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CHAPTER-I

INTRODUCTION
1.1 Director An Introduction

The

pnncipal

role

of

the

board

of

directors

as

representatives

of

the

shareholders, is to oversee the function of the organization and ensure that it continues to
perate in the best interests of all stakeholders. Given the complexity of today's rgamzations,
that is no simple or straightforward task. Today, board effectiveness is a key performance
dnver of the Indian companies.
With expectations of them continuing to increase, boards can take several actions lo govern
more effectively Indian boards must move away from being a rubber stamp to emg a
strategic asset for the company. They need to set the tone from top in promoting a transparent
culture that promotes effective dialogues among the directors, senior management,
and vanous function and nsk managers. Boards should look beyond the old boy network'
and select directors with individual areas of expertise, and invest on an ngoing basis on
their

formal

and

informal

education.

Independent directors

should significantly

contribute to the functioning of the board through requisite understanding of e company and
the business. Boards must take a hard look at its own performance valuation and enable
continuous feedback and communication cycle. Effective boards build capabilities within
themselves and their organizations that llow them to do both, protect existing assets
(compliance role), as well as, manage eats to future growth (strategy oversight role). This
section of the site includes a range f useful publications relating to improving the
effectiveness of the board. The liability regime of executive and non-executive directors in
companies nstitutes a necessary corollary to control issues within a company It is based on
the etermmation of specific duties, it establishes the limits of management behaviour and it
rovides stakeholders and thud parties dealing with the company with legislative
protection against management misconduct. In that respect, directors' liability is an
unportant and effective compliance and nsk-allocation mechanism.

The comparison and analysis regardmg the substantive law govemmg directors duties covers
a wide range of matenal and procedural aspects, notably (i) where and how directors' duties
are addressed m the law

regulatory approach; (ii) who owes the duties and to whom

addressees of duties, (iii) how the mterest of the company is defined; (iv) what represents
the matenal content of the directors' duties

duty of care, duty of loyalty; (v) the nature

of habihty, covenng m particular the extent to which an mdividual director is Iiable for
decisions taken by the board, (vi) further, it describes the type of habihty flowmg from
breaches of the duties, and limitations to the habihty
Day-to-day management of a company is delegated to the directors by its shareholders.
Directors are imtially appomted by the shareholders and can usually themselves appomt
additional directors up to any hrmt set by the articles of association.
The decisions of the directors are taken collectively by the board of directors. A director
cannot act as a director on his own unless only one director has been appomted. Decisions
are either taken by majority vote at board meetmgs or by the signmg by all the directors of a
written resolution.The director's role and his powers are pnmarily defined m the company's
articles and, if he is also an employee, in his service contract.
The mere fact of appomtment does not normally give a director any executive powers. Most
directors are, however, also employees of the company with specific powers delegated
to them. A managmg director usually has extensive powers to take day to-day decisions on
behalf of the company Other directors such as sales directors or finance directors will have
a more limited role.
Directors owe a duty to the company and, if msolvency threatens, to creditors. Certam key
duties of directors have been placed on a statutory footmg under the Compames Act 2006
(the "Act") These duties are owed to the company Directors are also subject to a number of
other statutory requirements and restnctions. These mclude a duty to keep proper books
and records and restrictions

on entenng into certain transactions with the company or

acceptmg loans from the company Breach of these duties and requirements can result m a

director bemg disqualified from actmg as a director and m many cases can lead to the
director mcumng personal habihty Insurance can be obtamed to cover some cases of personal
habihty

1.2 OBJECTIVES OF THE STUDY

The orgamsation and structure of boards, covenng the choice between one her and two her
structures, the roles of employee representatives and the appointment and dismissal process.
The substantive provisions on directors' duties. This is the main part of the analysts,
compnsing the issues of who owes the duties and to whom, which are the interests of
the company; and the content of the duty of care and the duty of loyalty Further, it describes
the type of habihty flowing from breaches of the duties, and hrmtations to the habihty

Questions of enforcement, i.e. who has the standing to sue and whether a
derivative action ts possible.

Duties in the vicuuty of insolvency, in particular to file for insolvency and the
prohibition to engage in wrongful tradmg. Further, whether there are other
changes to directors' duties in the vicinity of insolvency, and whether there is a
duty to recaprtahze or a mere duty to call a meeting.

Cross-border issues, notably the influence of the real seat or the incorporation
theones on the law applicable to directors' duties.

1.3 REVIEW OF LITERATURE

GENERAL RESOURCES

Brown, Jim. The Imperfect Board Member: Discovering the Seven Disciplines
of Governance Excellence.San Francisco, CA: Jossey-Bass Publishers, 2006. 204
p1 Brown uses a fictional story to outhne seven pnnciples
effective boards.

The

protagomst

discovers

but also cooperative

that

boards

that lead to more


must

be not

and focused, or "healthy"

only

experienced,

or "smart,"

Brown

emphasizes

the "healthy" aspects of successful boards. An afterword sums up the

model, gives more tips, and provides bibliographic citations.

Eadie, Douglas C. Extraordinary Board Leadership: The Seven Keys to High


Impact Governance. Gaithersburg, MD: Aspen Publishers, 2001. xxv, 243 p2
Explains the seven key pomts m building effective boards under the author's "high
impact governance model." Under the model, the board plays a proactive role m
addmg value to the organization,

creates a productive partnership with the chief

executive officer, capitahzes on the assets of the board members, carefully designs its
rmsston and structure, accepts the leadership role m producmg mnovation, takes part
m budget
connections.

and operational

planmng, and develops

external

relations

using its

Exceptional Board

Practices:

The

Source

in Action. Washington, DC:

BoardSource, 2007. xiii, 139 p3 A compilation of Board Member articles and


BoardSource

white papers

that help explam how boards

can apply pnnciples

highhghted in the compamon volume "The Source: Twelve Pnnciples of Governance


That Power Exceptional Boards." The pnnciples cover several areas, such as butldmg
partnerships, focusmg on your mission,

strategic plannmg, promotmg

transparency,

developmg resources, measunng outcomes, and other topics.

'San Francisco, CA. Jossey-Bass Publishers, 2006. 204 p


2

Gaithersburg, MD Aspen Publishers, 2001 xxv, 243 p

Exceptional Board Practices The Source m Action. Washmgton, DC BoardSource, 2007 xiii,

Non profit Board Answer Book: A Practical Guide for Board Members and Chief
Executives.

2nd ed. Washington, DC: BoardSource, 2007. xviii, 328 p4 Written in

question-and-answer format, provides basic information about the functions,


structure, tasks, meetings, and selection of nonprofit boards. Indexed.

O'Connell, Brian. The Board Member's Book: Making a Difference in Voluntary


Organizations. 3rd ed. New York, NY: Foundation Center, 2003. viii, 248 p5
Written for board members, this guide to the essential functions of voluntary boards
covers such areas as: the role of nonprofit boards; finding, developing, and
recognizing good board members; the role of the board president; working with
committees; the board's role in fundraising; accountability; and evaluation. With
bibliographic references and index.

Panel on the Nonprofit Sector. Principles for Good Governance and Ethical
Practice: A Guide for Charities and Foundations. Washington, DC: Independent
Sector, 2007. 28 p6 The guide outlines 33 practices designed to support board
members and staff leaders of every charitable organization as they work to improve
their own operations. The Panel on the Nonprofit Sector incorporated a careful review

of more than 50 self-regulation systems, counsel from a diverse committee of experts,


and significant feedback from the field in the development of the principles outlined
in the publication.

Collaboration I Partnerships

DeVita, M. Christine. "Constructing a Partnership." Board Member vol. 15


(September-October 2006) p7 8-11. The president of the Wallace Foundation
describes the complementary roles of board members and staff, and discusses the
elements of successful partnerships. She explains that organizations need to bridge
information gaps, build board cohesion, and develop appropriate meeting structures.

Washington, DC: BoardSource, 2007. xviii, 328 p

O'Connell, Brian. The Board Member's Book: Making a Difference in Voluntary Organizations.

3rd ed. New York, NY: Foundation Center, 2003. viii, 248 p
6

A Guide for Charities and Foundations. Washington, DC: Independent Sector, 2007. 28 p
DeVita, M. Christine. "Constructing a Partnership."

Howe, Fisher. The Nonprofit Leadership Team: Building the Board-Executive


Director

Partnership. San Francisco, CA: Jossey-Bass Publishers, 2004. xx,

198 p8 This book homes m on the special relationship between the board and
the executive director, emphasizing the nature of mutual expectations of this
shared leadership role. The responsibilities of the team are outlmed, and mclude
mission and strategic plannmg, financial governance, fundraismg, and marketmg.
The particular challenges are also explored. Special resources, such as a sample
board-staff contract, board self-assessment, code of onlme practices, are appended.
With bibliographical references and an mdex.

Williams, Sherill K. and Kathleen A. McGinnis. Getting the Best from your
Board: An Executive's Guide to a Successful Partnership. Washington, DC:
BoardSource, 2007. x, 63 p9 Focuses on the special relationship between the CEO
and the board. With bibliographical references.

LEADERSHIP

Carver, John. Boards that Make a Difference: A New Design for Leadership in
Nonprofit and Public Organizations. 3rd ed. San Francisco, CA: Jossey-Bass
Publishers, 2006. xxviii, 418 p10 Onents board members to their role as strategic
leaders, emphasizing the necessary aspects of governance: makmg policy, articulatmg
the organization's mtssion, and sustammg its vision. Helps boards to concentrate their
energies on the overall purpose of their organization and guides them m workmg with
managers to accomplish that purpose. Presents procedures for evaluatmg the
executive staff, organizmg committees, delegating authority to management, makmg
decisions as a board, and estabhshmg bylaws for the board's self-governance. With
bibliographical references and mdex.

8
9

CA. Jossey-Bass Publishers, 2004. xx, 198 p


An Executive's Guide to a Successful Partnership. Washington, DC: BoardSource, 2007 x, 63 p

10

San Francisco, CA. Jossey-Bass Publishers, 2006. xxviii, 418 p

Chait, Richard P., William P. Ryan, and Barbara E. Taylor. Governance as


Leadership:

Reframing

the Work

of Nonprofit

Boards.

Hoboken,

NJ:

John Wiley & Sons, 2005. xxvi, 198 p11 Notmg that board oversight is now frontpage subject matter due to recent controversies, the authors have developed the
principles in this book as part of a larger Governance Futures Project. They present

an analytical treatment of three modes of governance and follow with practical


initiatives that boards can adopt. The book is directed pnmanly to trustees and
leaders who are concerned with strategic change for their organizations. With
bibliographical references and an mdex.

Cialdini, Robert B. "A Board Member's Guide to Influence." Associations Now


vol. 3 (January 2007) p. 57-60i2 A behavioral scientist explams how to apply the
pnnciples of persuasion when you are new to the board, when you are the new board
chair, and when your board is at an impasse. The article is part of a special volunteer
leadership issue of "Associations Now"

Wertheimer, Mindy R. The Board Chair Handbook. 2nd ed. Washington, DC:
BoardSource, 2008. viii, 91 i3p. This guide explams the many factors that should be
considered when a person is deciding to accept the responsibility of bemg a board
chair Also delves mto the role of the chair, partnership with the chief executive, and
the importance of excellent communication. Includes numerous sample documents
such as a fundraismg letter to board members, job descriptions for board members,
and a letter requestmg terrmnation. With bibliographical references.

