their efficacy, and a report on the results of these evaluations is prepared in the annual report. The audit committee prepares this report for the shareholders, and through this annual report, duties may be assigned.
The dangers encountered during the performance of the strategic goal are taken into consideration by the company and are especially paid attention to support the systems in place. It ensures the company’s value and culture throughout the operation is protected. The annual report must certify the risk evaluated by the directors, what the company will face when achieving its business strategy, potential performance in the future, and threats to its survival. It is essential to highlight the business, operational, and financial risks and the company's risk management and mitigation plans.
Power of Board of Directors
According to the Companies Act, a minimum of three directors is required for public companies, two for private firms, and one for one-person companies,. A minimum of one female director may be required by the central government for a company. A third of the directors in publicly traded corporations must be independent directors. Listing Corporations are required by LODR to have an ideal mix of non-executive and executive directors, with a minimum of 50% non-executive directors. Diversity on the board encompasses age, gender, technical proficiency, country, and educational background.
The Companies Act allows the BoD to exercise the powers and perform as per the acts authorised by the company to them unless otherwise limited by memorandums, articles of incorporation, or the Companies Act. Resolutions adopted by the majority of members cannot override the authority of the directors. The only way to change the management authority is to amend the articles of organisation, which is limited to the directors. Collaboration exists between the Board of Directors and the shareholders, and among its functions are questions about unpaid debts, debenture issuance, investment opportunities, loan approval, financial statement approval, company diversification, and buyback authorisation.
Breach of Duty by the Directors
Legal actions are taken against the director found guilty of breaching the provisions of the Companies Act. In Rajeev Saumitra v. Neetu Singh, CS(OS) No.2528/2015, the court held that a majority shareholder in Paramount breached her directorial duties, violating the Companies Act, 2013. The plaintiff has the right to pursue a derivative action against the defendant. However, the court noted that a controlling shareholder has a duty of loyalty to the company and must act in good faith and honesty. Selling shares to a buyer likely to strip the company of assets is a breach of this duty.
Similarly, Terrascope Ventures Ltd. v. SEBI, Appeal No. 116 of 2021, is thought to be the SAT's decision creating a risky precedent resulting in the abuse of the ratification principle. Additionally, the issue with SEBI's ruling, which is determined to be post-facto shareholder approval absolving directors of accountability was illegal. The ratification principle is not recognised by Indian law's judiciary thus, the SAT should have upheld this verdict. It contends that rather than merely importing the common law idea without taking into account the uniqueities of Indian company law, the SAT ought to have placed higher priorities on fiduciary duties.
Conclusion
In today's rapidly evolving business landscape, it has become imperative for companies to adopt a proactive approach towards corporate governance, emphasizing the alignment of business strategies with ethical values and sustainable practices. The significance of a well-structured and efficient Board of Directors cannot be understated in ensuring the long-term success and integrity of an organization. Effective communication, diverse expertise, and a strong commitment to the company's goals are crucial elements in building a resilient corporate culture.
Moreover, as evidenced by various case laws, directors must uphold a high standard of fiduciary responsibility, ensuring that their actions consistently benefit the company and its stakeholders. Shareholder engagement plays a vital role in maintaining transparency and accountability, as shareholders rely on accurate and comprehensive information to make informed decisions. Risk management stands as a cornerstone in the pursuit of strategic goals, necessitating a vigilant assessment of potential threats and the development of robust mitigation plans. Adherence to legal guidelines and regulations remains a fundamental principle guiding the powers of the Board, with breach of duties by directors resulting in legal consequences.
To thrive in today's complex business environment, companies must foster a culture of integrity, accountability, and adaptability. By establishing a governance framework that prioritizes ethical conduct, transparency, and stakeholder engagement, organizations can build trust and sustain long-term value creation. Embracing these principles will not only reinforce the resilience of the company but also contribute to the overall well-being of the business ecosystem.
References
[1] The Companies Act, 2013, Available Here
[2] High-Performance Boards, Professor Didier Cossin, April 2020, ISBN: 978-1119615651.
[3] Role of the Board of Directors in Corporate Governance, Available Here
[4] Importance of Board of Directors in Corporate Governance: A Complete Guide, Available Here