Werther, William B., Jr. and Evan M. Berman. "Leading the Transformation of
Boards." Nonprofit World vol. 22 (March-April 2004) pi4 9, 11-3. The authors
ahgn the life cycle stages of a nonprofit organization (start-up, growth, and matunty)
with changmg expectations and roles for board members.

11,

NJ John Wiley & Sons, 2005 xxvi, 198 p

12Cialdini,
13

Robert B. "A Board Member's Guide to Influence." Associations Now vol. 3 (January 2007) p.

Wertheimer, Mindy R. The Board Chair Handbook. 2nd ed. Washington, DC: BoardSource, 2008 viii,
Werther, William B., Jr and Evan M. Berman."Leading the Transformation of Boards." Nonprofit World

14

vol. 22 (March-April 2004)

LEGAL RESPONSIBILITIES

Bobowick, Marla J. "Rules for Board Members Who Provide Professional


Services." Exempt, (September-October

2007): pi5 13-5. The article describes

potential conflict of mterest issues that may anse when board members have techmcal
expertise, such as lawyers, financial advisors, or funders.

Bryson, Ellen and Andrew Schulz. Top 10 Ways Corporate Foundations Get into
Trouble. Washington, DC: Council on Foundations, 2004i6 21 p. Bnef guidelmes
for board members of corporate foundations, specifically related to certam aspects of
law self-deahng, disqualified persons, conflict of mterest, quid pro quo grants,
employee pledges and matchmg gifts, tickets to fundraismg events, shanng resources,
grants to mdrviduals, scholarships, grants to organizations that are not chanties, and
mternational grantmakmg.

Tesdahl, D. Benson. The Nonprofit Board's Guide to Bylaws: Creating a


Framework for Effective Governance. Washington, DC: BoardSource, 2003i7 ix,
32 p. Provides a basic definition of bylaws and an overview of the issues and areas
bylaws should address. Gives examples to illustrate the relationship between state law
and bylaws, and also explams how to amend the bylaws. Includes a sample conflicts
of-mterest pohcy and a bibhography.

15Bobowick,

Marla J "Rules for Board Members Who Provide Professional Services." Exempt, (September-

October 2007): p.
16

Bryson, Ellen and Andrew Schulz. Top 10 Ways Corporate Foundations Get into Trouble. Washmgton,

DC: Council on Foundations, 2004


17

Tesdahl, D. Benson. The Nonprofit Board's Guide to Bylaws: Creatmg a Framework for Effective

Governance. Washmgton, DC: BoardSource, 2003

1.4 RESEARCH METHODOLOGY

There are two types of research


quantitative

research.

methodology

based

Qualitative

methodologies
research

on small data to provide

that can be used, t.e. qualitative and


is

an

insight

unstructured

and

and understanding.

exploratory
Quantitative

research is aimed to measure data and used some form of statistical analysis.

Several studiesmentioned
case studies)

that the use of qualitative research (e.g. mterview, focus groups or

is surtable m E-commerce

research.

This is because

the strength

of the

qualitative approach based man ability to investigate human subject motivation and actions
withm a research study, thus the nchness and detail data can be exposed m commerce
study

In order to carry this study effectively, several qualitative methodologies

have been taken

mto consideration. These methodologies are explamed m the next section below

Interviews

Aakerexplamed
because

that interview

is the most frequent used method to collect pnmary data

1t ts easier to get accurate

information

and immediate

feedback.

Without

the

interviews, it would have been difficult to obtam important facts for this study This ts one
of the ways to get clanfication and explanation from the parties mvolved.

Personal interviews with lengthy structured interviews were earned out on this study The
interviews were conducted by e-mail, thus the result of the findmgs can be obtamed m
accurate and complete outlme. Another reason for usmg e-mail is that it is easy and faster
to gather and analyse the findmgs. However, lack of respond m answenng questions
occur

as researcher

cannot

probe

interviewees

directly

may

for further explanation when

faced with inconsistencies or illogical arguments.

The interviews procedure, firstly, involved choosmg consultants, analysts, and wnter from
Malaysia and Indonesia (Appendix 18). These respondents were selected because they (1)
were familiar

and expert with IT and E-commerce;

(2) usually had previous busmess

expenence; and (3) are contmuously domg research studies regardmg

SMEs and E-commerce, hence the respondents would be able to provide new mformanon for
this study
The interview questions were formulated to gather information from the impact of the
Tomatsky and Fleischer's model on SMEs' adoption and implementation of commerce.
The questions covered subjects such as level of E-commerce technology sophistication and
use in SMEs, major reasons, factors or people responsible for the adoption and extent of
implementation of E-commerce m SMEs, major reasons or factors facihtatmg or preventmg
from usmg E-commerce, etc. A pilot study was used with two IT consultmg firms in both
countnes. On this base, the questions were revised to improve the understandability of the
questions.

Case Study

Although respondents certainly can contribute significantly to this study, they are not
directly involved m the implementation and adoption of E-commerce. They merely give
opimons and ideas based on their observation and research studies.
Also any important issues which are covered directly in interviews were missed. The
questions of interview can show questions such as 'benefits of E-commerce' or 'what factors
are important', but fell short of addressing 'Its reasons and understand the problems'
To explore these questions, an interactive approach such as a case study was needed.

The ments of case study have also been discussed by other researchers. Benbasat et al.
pointed out that such approach is suitable for investigating "certain types of problems
those m which research and theory are at their early, formative stages, and sticky, practicebased problems, where the experiences of the actors are important and the context of action
are cntical." The way to conduct a case study, as Poon suggested, is "to do it the same way
as multiple expenments

to produce a 'replication logic', rather than the 'sampling logic'

obtained from survey data"

1.5 LIMITATIONS OF THE STUDY

Directors are mostly professional men hired by the company to managed its affairs and they
are not the servant of the company rather they are officers of the company there is no
exhaustive definitions of the duties of the Directors but based on the analysis of the
provisions of company act 1956 some general duities of directors are as follows - To file
return of allotments. a company must file with the registrar withm a penod of 30 days, a
return of the allotment, statmg the specified particulars and its failure leads to default with a
fine.

Not to issue irredeemable preference shares or shares, redeemable after 20 years.

To disclose mterest to the Board,

A company can enter mto contract with the director who rs mterested but such
director cannot vote m his mterest;

Duty to attend Board Meetmg;

To convene Statutory/annual/ General meetmg and also extra ordmary meetmg;

To prepare and place before the AGM, along with the balance sheet and profit and
loss account, a report on the company affairs mcludmg the report of the Board of
Directors,

To authenticate and approve annual Financial statements,

To appomt first auditor of the company;

To appomt cost auditor of the company;

To make declarations of the Solvency m the case of a members' voluntanly


wmdmgup;

1.6 CHAPTER SCHEME

>

ChapterI deals with the meamng introduction to the topic

>

Chanter Uyresents the detailed study of the director ma CODJPalJY

>

ChapterIII gives the theoretical framework of the study

>

ChapterIV shows the habihties of director

>

ChapterV Fmdmgs, Suggestions and Conclusion

CHAPTER II

DIRECTOR - INTRODUCTION

2.1 DIRECTOR

"A company is a legal entity and does not have any physical existence. It can act only
through natural persons to run its affairs. The person, acting on its behalf, is called Director.
A Director is any person, occupying the position of Director, by whatever name called. They
are professional men, hired by the company to direct its affairs. But, they are not the servants
of the company. They are rather the officers of the company.
The definition of Director given in this clause is an inclusive definition. It includes any
person who occupies the position of a director is known as Director whether or not
designated as Director. It is not the name by which a person is called but the position he
occupies and the functions and duties which he discharges that determine whether in fact he
is a Director or not. So long as a person is duly, appointed by the company to control the

company's business and, authorized by the Articles to contract in the company's name and,
on its behalf, he functions as a Director.

The Articles of a company may, therefore, designate its Directors as governors, members
of the governing council or, the board of management, or give them any other title, but so
far as the law is concerned, they are simple Directors.

Directors are responsible for managing the company's day-to-day business and may, or
may not, be shareholders. Directors owe duties to the company, to its shareholders,
and to others dealing with the company.

2.2 DIRECTOR OF A COMPANY - MEANING

A board of directors is a body of elected


the activities

of a company or organization.

or appointed
Other

names

members

who jointly oversee

include board

of governors,

board of managers, board of regents, board of trustees, and board of visitors. It is often
simply referred to as "the board".

A board's activities are determined by the powers, duties, and responsibilities delegated to
it or conferred on it by an authority outside itself. These matters are typically detailed in the
organization's bylaws. The bylaws commonly also specify the number of members of the
board, how they are to be chosen, and when they are to meet.

In an organization with voting members, the board acts on behalf of, and is subordinate
to, the organization's full group, which usually chooses the members of the board. In a stock
corporation,
management
membership,

the board is elected by the shareholders and is the highest authority in the
of the

corporation.

In a non-stock

corporation with

no general voting

the board is the supreme governing body of the institution; its members are

sometimes chosen by the board itself.

Typical duties of boards of directors include:

Governing the organization by establishing broad policies and objectives;

Selecting,

appointing,

supporting

and reviewing

the performance

of the chief

executive;

Ensuring the availability of adequate financial resources;

Approving annual budgets;

Accounting to the stakeholders for the organization's performance;

Setting the salaries and compensation of company management;

The legal responsibilities


organization,
publicly

of boards and board members

and with the jurisdiction

trading

Directors

within which it operates.

stock, these responsibilities

complex than for those of other types.

vary with the nature of the

are typically

much

For companies
more

rigorous

with
and

The directors of an organization are the persons who are members of its board. Several
specific terms categorize directors by the presence or absence of their other relationships
to the organization.

A. Inside Director

B. Outside Director

A. INSIDE DIRECTOR

An

inside

director

is

director

who

ts

also

an

employee,

officer, major

shareholder, or someone similarly connected to the organization. Inside directors represent


the interests of the entity's stakeholders, and often have special knowledge of its inner
workings, its financial or market position, and so on.
Typical inside directors are:

A Chief Executive Officer (CEO) who may also be Chairman of the Board

Other executives of the organization, such as its Chief Financial Officer (CFO)

or Executive Vice President

Large shareholders (who may or may not also be employees or officers)

Representatives of other stakeholders such as labor unions, major lenders, or members of the
community in which the organization is located
An inside director who is employed as a manager or executive of the organization

is

sometimes referred to as an executive director (not to be confused with the title


executive director sometimes used for the CEO position). Executive directors often have a

specified area of responsibility in the organization, such as finance, marketing, human


resources, or production.
B. OUTSIDE DIRECTOR

An outside director is a member of the board who is not otherwise employed by or engaged
with the organization, and does not represent any of its stakeholders. A typical example is a
director who is president of a firm in a different industry.
Outside

directors

bring outside

experience

watchful

eye on the inside directors

directors

are often useful

shareholders

in handling

and perspective

to the board. They keep a

and on the way the organization


disputes

between

inside

and the board. They are thought to be advantageous

is run. Outside

directors,

or between

because they can be

objective and present little risk of conflict of interest. On the other hand, they might lack
familiarity with the specific issues connected to the organization's governance.

PROCESS

The process for running a board, sometimes called the board process, includes the selection
of board members, the setting of clear board objectives, the dissemination of documents or
board package to the board members, the collaborative creation of an agenda for the
meeting, the creation and follow-up of assigned action items, and the assessment of the
board process through standardized assessments of board members, owners, and CEOs. The
science of this process has been slow to develop due to the secretive nature of the way most
companies run their boards, however some standardization is beginning to develop. Some
who are pushing for this standardization in the USA are the National Association of
Corporate Directors, McKinsey Consulting and The Board Group.
NON-CORPORATE BOARDS

The role and responsibilities of a board of directors vary depending on the nature and type of
business entity and the laws applying to the entity. For example, the nature of the business
entity may be one that is traded on a public market (public company), not traded on a public

market (a private, limited or closely held company), owned by family members (a family
business), or exempt from income taxes (a non-profit, not for profit, or tax-exempt entity).
There are numerous types of business entities available throughout the world such as a
corporation, limited liability company, cooperative, business trust, partnership, private
limited company, and public limited company.
Much of what has been written about boards of directors relates to boards of directors of
business entities actively traded on public markets. More recently, however, material is
becoming available for boards of private and closely held businesses including family
businesses.
A board-only organization is one whose board is self-appointed, rather than being
accountable to a base of members through elections; or in which the powers of the
membership are extremely limited.
CORPORATIONS

In a publicly held company, directors are elected to represent and are legally obligated
to

represent

the

interests

of

the

owners

of

the

company the

shareholders/stockholders. In this capacity they establish policies and make decisions on


issues such as whether there is dividend and how much it is, stock options distributed to
employees, and the hiring/firing and compensation of upper management.
GOVERNANCE

Theoretically, the control of a company is divided between two bodies: the board of
directors, and the shareholders in general meeting. In practice, the amount of power
exercised by the board varies with the type of company. In small private companies, the
directors and the shareholders are normally the same people, and thus there is no real
division of power. In large public companies, the board tends to exercise more of a
supervisory role, and individual responsibility and management tends to be delegated
downward to individual professional executives (such as a finance director or a marketing
director) who deal with particular areas of the company's affairs.[14]

Another feature of boards of directors in large public companies is that the board tends to
have more de facto power. Many shareholders grant proxies to the directors to vote their
shares at general meetings and accept all recommendations of the board rather than try to
get involved in management, since each shareholder's power, as well as interest and
information is so small. Larger institutional investors also grant the board proxies. The
large number of shareholders also makes it hard for them to organize. However, there
have been moves recently to try to increase shareholder activism among both institutional
investors and individuals with small shareholdings.A contrasting view is that in large public
companies it is upper management and not boards that wield practical power, because boards
delegate nearly all of their power to the top executive employees, adopting their
recommendations almost without fail. As a practical matter, executives even
the directors, with

choose

shareholders normally following management recommendations

and voting for them.

2.3 DUTIES OF A DIRECTOR

DUTIES

The

directors

exercise

control

and

management

over

the

organization,

but

organizations are run for the benefit of the shareholders, the law imposes strict duties on
directOrs in relation to the exercise of their duties. The duties imposed on directors are
fiduciary duties, similar to those that the law imposes on those in similar positions of trust,
agents and trustees.
The duties apply to each director separately, while the powers apply to the board jointly.
Also, the duties are owed to the company itself, and not to any other entity. This does not
mean that directors can never stand in a fiduciary relationship to the individual shareholders;
they may well have such a duty in certain circumstances.
"PROPERPURPOSE"

Directors must exercise their powers for a proper purpose. While in many instances
an improper purpose is readily evident, such as a director looking to feather his or her own
nest or divert an investment opportunity to a relative, such breaches usually involve a breach
of the director's duty to act in good faith. Greater difficulties arise where the director, while
acting in good faith, is serving a purpose that is not regarded by the law as proper.
"UNFETTERED DISCRETION"

Directors cannot, without the consent of the company, fetter their discretion in relation to
the exercise of their powers, and cannot bind themselves to vote in a particular way at future
board meetings. This is so even if there is no improper motive or purpose, and no personal
advantage to the director.
This does not mean, however, that the board cannot agree to the company entering into a
contract which binds the company to a certain course, even if certain actions in that course
will require further board approval. The company remains bound, but the directors retain the
discretion to vote against taking the future actions (although that may involve a breach by
the company of the contract that the board previously approved).

"CONFLICT OF DUTY AND INTEREST"

As fiduciaries, the directors may not put themselves in a position where their interests
and duties conflict with the duties that they owe to the company. The law takes tJJe p)ew
tJJ;;tgooo f;;)tJJ mvst 220! 022)ybe 0022e, bot mvst be mt1miest}yseen to be done,

and zealously

patrols the conduct of directors in this regard; and will not allow directors to escape
liability by asserting that his decision was in fact well founded. Traditionally, the law has
divided conflicts of duty and interest into three sub-categories.
TRANSACTIONS WITH THE COMPANY

By definition, where a director enters into a transaction with a company, there is a conflict
between the director's interestand his duty to the company (to ensure that the company gets
as much as it can out of the transaction). This rule is so strictly enforced that, even where
the conflict of interest or conflict of duty is purely hypothetical, the directors can be
forced to disgorge all personal gains arising from it.

"A corporate body can only act by agents, and it is, of course, the duty of those agents so to
act as best to promote the interests of the corporation whose affairs they are conducting.
Such agents have duties to discharge of a fiduciary nature towards their principal. And it is a
rule of universal application that no one, having such duties to discharge, shall be allowed
to enter into engagements in which he has, or can have, a personal interest conflicting or
which possibly may conflict, with the interests of those whom he is bound to protect... So
strictly is this principle adhered to that no question is allowed to be raised as to the fairness
or unfairness of the contract entered into ... "
However, in many jurisdictions the members of the company are permitted to ratify
transactions which would otherwise fall foul of this principle. It is also largely accepted
in most jurisdictions that this principle can be overridden in the company's constitution.
In many countries, there is also a statutory duty to declare interests in relation to any
transactions, and the director can be fined for failing to make disclosure.[38]. Directors must
not, without the informed consent of the company, use for their own profit the company's
assets, opportunities,
prohibition

or information.

This prohibition

is much less flexible

than the

against the transactions with the company, and attempts to circumvent it using

provisions in the articles have met with limited success.

COMPETING WITH THE COMPANY

Directors cannot compete directly with the company without a conflict of interest arising.
Similarly, they should not act as directors of competing companies, as their duties to each
company would then conflict with each other.
COMMON LAW DUTIES OF CARE AND SKILL

"A director need not exhibit in the performance of his duties a greater degree of skill than
may reasonably be expected from a person of his knowledge and experience."
However, this decision was based firmly in the older notionsthat prevailed at the time as to
the mode of corporate decision making, and effective control residing in the shareholders; if
they elected and put up with an incompetent decision maker, they should not have recourse
to complain.
"Such care as an ordinary man might be expected to take on his own behalf."

This was a dual subjective and objective test, and one deliberately pitched at a higher
level.
More recently, it has been suggested that both the tests of skill and diligence should be
assessed objectively and subjectively; in the United Kingdom, the statutory provisions
relating to directors' duties in the new Companies Act 2006 have been codified on this basis.

REMEDIES FOR BREACH OF DUTY

In most jurisdictions, the law provides for a variety of remedies in the event of a breach by
the directors of their duties:

Injunction or declaration

Damages or compensation

Restoration of the company's property

Rescission of the relevant contract

Account of profits

Summary dismissal

THE FUTURE

Historically, directors' duties have been owed almost exclusively to the company and its
members, and the board was expected to exercise its powers for the financial benefit of
the company. However, more recently there have been attempts to "soften" the position, and
provide for more scope for directors to act as good corporate citizens. For example, in the
United

Kingdom,

the Companies

Act

2006 requires

directors

of companies "to

promote the success of the company for the benefit of its members as a whole" and sets
out the following six factors regarding a director's duty to promote success:

The likely consequences of any decision in the long term

The interests of the company's employees

The need to foster the company's business relationships with suppliers,

customers and others

The impact of the company's

operations

on the community

and the

environment

The desirability

of the company maintaining

a reputation

for high

standards of business conduct, and

The need to act fairly as between: members of a company

MAJOR DUTIES OF BOARD OF DIRECTORS

1. Provide continuity for the organization by setting up a corporation or legal existence, and
to represent the organization's point of view through interpretation of its products and
services, and advocacy for them.

2. Select and appoint a chief executive to whom responsibility for the administration of the
organization is delegated, including:
To review and evaluate his/her performance regularly on the basis of a specific job
description, including executive relations with the board, leadership in the organization, in
product/service/program

planning

and implementation,

and in management

of the

organization and its personnelTo offer administrative guidance and determine whether to
retain or dismiss the executive
3. Govern the organization by broad policies and objectives, formulated and agreed upon by
the chief executive and employees, including to assign priorities and ensure the
organization's capacity to carry out products/services/programs by continually reviewing its
work
4. Acquire sufficient resources for the organization's operations and to finance the
products/services/programs adequate!y
5. Account to the stockholders (in the case of a for-profit) or public (in the case of a
nonprofit) for the products and services of the organization and expenditures of its funds,
including:
o To provide for fiscal accountability, approve the budget, and formulate
policies related to contracts from public or private resources
o To accept responsibility for all conditions and policies attached to
new, innovative, or experimental products/services/programs.

MAJOR RESPONSIBILITIES OF BOARD OF DIRECTORS

1. Determine the Organization's Mission and Purpose

2. Select the Executive

3. Support the Executive and Review His or Her Performance

4. Ensure Effective Organizational Planning

5. Ensure Adequate Resources

6. Manage Resources Effectively

7. Determine and Monitor the Organization's Products, Services and Programs

8. Enhance the Organization's Public Image

9. Serve as a Court of Appeal

10. Assess Its Own Performance

POWERS AND AUTHORITY

The board

The directors act as a board but the board may (if the articles permit, as they generally will)
delegate powers to a committee of board members or to an individual director.

Non-executive directors

Non-executive directors are, as their name implies, directors to whom no executive


powers have been granted by the board. Although they have no executive powers, they can
vote at board meetings and have the same duties as executive directors.

Executive directors

Executive directors are generally employees with specific powers delegated to them
either by a resolution of the board or under their service contracts.

Managing directors

Most companies have a managing director (sometimes called a chief executive). He is


granted more extensive executive powers by the company's articles or by board
resolution.

Exceeding authority

Directors should not act outside the scope of the powers delegated to them. Major contracts
and commitments should always be authorised by board resolution. A director who exceeds
his powers (for example, by signing a contract not authorised by the board) may incur
personal liability for the performance of the company's obligations under that contract.
However, he will be relieved from such personal liability if the board subsequently ratifies
his actions.If a director is liable for conduct amounting to negligence, breach of duty,
default or breach of trust, the power to ratify such conduct lies with the shareholders. The
shareholder resolution ratifying such conduct must be passed without counting the votes of
the director concerned (if a shareholder) or those of any connected person.

General duties

A director's general duties are owed to the company and not to individual shareholders. The
Act codifies certain key duties, as follows:
Duty to act within powers

A director must act in accordance with the company's constitution (which includes its articles
of association and shareholder resolutions) and must only exercise his powers for their
proper purpose.
Duty to promote the success of the company
A director must act in the way he considers, in good faith, would be most likely to promote
the success of the company for the benefit of its members as a whole. In doing so, the
director must have regard to:

the likely consequences of a decision in the long term;

the interests of the company's employees

the need to foster the company's business relationships with suppliers,

customers and others;

the impact of the company's

operations

on the community

and the

environment;

the desirability

of the company maintaining

a reputation

for high

standards of business conduct; and

the need to act fairly as between the members of the company.

Directors must exercise reasonable care, skill and diligence in having regard to this nonexhaustive list of factors, which may sometimes conflict with each other, but the overriding
consideration is the success of the company. This duty is subject to the existing
common law duty to creditors which will override almost all other interests if the company is,
or is at risk of becoming insolvent.

Appointment of a Director
The Articles of Incorporation must provide for the addition of Directors.

The person appointed as director must be an individual eligible to be a director as per


the relevant clauses in the Articles of Association and must give his consent to be .a
director in written form which the company must register with itself.

The newly appointed director must apply for a Director Identification Number by
filing E-Form DIN 1 with the Ministry of Corporate Affairs, Government oflndia.

Removal of a Director

A company may, by ordinary resolution, remove a director before the expiry of his period of
office provided he does not hold office for life (irrespective of the age of retirement for
directors mentioned in the Articles of Association)
Special notice of any resolution to remove a director must be sent by the company to the
director concerned

The director (whether or not he is a member of the company) shall be entitled to be


heard on the resolution at the meeting.

If on receipt of the notice, the director responds to the notice in writing, the company

must (unless the representations are received by it too late for it to do so):

Intimate all its members of the existence of the written representation to the resolution
for removal of the director in a notice

Send a copy of the representations to every member of the company

If the abovementioned process is not possible due to delay or default of the company,

the director has the right to have the written representation read out at the meeting of
members.

A vacancy created by the removal of a director may be filled by the appointment of


another director to replace him by the members at the meeting at which he is

removed, provided special notice of the intended appointment has been given to all
members

A director so appointed shall hold office until the date up to which his predecessor
would have held office unless removed beforehand.

If the vacancy is not filled it may be filled as a casual vacancy as per 262 of the Companies
Act, 1956.

The director remove must be compensated as per his due.

APPOINTMENT OF MANAGING DIRECTORS

A Managing Director must be an individual and can be appointed for a maximum term of
five (5) years at a time.A person who is already a Managing Director I Manager of a public
company or a private company subsidiary of a public company can become the Managing
Director I Manager of only one other company (whether private or public) with the prior
unanimous

approval of the Board of such company. However, no such restrictions

are

applicable to a Manager or a Managing Director of "pure" private compames.


In case of a public company or a private company that is a subsidiary of a public company, if
the appointment is not in accordance with Parts I and II of Schedule XIII of the Companies
Act, such appointment must be approved by the Central Government.

REMUNERATION

In the case of a public company or a private company which is a subsidiary of a public


company, the remuneration
may be determined

payable is subject to the provisions of the Companies Act, and

either by the Articles or, if the Articles

resolution of the company in general meeting.

QUALIFICATIONS FOR DIRECTORS

so provide, by a special

The Companies Act does not prescribe any qualifications

for Directors of any company.

An Indian company may, therefore, in its Articles, stipulate qualifications for Directors. The
Companies Act does, however, limit the specified share qualification

of Directors which

can be prescribed by a public company or a private company that is a subsidiary of a public


company, to be five thousand rupees (Rs. 5,000/-).

CONDITIONS

FOR

APPOINTMENT

OF

MANAGING

WHOLE-TIME

DIRECTORS; DISQUALIFICATIONS
The Companies Act, under Schedule XIII, also prescribes certain other conditions that are to
be fulfilled for the appointment

of a Managing or a Whole-time

Director or Manager in

case of a public company and a private company that is a subsidiary of a public company.

Accordingly,

no person

shall be eligible for appointment

as a Manager,

a Managing

Director or a Whole-time Director if he or she fails to satisfy the following conditions:

1. He or she should not have been sentenced to imprisonment

for any period, or a fine

imposed under any of the following statutes, namely:


i. The Indian Stamp Act, 1899;

ii. The Central Excise Act, 1944;

iii. The Industries (Development and Regulation) Act, 1951;

iv. The Prevention of Food Adulteration Act, 1954;

v. The Essential Commodities Act, 1955;

vi. The Companies Act, 1956;

vii. The Securities Contracts (Regulation) Act, 1956;

viii. The Wealth Tax Act, 1957; ix. The Income Tax Act, 1961; x. The
Customs Act 1962;
xi. The Monopolies and Restrictive Trade Practices Act, 1969 - now
the
Competition Act, 2002;

xii. The Foreign Exchange Regulation Act,

1973 -

now the Foreign

Exchange Management Act, 1999;

xiii. The Sick Industrial Companies (Special Provisions Act) 1985;


xiv. The Securities Exchange Board of India Act, 1992; and I or xv. The
Foreign Trade (Development and Regulation) Act, 1973.

2. He or she should not have been detained

or convicted

for any period under the

Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974.

3. He or she should have completed twenty-five (25) years of age, but be less that the age of
seventy (70) years. However, this age limit is not applicable if the appointment is approved
by a special resolution

passed by the company in general meeting or the approval of

the Central Government is obtained.


4. He or she should be a managerial

person

in one or more comparues and draws

remuneration from one or more companies subject to the ceiling specified in Section III of
Part II of Schedule XIII.
5. He or she should be a resident of India. 'Resident' includes a person who has been staying
in India for a continuous period of not less than twelve (12) months immediately preceding
the date of his or her appointment as a managerial person and who has come to stay in India
for taking up employment in India or for carrying on business or vocation in India. However,
this condition is not applicable for companies in the Special Economic Zone, as notified by
Department of Commerce from time to time.

RESTRICTIONS ON NUMBER OF DIRECTORSHIPS

The Companies Act prevents a Director from being a Director, at the same time, in more
than fifteen (15) companies. For the purposes of establishing this maximum number of
companies in which a person can be a Director, the following companies are excluded:
1. A "pure" private company;

2. An association not carrying on its business for profit, or one that prohibits
the payment of any dividends; and
3. A company in which he or she is only appointed as an Alternate Director.
Failure of the Director to comply with these regulations will result in a
fine of fifty thousand rupees (Rs. 50,000/-) for every company that he or she
is a Director of, after the first fifteen (15) so determined.

DIRECTOR IDENTIFICATION

NUMBERS

All Directors of Indian companies are required to obtain Director Identification Numbers
("DINs"). Primarily, DINs are required to authenticate any electronic filings made by the
company.
Additional disqualifications in case of a public company

In addition to the requirements mentioned above, the Companies Act further provides
that a person shall not be eligible to be appointed as a Director of any other public
company for a period of five (5) years from the date on which the public company, in which
he or she is a Director, has failed to file annual accounts and annual returns or has failed to
repay its deposits or interest thereon or redeem its debentures on the due date or pay
dividends declared.

Additional disqualification in case of a "pure" private company

A private company that is not a subsidiary of a public company can, by its Articles,
provides that a person shall be disqualified for appointment as a Director on any grounds in
addition to those specified in the Companies Act.

Additional disqualifications for Managing and Whole-time Directos


An individual cannot be appointed as a Managing or a Whole-time Director of a company
if he or she:

1. is an undischarged insolvent, or has at any time been adjudged an insolvent;

2. suspends, or has at any time suspended, payment to his or her creditors, or makes, or
has at any time made, a composition with them; or
3. is, or has at any time been, convicted by a court of an offence involving moral
turpitude.
These requirements are not only more stringent than the requirements for an ordinary
Director, but are also of an absolute and mandatory nature.

RETIREMENT OF DIRECTOS

In any public company or a private company that is a subsidiary of a public company,


one-third of the Directors must retire at every AGM. However, every retiring Director is
eligible for re-appointment.

If the vacancy is not filled and the meeting has not expressly

resolved to fill such vacancy, he or she shall be deemed to have been re appointed until
the next election meeting, unless he or she is not otherwise disqualified or is unwilling to so
act as a Director or no resolution for such appointment has been put to the meeting and lost.

REMOVAL OF DIRECTORS

A Director can be removed by an ordinary resolution of the general meeting after a special
notice has been given, before the expiry of his term of office. However,
applicable

to Directors

appointed

by proportional

representation

this is not

or the Directors

appointed by the Central Government.

VACATION OF OFFICE

The office of a Director of a public company, or of a private company which is a ubsidiary


of a public company, becomes vacant ifhe or she:

1. Becomes subject to any of the three (3) disqualifications

mentioned above (with regard to

disqualifications for a Managing or a Whole-time Director) during his or her term of office;
2. Fails to obtain within any time period as may be specified in the Articles (two months in
case of a public company),

or at any time thereafter

ceases to hold, the necessary share

qualification if any as prescribed by the Articles;


3. Absents himself or herself from three (3) consecutive meetings of the Board, or from all
meetings of the Board for a continuous period of three (3) months, whichever is longer,
without obtaining leave of absence from the Board;
4. Whether by himself or herself, or by any person on his or her account or any firm in
which he or she is a partner or company in which he or she is a Director, accepts a loan or
guarantee or security for a loan from the company in contravention

of the requirements

governing loans etc to Directors;


5. Acts in contravention of the requirements regarding disclosure of interests;

6. Is removed from office under the Companies Act; or

7. Having been appointed


employment

as Director by virtue of his or her holding an office or other

in the company (for instance, that of Managing Director),

hold such office or other employment.

he or she fails to

Also, in such public companies

and private companies

that are subsidiaries

of public

companies, if a Director or his or her relative holds an office of profit without the consent of
the company, and with such Director's knowledge, such Director shall be deemed to have
vacated his or her office.
In addition to these reasons for the Director's

office becoming

vacant, a "pure" private

company may prescribe other such reasons in its Articles.

If a person continues to act as a Director, despite knowing that his or her office has

become vacant, he shall be punishable with a fine up to five thousand rupees (Rs. 5,000/-) for
every day that he or she continues to function and act as such.
RESIGNATION

The Companies Act is silent with respect to resignation of Directors. However, in a majority
of cases, the Articles provide for Directors to resign. Even in cases where the Articles
silent, there is no absolute bar on Director's

resigning,

are

which becomes effective upon

submission of such resignation letter and the filing of the necessary form for such resignation
with the Registrar of Companies (whether or not the Board formally accepts the same, unless
the Articles provide otherwise). The filing of such resignation related form with Registrar
of Companies is an obligation to be discharged by the company in question.

The only exception to the above rule is in the case of Managing, Whole-time and Executive
Directors who are employees of the company, and where the terms of their respective
service contracts will ordinarily refer to resignations, notice periods and I or compensation
in lieu thereof.

2.4 ROLES AND RESPONSIBILITIES

OF NONPROFIT

BOARDS

STARTING OFF RIGHT

Start your new board members off on the right foot with an orientation program that
introduces them to the basic roles and responsibilities of serving as a nonprofit board
member. Don't forget to include those special issues that pertain specifically to your
nonprofit's mission, plus information on: governance policies (so that all board members are
reminded about their legal and fiduciary duties); accountability practices (such as the need to

disclose conflicts of interest); and the responsibility to review and approve the executive
director's performance and compensation.
When board members are recruited, consider using a board member agreement to ensure
that everyone's on the same page. And for your nonprofit's officers (President, Secretary,
Treasurer, etc.) - make sure they understand what is expected for the specific roles they
will be playing as officers of the nonprofit.

12 WAYS TO LIVEN UP YOUR BOARD MEETINGS AND YOUR BOARD


Here are 12 great ways to rethink your approach and create meetings that bring out your
board's best.

1) Focus the agenda on results.


Look for ways to structure real discussions among board members that will elicit
commitment and leadership. Decide what is needed most out of this meeting, set your agenda
accordingly and tell your board members at the beginning of the session why they are
present and what you need out of them:"By the end of this meeting, we need to
accomplish x, y, and z." That will get their attention.

2) Be creative with the agenda.


Look for ways to tweak the meeting plan to evoke your board members' passion for your
cause. Avoid a dry recital of figures, and instead humanize your discussions by giving the
board insight to what the agency is really accomplishing out in the world. For a more radical
approach, occasionally throw out the agenda altogether!
Let the board create its own order of business by consensus at the beginning of the meeting.
That way everyone is immediately
accomplished in the meeting.

paying more attention to the work that needs to get

They are not just meeting for routine reporting and discussing;

action needs to be taken on real issues now.

3) Focus on problems, challenges, or broad issues.


Discussions of this nature will activate your board members' various backgrounds and skills
sets, not to mention their interest.

It will allow you to draw upon a deeper reservoir of

their talent and energy, and will give them more interesting work.

4) Look at trends within routine reports.


Identify larger, big-picture issues that are reflected within routine reports. For example,
along with the financial report, consider a discussion of long-run implications of certain
revenue or cost trends.

5) Plan big.
Bring big-picture strategic planning issues into regular board meetings.

For example,

you could take the standard strategic planning issues focusing on organizational strengths,
weaknesses, opportunities and threats (SWOT analysis).
Divide the four subjects over four board meetings and at each meeting, take your
board through a discussion or update of one of these issues.
6) Look at your board meetings as cheerleading sessions.
Get ready to fire up your board members and put them into action. For these meetings,
switch your view to seeing the board as the team that is out on the field, with the role of
the staff being there to encourage and congratulate them: How would you stage such a
session? Identify who would need to speak in order to rev up the energy of your board.

7) Use consent agendas.


A list of items can be mailed out in advance and approved in one vote. Any member can
ask that a consent agenda item be moved back into the regular agenda for discussion. Try

handling committee reports in this manner by providing written reports in the place of
lengthy oral reports.
8) Interview the Executive Director.

Occasionally consider allowing time for the board members to interview the executive
director about what is on his/her mind.

9) Always choose one interestingitem and set it up for a discussion.


If you are nervous about turning your board loose and are not sure where the discussion

might go, then let a couple of trusted board members know in advance about the planned
discussion.Tell them your perspective and what you need from the board's conversation on
this issue.

10) Select a theme for each meeting.


This allows ample time for in-depth analysis of that topic.For particularly important
issues, the theme can be repeated over the course of several meetings until the issue has
been adequately addressed."

11) Create"mission moments" in every boardmeeting.


Give your trustees a personal experience of your mission in

action.

Use a

testimonial or a story about someone touched by your organization. This could be the
most powerful subject of the entire meeting.

12) Breakinto groups.


Instead of reporting to board members about an upcoming challenge, present the issue as a
question and ask them to discuss it in small groups. Then the board chair can facilitate the
full group discussion afterwards.

Having small groups enables everyone to speak,

encouraging shy people, those who typically avoid speaking to the full board, to
participate.
The Multiple Roles of Nonprofit Boards: A Resource List

An engaged and effective board of directors is key to a nonprofit organization's success.


This resource list celebrates the philanthropy of board members and honors their service in
the multiple roles they play in their organizations-as leaders, planners, stewards,
fundraisers, and partners. It includes citations to selected works from the Foundation
Center's bibliographic database, Catalog of Nonprofit Literature. For a complete list of
citations on board-related topics, search Catalog of Nonprofit Literature using Board
members or Nonprofit organizations-administration
Fundraising-administration,

Nonprofit

organizations-finance, and Strategic planning.

General Resources

Collaboration I Partnerships

Fiduciary Responsibilities

Fundraising

Leadership

Legal Responsibilities

Strategic Planning

Surveys and Reports

Links to Internet Resources

and other suggested subject headings:

organizations-collaboration,

Nonprofit

CHAPTER - III
ROLE OF DIRECTOR AS MAJOR PLAYER
3.1 ROLE OF A DIRECTOR

The Companies Act, 2013 ("Act") is enacted to gradually replace the old Act of 1956,
with the objective to bring more accountability and good corporate governance. The
Ministry of Corporate Affairs has notified ninety-eight sections of the Act which have
come into effect from September 12, 2013 and repealed the corresponding sections of the
1956 Act. The Act appears to place a higher degree of responsibility on the Board members
for good corporate compliance. A clear understanding of these obligations and
responsibilities will be critical for current and prospective Board members. In the Act, the
sections related to role, duties and removal of directors are yet to be implemented but it will
happen soon and, therefore, merits attention. In the context of the Board of a
company, the legislators have focused on the role of independent directors and have codified
the duties of directors, which were missing in the old Act.
This newsletter describes selective changes introduced by the Act regarding different
directors and their significance.

1. BOARD FORMATION

The .1956 Act prescribes minimum 2 directors for private and 3 directors for a public
company. This criterion is retained in the Act, but the maximum directors on the Board have
been raised from 12 to 15 and the Act has also dispensed with the approval from Central
Government for raising the number of directors above the prescribed limit. The

Act

requires the Board to devise mechanisms to ensure compliance with the applicable
laws which should be effective and adequate. The Board may consist of several
categories of directors including whole-time directors, managing directors, independent
directors, nominee directors 1 and women directors.

Under the Act, there is a mandatory requirement that one-third of the Board should
consist of independent directors for listed companies and public companies with a paid-up
capital of INR 1,000 millionor debt of INR 2,000 million Independent directors are expected
to be completely unrelated to the company or its
this, the

Act

has

prescribed

shareholders.

certain disqualifications

In

order

to

implement

for appointment as an independent

director which aim to ensure that a potential appointee or his relative4 is not an employee or
involved

in any relationship

disqualification

or transaction

with the company.

is that the director has a pecuniary

relationship

The most

important

or is a part of any

organization with which the company does business at the time of his appointment.

The Act mandates that not only him, but an independent director's relative should also not
be an employee

or be involved

in any relationship

or transaction

with the company.

These detailed criterions for eligibility of independent director were missing in the old Act
and appear to have been introduced to bring objectivity to the functioning of the Board.
Independent

directors

will not be able to hold

remuneration

to payment of sitting fees and reimbursement

that they have no financial relationship

shares and the Act even restricts their


for expenses, so as to ensure

with the company and can carry on their duties

without any partiality. Independent directors may be selected from a data bank notified by
the Central Government and after proper background
independence.

check by the company to verify their

Every listed company and unlisted companies with paid-up capital of INR 1,000 million will
now be required to appoint one woman director within one year and three years of
notification of Section 149(1), respectively. This requirement is introduced to facilitate the
presence of women in the Board room. India is already making progress in gender issues
and this is a welcome

step which should help to put diverse views on the boards of

companies.

The section also stipulates that at least one director of the company should stay in India for
182 days or more in the previous calendar year. This will ensure that the Board shall continue
to monitor

directly the management

of the company

on a regular

basis

and shall be

responsible

for acts and deeds of the company. Their continued presence will not delay

statutory action steps and will be a step forward towards meeting the timely corporate
compliance

requirements.

This requirement

was missing

in the old Act and foreign

companies starting business in India typically appoint foreign directors as the directors of
the Indian subsidiary. With the implementation of this prerequisite, foreign companies doing
business in India will now have to appoint at least one resident director or Indian national to
act as director to comply with this qualification.

INDEPENDENT DIRECTORS

The role

of independent

directors is

chalked down in detail in the

"Code for

independent directors" appended to it, which contains clear guidelines regarding


professional conduct, roles and responsibilities of independent directors. Independent
directors are bound by this Code to play a role in the appointments, determination of
remuneration and removal of non-independent directors and other managerial employees.
Though the 1956 Act and Clause 49 of the listing agreement have the provision of an
independent director for every listed company, they have not elaborated on the roles and
duties of these directors as the Act does. Such enumeration now require an independent
director to ensure that he does not abuse his position and devotes his time and attention to
assist the company in implementing best corporate governance practices.

The legislators have also set certain generic duties for the independent directors to bring a
perspective on matters related to strategy, performance and risk management and balance
the conflicting interest of the stakeholders. The duties under the Code are exhaustive and
needs the director to maintain confidentiality and attend the general meetings of the
company. The independent directors have to hold at least one meeting every year,7 without
the attendance of non-independent directors and with the members of management to
review their respective performance, and determine whether the non independent directors
are meeting the specified targets and reporting compliance. They also have to ensure that
the financials are reflected accurately, controls system and risk management are in place,
seek clarifications in case of ambiguity and take and follow the advice of experts at the
company's expense.
Independent directors are also expected by the Code to act as a moderator to resolve
disputes, act in

the interest

of the

company and with

no partiality towards

management or shareholders. In audit committee, the role of independent directors is


expanded under the Act and they have to now examine the financials and approve the
related party transactions compared to only a review function in both cases under the old
Act. The independent directors have also been given the duty to determine the appointment,
removal and remuneration of executive directors, key managerial personnel and
management.

senior

However, the exact process will be clear once the rules are finalized.

OTHER DIRECTORS

The non-independent directors are under an obligation to make disclosure for buying,
selling or disposing of any property, leasing of any property, appointment of an agent and
appointment in place of profit in the company or in associate/subsidiary.8 In view of the
fiduciary position held by directors, explicit provisions prescribing directors duties have been
added to the new Act. These include keeping away from situations in which they have
conflicting interest with that of the company, duty to make good in monetary terms any
undue gain/advantage on the part of the directors etc., similar to what was there in the old
Act.

There are also certain general duties, such as acting in good faith for the benefit of the
company and to ensure that the company is filing its financials, annual return and payment
of debentures in time. These amendments, though not substantial, have tried to shift the
onus on the director for the loss/liability suffered by the company due to their lack of
discipline by increasing the penalty and clearly codifying the role and duties.
The Act has focused on corporate compliance and a director will not be re appointed
if the company has failed to file its annual returns for three continuous years. Reappointment in such cases, in that company or any other company, can happen only after
five years from the date of the failure to file accounts. However, if the company chooses
to re-appoint a director even after its failure to file the accounts shall be penalized.
Additionally, the practice of directors absenting themselves from meetings and sending
proxy has been placed under check. Any director who was absent from the board meetings
for the previous twelve months, whether he sought leave or not, will have to vacate his
office. If the director continues to function as a director even after he knows that he is
disqualified to hold the office shall be imprisoned for up to one year or punishable
with fine.
The Act prohibits directors from buying, selling, leasing or disposing of any property,
appointment of an agent and appointment in place of profit in the company or
associate/subsidiary and, in all such cases, they are mandated to make a disclosure for these
transactions. In case of non-disclosure by a director, he will indemnify the company against
any loss incurred by it. The Act has codified and set high standards for a director's duty and
liability towards the company.

The general penalty prescribed

for all the contravention

above is fine of INR 100,000 to INR 500,000

The role of the board changes as the company grows and the management team becomes
more diverse, with a wide range of experts who can contribute to strategy in different
ways.

A company passes through several stages in its life cycle. In the first stage 'Start up'

strategy is developed and implemented by the founder and a close team. At this stage it is
not often clear who is doing what. The team will switch from their shareholder role, to their

executive role and then their board role quickly whenever the need anses. Usually,
whichever role the founder plays most can be said to be the place in the organisation
where the strategy is developed.

As the company enters the second stage 'Growth' more people join and the roles start to be
defined with greater clarity. Skilled or qualified staff start to offer their inputs to strategy
and the board needs to be explicit about the sharing of the roles to ensure that efforts are
coordinated so that people feel engaged. Failure to separate and define roles will lead to
dissent and disorder. Failure to share opportunities to contribute will disenfranchise
management. The board need to be especially vigilant that the founder does not continue
to dominate the process although they may still design the process so that the founder has
the final say.
Eventually growth will start to slow down. This is a stage at which a company needs to
focus efforts on internal effectiveness, systems and processes. It is also a stage during
which the strategy development, in good companies, is formally delegated to the now strong
and experienced management team and the board moves into the more traditional role
of understanding, testing and endorsing strategy. Much will depend on the decision of the
founder to remain as an executive (usually CEO) or to move to a non executive role (often
Chairman but not necessarily always so).
If the transition is an abrupt or unexpected slowing of growth and represents a deviation

from agreed plans it is not uncommon for a board, at this stage, to step in and remove the
CEO or undertake other actions to restructure management so as to gain better visibility of
the path ahead. If the transition is smooth, expected and well prepared for then the role of

the board is not as overt.


At this point the company needs to decide if there are additional activities they wish to
undertake that would effectively renew the organisation and continue the growth or if they
are happy to transition to a less volatile mature operating state as the company becomes
'Sustainable'

or

'Mature'.

This is the

stage of life

of most

large blue

chip

organisations. They undertake enough new developments to maintain their sustainability but
never so many that they revert to the risky volatile growth phase. Outcomes are expected to

conform to plans and the board spends as much or more time monitoring strategy
implementation as they do developing strategy.
Finally the organisation will enter the stages of decline and, if this is not arrested by
reinvention, decay. A good board will be alert for indications that decline is imminent and
will ensure that management are challenged with the task of developing new
strategies for growth to counteract the tendency of the organisation to drift into these stages.
Companies in decline are often paradoxically very profitable as investment in new lines of
business and growth projects slows whilst tried and tested products are efficiently produced
and sold.
Many family businesses enjoy this phase as a means of creating funding for the retirement
of the founder. Other businesses work hard to transcend the tendency towards decline and
decay. The board may, again, need to become more active (and possibly even forceful) to
ensure that management focus their efforts appropriately depending on the owners' desires
for the organisation.
Some not-for-profit businesses look forward to these stages as they will indicate that the
mission has been achieved; when a cure is found for cancer most cancer-related charities
will focus on transitional arrangements to assist current sufferers, on providing information
about the cure and on closing down in an honourable manner. A few will move into other
disease related work whilst most will seek to exit the marketplace. For commercial
companies the imperative will be to either create new business streams or to return capital to
the shareholders whilst meeting obligations to stakeholders. The board must step into their
role as the ultimate endorsers of strategy during these phases.

3.2 TYPES OF DIRECTOR


Chart

secondary data
THE VARIOUS TYPES OF DIRECTORS ARE :
a. MANAGING DIRECTORS

INSIDE DIRECTORS

c. OUTSIDE DIRECTORS

d. PROFESSIONAL DIRECTORS
e. NOMINEE DIRECTORS
f.

EXECUTIVE DIRECTORS

g.

INDEPENDENT DIRECTORS

A) MANAGING DIRECTORS

A managing director is someone who is responsible for the daily operations of a company,
organization, or corporate division. In some regions of the world, the term is equivalent to
"chief executive officer," the person who is the executive head of a company. In other
places, managing directors primarily work as the heads of individual business units within a
company rather than heading up the company as a whole. Whether managing an entire
organization or just a part of one, these professionals have a number of key duties.

B) INSIDE DIRECTORS

A board member who is an employee, officer or stakeholder in the company. Inside directors
- and outside directors, for that matter - have a fiduciary duty to the company of which
board they sit on, and are expected to always act in the best interests of the company.
Because of their specialized knowledge about the inner workings of the company, a strong
board of inside directors is a key element in its success.
C) OUTSIDE DIRECTORS

Any member of a company's board of directors who is not an employee or stakeholder in


the company. Outside directors are paid an annual retainer fee in the form of cash, benefits
and/or stock options. Corporate governance standards require public companies to have a
certain number or percentage of outside directors on their boards as they are more likley to
provide unbiased opinions.

D) PROFESSIONAL DIRECTORS
Any director possessing professional qualifications and do not have any pecuniary interest in
the company are called as "Professional Directors". In big size companies, sometimes the
Board appoints professionals of different fields as directors to utilise their expertise in the
management of the company.

E) NOMINEE DIRECTORS
The banks and financial institutions which grant financial assistance to a company generally
impose a condition as to appointment of their representative on the Board of the concerned
company. These nominated persons are called as nominee directors.

F) EXECUTIVE DIRECTORS
Whole-time Director or Executive Director includes a director in the whole-time employment
of the company.

G) INDEPENDENT DIRECTORS

who-

(a) apart from receiving director's remuneration, does not have any material

pecuniary relationships or transactions with the company, its promoters, its directors, its
senior management or its holding company, its subsidiaries and associates which may affect
the independence of the director; (b) is not related to promoters or persons occupying
management positions at the Board level or at one level below the Board; ( c) has not been
an executive of the company in the immediately preceding three financial years; (d) is not a
partner or an executive or was not partner or an executive during the preceding three years,
of any of the following:- (i) the statutory audit firm or the internal audit firm that is
associated with the company; (ii) the legal firm(s) and consulting firm(s) that have a
material association with the company. (e) is not a material supplier, service provider or
customer or a lessor or lessee of the company which may effect the independence of the
director; and (f) is not a substantial shareholder of the company, i.e. owning two percent
Independent director as per Clause 49 of the Listing agreement shall mean non-executive
director of the or more of the block of voting shares.

CHAPTER-IV LIABILITY OF DIRECTOR

4.1 LIABILITY OF A COMPANY TO THE DIRECTOR

The CA 1956 has not codified the law relating to duties of directors but in all cases all
directors must ensure compliance with the provisions

of the CA1956 and other

applicable laws. Further, under the CAI 956 the directors of Indian companies are subject to
common law duties. Thus, a director has fiduciary duty towards the company.

As per s.5 of the CA1956, for violation of the provisions of the CA1956 the managing
director/ whole time director (director who is in whole time employment of the company) I
manager (who is so appointment in accordance with the provisions of the CA 1956) and
the company secretary, if any, are responsible in first instance. In the absence of
aforesaid categories of officers, prosecutions should be against all other directors of the
company unless the directors have authorised any other person to make compliance with
that provisions of the CAI 956 and such person has accepted any such authorisation. The
Master Circular No. 1/2011 dated 29 July 2011 of the Ministry of Corporate Affairs,
Government of India ("MCA") consolidating the provisions relating to prosecution of
directors under the CA 1956 has clarified that Registrar of Companies should take extra
care in examining the cases where following directors are also identified as 'officer who is in
default' under s.5 of the CA1956:

For listed compames (companies of which shares are listed at Indian stock exchange),
Securities and Exchange Board of India requires nomination of certain Directors designated
as Independent Directors.

For public sector undertakings, respective Government nominates directors on behalf of


the respective Government.Various public sector financial institutions, financial institutions
and banks having participation in equity of a company also nominate directors to the board of
such companies.

Directors nominated by the Government under s.408 of the CA1956.

4.2 DISQUALIFICATIONS

OF THE DIRECTOR

This has three objectives. First, we consider some theoretical issues associated with the
regulation of directors' conflicts of interest. Second, we provide a brief overview of the
legal framework for regulating directors' conflicts. Third, we present the results of an
empirical study of directors' conflicts in India. It is a study of the disclosure by the largest
companies of financial benefits between these companies and their directors. The purpose is
to provide some insight into the types of matters which potentially

involve directors'

conflicts.
Our objective in this section is to examine a number of the issues associated with different
institutional mechanisms which regulate directors' conflicts. We commence by examining
the role of market forces in regulating directors' conflicts. We then examine the role of
disinterested directors, shareholders and courts.
Directorand Officer Liability for Dishonour of Cheques

(The following post has been contributed by Avirup Bose. Avirup is an Indian lawyer,
who has graduated from NUJS Kolkata and has an LL.M from the Harvard Law School)
On July 6, a Division Bench of the Supreme Court passed a judgment in K.K. Ahuja
v. VK.

Vora(MANU/SC/1111/2009, per R.V. Raveendran, J.) ("K.K. Ahuja"), where it

considered the particular question as to who can be said to be persons "in-charge of, and
was responsible to the company for the business of the company" under Section 141 of
the Negotiable Instruments Act, 1881 ("NI Act"). Section 141 of the NI Act provides that

when a company's cheque is dishonoured under Section 13 8 of the NI Act, then


those who were in-charge of the conduct of the business of the company, at the time the
offence was committed, would be constructively liable.
K.K. Ahuja, the appellant, had filed two criminal complaints, under Section 138 of the NI
Act, against M/S MotorolSpeciality Oils Ltd. (the "Company"), and eight of its officers
(Chairman, four Directors, VP Finance, General Manager and Deputy General Manager
("DGM") respectively), in the Court of the Metropolitan Magistrate, Delhi, averring that at
the time of the commission of the offence, all the eight officers were in-charge of and
responsible for the conduct of the day-to-day business of the Company and thus deemed to
be guilty under Section 138, read with, Section 141 of the NI Act. Next, the accused DGM
moved to quash the proceedings against him on the ground that as DGM of the Company
he was not in-charge of the conduct of the day-to-day business

of the Company. This

petition was allowed by the Delhi High Court, which was then challenged before the Supreme
Court in K.K. Ahuja.

The Supreme Court ruled in dicta that, "[] .... to be vicariously liable under Sub-section
( 1) of Section 141, a person should fulfill the 'legal requirement' of being a person in law
(under the statute governing companies) responsible to the company for the conduct of the
business of the company and also fulfill the 'factual requirement' of being a person in charge
of the business

of the company."

In other words,

any corporate

Section 141(1) of the NI Act has to: (1) be a person responsible

officer accused under

to the company for the

conduct of the business of the company under the provisions of the Companies Act, 1956
and (2) be in-fact also a person in-charge of the business of the company. REQUIREMENTS
TO SATISFY THE FIRST PRONG:
The Court, relying on Sections 5 and 291 read with clauses (24), (26), (30), (31) and (45) of
Section 2 of the Companies

Act, 1956, lists the categories

of persons who under the

Companies Act can be considered as persons who are responsible to the company for the
conduct of the business of the company. They are:

(a) the managing director/s; (b) the whole-time director/s; ( c) the manager;
(d) the secretary;

( e) any person in accordance with whose directions or instructions the Board


of directors of the company is accustomed to act;
(t) any person charged by the Board with the responsibility

of complying

with that provision (and who has given his consent in that behalf to the Board);
and

(g) where any company does not have any of the officers specified in clauses
(a) to (c), any director or directors who may be specified by the Board in this
behalf or where no director is so specified, all the directors.
The above list is exhaustive
company

since the Supreme Court held that other employees of the

cannot be said to be persons

who are responsible

to the company

for the

conduct of the business of the company.

REQUIREMENTS TO SATISFY THE SECOND PRONG:

The Supreme Court, relying on past precedents, held that the words "person in charge of
the business of the company" refer to a person, who is in overall control of the day-to-day
business of the company. The Supreme Court further held that, since the question as to
who is in "overall control" is a fact specific one, specific averment in the complaint is
required. This the Court felt necessary since a person may be a Director and thus belong to
the group of officers who are involved in policy-making for the company, yet he may not be
in-charge of the business of the company.

Consequently, the Supreme Court provides a two-pronged

test-the

first prong is a legal,

statute-based test, where to prove that a person is responsible to the company for the conduct
of the business of the company, one needs to merely check if the accused person falls in
any one of the listed categories.
specific averments

The second prong is a fact-based

the complainant

test, where

through

has to allege that the particular accused was in-fact

in overall control of the day-to-day business of the company. Both the prongs need to be
complied with. Hence, if a person does not satisfy the first prong, i.e., if he is not one of the
above-mentioned officers as listed by the Supreme Court, then he is neither required to meet
the second prong nor can he be held liable under Section 141(1).
However, if the accused falls under one of the categories listed by the Supreme Court, i.e.,
he is under statute, the Companies Act 1956, a person responsible to the company for the

conduct of the business of the company, then the judgment provides for a sliding scale of
averment that needs to be made in the complaint, depending upon the particular category of
the officer.
These are as tabularized:

The Supreme Court also held that other officers of the company, apart from those tabularized
above, cannot be made liable under

Section

141(1) of the NI Act. Such officers can

however be made liable under Section 141 (2), which provides

for liability to corporate

directors/officers

who may not be in-charge of the conduct of the business of the company,

but nevertheless

the offence under Section 13 8 of the NI Act (dishonour of cheque)

was

committed with their consent or connivance or due to their negligence. However, in such
circumstances,

specific averments must be made in the complaint as to how and in what

manner the accused was guilty of consent and connivance or negligence.

This brings us to an interesting issue, albeit beyond the scope of the present case- say a nonexecutive
company,

director who is a financial expert and a past banker sits on the Board of
which has issued certain cheques, which have been dishonored

and returned

by the respective banks unpaid. By merely being a non-executive director he is most likely
not one of the officers responsible for the conduct of the business of the company, nor is
he in-charge

of the business

of the

circumstances,

as per KK Ahuja, such a non-executive

liable under Section 141(1). However,

company.

Hence,

in the

absence

of special

director will probably not be held

the scope of Section 141(2) is wide open. In case

such a director votes in favor of a resolution, which provides for payment of a certain sum
of money, from one of the several bank accounts of the company, to a supplier/contractor
that cheque bounces-is

and

the director liable? Can his consent be construed from his "yes"

vote? I would argue that the case then depends upon how the executive director went about
doing his job. Did he ask relevant questions, did he try to inquire if the company had sufficient
funds in that particular account, especially if he had reason to believe otherwise?

Does the

fact that he is a financial expert make him more readily liable under Section 141(2) of the
NI Act than the other directors? In fact, in U.S. the Delaware chancery court in re Emerging

Communications, Inc. Shareholders Litig., 2004 WL 130 5745 (Del.Ch. June 4, 2004))
found that a particular director who was a former investment banker with relevant
experience in the particular industry be held to a higher standard of inquiry than non-expert
directors when he failed to apply his "specialized financial expertise", when evaluating a
going-private transaction. The case was

uniformly

held

to

have

taught

directors,

especially the non-executive

and independent ones, not to simply rely on information

either given by the management or outside professionals, especially when they were
themselves experts in the relevant field.

One might wonder why the complainant needs to specifically aver in a complaint under
Section 13 8

and 141 of the NI Act,

that at the time when the offence was

committed, the person accused was in-charge of, and responsible for the conduct of the
business, since in the absence of such an averment, as held by the Supreme Court in the
three judge decision of S.MS. Pharmaceuticals Ltd. v. Neeta Bhalla and Anr ("S.M.S.
Pharma"(MANU/SC/0622/2005)),
Supreme

Court's

director/officer

logic

Section

in requiring

141 of the NI Act cannot be invoked.

such

specific

averments

before

can be held liable,. as held in a series of decisions

Faizi&AshishAggarwal,

Khergamvala

on

The

Negotiable

any

The

corporate

[See generally: OP

Instruments

Act 514

-525(2008)], is that the liability under Section 141(1) is raised by legal fiction, such that
even though a person is not personally liable, he will be held liable vicariously and hence a
clear case connecting the accused with the commission of the crime, as required under
Section 141 (1) has to be spelled out in the complaint through specific factual averments.
However, the obvious disadvantage the complainant suffers when he has to specifically aver
that a certain director or officer was in-charge is that, being an outsider, he might not know
exactly how the internal business of the accused company is organized i.e., who are its
principal executive officer bearers and who are only involved in business policy
making. This is easy when dealing with the Managing Director and the signatories of the
cheque, but beyond that the picture becomes fuzzy.
As per S.M.S. Pharma (which the Supreme Court heavily relied upon in KK Ahuja):

"The liability arises from being in charge of and responsible for conduct of business of
the company at the relevant time when the offence was committed and not on the basis of
merely holding a designation or office in a company. Conversely, a person not holding
any office or designation in a Company may be liable if he satisfies the main requirement of
being in charge of and responsible for conduct of business of a Company at the
relevant time. Liability depends on the role one plays in the affairs of a Company and not on
designation or status." (Emphasis Added)

Imagine a family based company having a majority shareholder holding more than 50% of
the stock. The company is nevertheless, run by a team of non-familial professional
managers. Can such a majority shareholder be held liable if, the managers of the
company, which he controls, issue a cheque, which, is dishonoured by the banks. In KK
Ahuja one of the people listed by the Supreme Court in paragraph 14 as persons
responsible to the company for the conduct of the business of the company is:
"(e) any person in accordance with whose directions or instructions the Board of directors of
the company is accustomed to act;"
A controlling shareholder can very well be someone who regularly instructs the Board and
the senior management.
controlling
specific

shareholder

factual

Yet, when the complaint

would

in his complaint, under Section

averments,

showing

how

in-fact

want to include

such a

141 (1 ), he will need to make

such

controlling

shareholder

was

regularly consulted by the Board or otherwise in-charge of the business of the company. The
complainant might not have access to such materials if they are not in the public domain.
It is not enough
"controlling

for the courts if the complainant

shareholder."

merely

states that the accused

is a

The decision in KK Ahuja fails to take into account such

practical business scenarios. The Court could have provided some more guidance, like
examples of factual averments that will be required, when a complainant

wants to hold

corporate officers, who are not managing directors or signatories of the bounced cheques,
liable under Section 141 (1) of the NI Act. The standard of averment that the Court in KK
Ahuja

suggests,

in paragraph

Delhi) MANU/SC/071112007):

9, (quoting Saro} Kumar

Poddar

v.

State

(NCT of

"the complaint should contain averments as to how and in

what manner the accused was responsible for the conduct of the business of the company, or
otherwise responsible

for its functioning",

is general and vague, especially in scenarios

described above.
Why cannot the complainant

sue the entire Board and the senior management

under

Section 141 and then such officers can prove that they were not in-fact in-charge of the
company's business at the time of the commission of the crime? It would be much easier for
the directors to deny responsibility

than for an outsider to aver responsibility

on part of

internal corporate officers at the trial stage. This view although a minority one, found voice
in a two judge bench decision of the Supreme Court in N. Rangachari v. Bharat Sanchar
Nigam Ltd (2007) II CCR 191 (SC), which held the following in obiter:

"A person in the commercial

world having a transaction

with a company is entitled to

presume that the directors of the company are incharge of the affairs of the company. If any
restrictions

on their

powers

are placed

by the memorandum

or articles

of the

company, it is for the directors to establish it at the trial. It is in that context that Section 141
of the Negotiable
person,

Instruments

Act provides that when the offender is a company, every

who at the time when the offence

was committed

was incharge

of and was

responsible to the company for the conduct of the business of the company, shall also be
deemed to be guilty of the offence along with the company. It appears to us that an
allegation in the complaint that the named accused are directors of the company itself
would usher in the element of their acting for and on behalf of the company and of their
being incharge of the company.

A person

normally

having

business

or commercial

satisfy himself about its creditworthiness


Board of Directors

dealings

with a company,

would

and reliability by looking at its promoters

and the nature and extent of its business

and its Memorandum

and
or

Articles of Association. Other than that, he may not be aware of the arrangements within the
company in regard to its management, daily routine, etc. Therefore, when a cheque issued to
him by the company is dishonoured, he is expected only to be aware generally of who are
incharge of the affairs of the company. It is not reasonable to expect him to know whether

the person who signed the cheque was instructed to do so or whether he has been deprived
of his authority to do so when he actually signed the cheque. Those are matters peculiarly
within the knowledge of the company and those in charge of it. So, all that a payee of a
cheque that is dishonoured can be expected to allege is that the persons named in the
complaint are in charge of its affairs. The Directors are prima facie in that position."
To conclude, the Supreme Court in K.K. Ahuja fine-tuned the principles relating to
director and officer liability for dishonour of cheques and built upon the policy laid down in
the previous case of S.M.S. Pharma. However, there continue to be some open issues as
discussed above, and the Court has left complainants with a somewhat insurmountable
burden of averment as outsiders to the company.

4.3 DIRECTORS REVIEW

REVIEWBY INDEPENDENT DIRECTORS

It is possible for independent or disinterested directors to operate as a mechanism for

regulating directors' conflicts. A director who is in a position of conflict of interest and


duty must disclose the conflict to disinterested directors who then review it to decide
whether or not the company and/or director should proceed with the transaction in which the
director is interested.
First, some countries place significant emphasis on independent directors. This is particularly
true of the United States where it has been said that the law invests in disinterested
directors "a

considerable measure of discretion to assess the merits of conflict

transactions".

To some degree, this may be a reflection of the proportion of independent

directors on boards of companies in that country.


The second point to note is that a distinction must be drawn between non executive
directors and independent directors. Definitions of who is an independent director differ
from country to country. The Investment and Financial Services Association, which
represents the largest institutional investors, has proposed the following definition. An
independent director is a non-executive director who:

Is not a substantial shareholder of the company or an officer of or otherwise


associated directly or indirectly with a substantial shareholder of the company;

Has not within the last three years been employed in an executive capacity by the
company or another group member or been a director after ceasing to hold any such
employment;

Is not a principal of a professional adviser to the company or another group


member;

Is not a significant supplier or customer of the company or another group member or


an officer of or otherwise associated directly or indirectly with a significant supplier
or customer;

Has no significant contractual relationship with the company or another group


member other than as a director of the company; and

Is free from any interest and any business or other relationship

which could, or

could reasonably be perceived to, materially interfere with the director's ability to act
in the best interests of the company

REVIEWBY SHAREHOLDERS

As is the case with review of directors' conflicts by independent directors, the emphasis
placed on review by shareholders of such conflicts differs between countries. For example,
the emphasis on review by independent directors in the United States means there is less
emphasis placed on shareholder review in that country.
There are problems with shareholder review of directors' conflicts. First, in the case of
companies with many shareholders, it can be costly to have decisions made by shareholders.
Second, shareholders with only a small investment have little incentive to become informed
and vote on a matter regarding a director's conflict. Shareholders with a small investment
suffer a collective action problem when voting which undermines their effectiveness as a
decision-making body. A rational small shareholder in a public company will not
expend the time and effort to evaluate a particular director's

conflict because the

shareholder's costs of becoming informed and voting typically outweigh any expected
benefits. This is because the shareholder's vote would have only a small effect on the
outcome and the shareholder would have difficulty identifying any significant benefit in
voting.

REVIEWBY COURTS

It is possible to envisage a role for courts in reviewing directors' conflicts. There may be a

narrow or broad role. A narrow role is where the court determines whether a director has
made appropriate disclosure to either shareholders or disinterested directors. A broader role
is where the court reviews the fairness of a particular transaction in which a director is
interested. Such a role is given to the court under the Delaware companies law. Section
144 of the Delaware General Corporation Law provides that a contract in which a director
is interested is valid if the contract "is fair as to the corporation as of the time it is

authorized, approved or ratified, by the board of directors, a committee or the


shareholders".Some commentators have expressed reservations about a significant role for
the courts in corporate regulation.

SUMMARY

There are both costs and benefits to each of the review mechanisms for directors' conflicts
identified above. It can be efficient to have the review undertaken by disinterested or
independent directors. Alternatively, the review could be undertaken by shareholders in
asmall private company with few shareholders. As we have seen, the choice between
independent directors and shareholders turns,

to a substantial degree, upon the

ownershipstructure of the particular company concerned. It is also possible for review of


directors' conflicts to be undertaken by courts or regulators although once again there are
costs associated with such review.

CHAPTER-V
FINDINGS AND CONCLUSION

5.1 FINDINGS

Question 1. How long have you been a directorof this company?


Veteran directors of the company are the overwhelming choice to be the lead director; 83
percent of the respondents have served for five or more years as a director.

Question 2. Which of the following positions on the boarddo you currentlyhold?


For purposes of the survey, a lead director was defined as also including a presiding
director (13 percent) or independent board chairman (25 percent). A large majority, 62
percent, are known as lead directors. The term presiding director may not adequately
describe the level of responsibilities associated with the position because the presiding
director does not merely preside; but the term is still in use, albeit on a comparatively
smaller scale. Of note is the 25 percent of responders who hold the position of
independent board chairman. As the roles and responsibilities continue to be debated, it will
be interesting to see if the occurrence of independent board chairman increases or decreases
in relation to the use of lead director. There are questions whether lead directors are
considered "the equivalent of board chairmen by the board or shareowners, even when such
directors are provided with comparable authorities."

Question 3. Whatis the size of the company'sboard?


The size of a company's board can have a distinct impact on its effectiveness, with too
large or too small a board posing its own unique challenges. When a board is too small, it
"runs the risk of being insufficiently diverse in the range of backgrounds, experiences,
skill sets, and perspectives." In the inverse, a board that is too large can impact the
quality of discussion and hinder individual accountability.14 Among respondents, boards
predominantly have nine to 12 directors, with almost 70 percent falling into this range.

Question

4. In addition to your position,

which of the following

board leadership

positions does your board currently have?

Although there is a great deal of current debate about separating the combinedposition of
chairman and CEO, the survey group includes two-thirds from companies that still have this
traditional form of organization. Some companies questioned the benefits of separating
these roles and instead chose to adhere to the dictates of the stock exchanges, which call
only for an independent director who presides over executive sessions. While conceptually
weaker than most had hoped for, the lead director role has grown in both its influence
and responsibilities, thereby providing hope that it is a viable alternative to a separate

chairman and CEO. However, if in the long run the lead director role fails to deliver, it is
likely that calls for separating the chairman/CEO position will continue and grow.

Question 5. At how many otherpublic companies are you a director?


Lead directors are apparently sensitive to serving on too many boards, an oft made
criticism recently, with the majority, 60 percent, serving on only one or two other public
company boards. Twenty percent of lead directors are not directors of any other compames.

Question 6. How long has the company had the lead directorposition?
Many companies created the lead director position in response to the new and enhanced
standards imposed in 2012, including demands for greater transparency, accountability, and
integrity. In the wake of the new regulatory and corporate governance environment created
by

Sarbanes-Oxley, the lead director position was viewed as an important tool in

strengthening the checks and balances between the CEO and board functions.

Question 7. How long have you been lead directorof this company?
In most cases, lead directors are likely to be trusted advisors, having intimate familiarity
with the major issues the company faces, the CEO' s preferences, and management
styles because of the lead director serving on the board three years or more.
Question 8. What other positions have you held with this company or another public
company?

Among respondents, more than half currently servmg as lead director of the company
have previously served as a CEO and more than one-third as chairman. The leadership and
executive skills garnered in these roles make for an easy transition to the lead director post
and will help better position the lead director as an important advisor to the chairman/CEO.

Question 9. Have you advised companies in this industryin any of the following
capacities?
Lead directors generally have significant management experience in the corporate world and
bring that experience to the advice they provide. People who are professional advisors, such
as lawyers, accountants, bankers, and consultants, are less likely to be lead directors. The
majority of respondents, 55 percent, have not advised companies in any of these capacities.

Question 10. How many additionalhours per month do you devote to the lead
directorrole on average, beyond the time you spend as a director?
Lead

directors are usually

spending an additional six to

10 hours

on their

responsibilities, our survey respondents say. But the typical director spends about 20
hours a month on average on board work, according to another recent PwC survey

Question 11. Do you receive additionalcompensation to be lead director?


Companies have no commonality on the level of compensation lead directors should
receive. Salaries vary widely from as low as 5,000 to 150,000 (only 3 percent ofthe
cases). The most common figure was 15,000, in 16 percent of the cases.

Question 12. How long is your termas lead director?


Companies show a distinct divergence in the length of service for lead directors, with 45
percent responding that they have created an indefinite term and 35 percent a one-year
term. Clearly, there is no consensus on which is more effective for a lead director,
serving indefinitely or with a term limit. However, a shorter term can pose difficulties for a
lead director's ability to lead. The lead director may not be able to develop a solid
relationship with the CEO/chairman and might have difficulty in bringing important
initiatives to conclusion in such a limited time frame. Additionally, the constant changing of the
guard" could lead to board confusion and an overall lack of momentum.

Question 13. Who provides administrativesupportfor the lead director?

Corporate

secretary 58%,

General counsel 75% , Other company lawyer

10%, Separate

staff (counsel, accountants, other experts, etc.) 8 %

Question 14. Do you, as lead director,have a significant role in communication of


substantivebusiness or governance issues to the following people:
The lead director's most important role is communication
governance
lead

issues with the CEO or senior management

director

investors,

is

much

less

involved

in

about substantive business or

and other board members.

communication

issues

the media, and the public. The low survey percentage

institutional

investors is interesting

The

with institutional

seen in the area

as the lead director has sometimes

of

been view ed as

someone who could improve these relations.


Communication
management

with

shareholders/investors

an

important

initiative

of

and may be an area where lead directors can get more involved in the future.

Howe er, communication

with the media and public will likely not change because the

lead director should defer to the CEO/chairman


company.

remains

as the principal

representative

of the

5.2 CONCLUSION

LACK OF ENFORCEMENT

This study concludes that gaps and deficiencies


rules on directors'

exist less with regard to the substantive

duties, and more in relation to enforcement.

In the vast majority of

Member States, breaches of directors' duties do not normally lead to judicial enforcement of
claims against directors as long as the company continues to operate as a going concern.
There are several factors that contribute to what may be seen as under enforcement of
directors' duties. We find that the most important of these factors cannot easily be addressed
by changes to the national

law rules concerning

directors'

duties; rather, the relevant

obstacles are of a structural nature.

First, in most jurisdictions

the most important business decisions are taken by, or with the

formal or informal approval of, the controlling shareholders.

Consequently, it may be said

that the issue in need of regulatory intervention is not so much wrongdoing by the directors
that affects the shareholders as a class, but rather the minority/majority shareholder conflict.

Second. the rules on standing do not seem to be working well. If the board of direct rs
in companies

with

a one-tier

board

structure

has

authority

to instigate pro eedings

on behalf

of the company,

the conflict

of interest

is apparent,

in particular where

incumbents are sued. However, data indicates that the problem is not alleviated by allocating
the power to enforce the company's

claims to another organ,

for example the general

meeting or, in companies following the two-tier board model, the supervisory board.
Third,

the

enforcement.

institutional

preconditions

may

not

always

be

conducive

Even where the law on the books seems to be, in principle,

to

satisfactory,

enforcement is perceived in some Member States as being lengthy, expensive, and fraught
with uncertainties.
judicial

system

In addition, the perception

of the competence

does not seem to be unreservedly

positive

and efficacy of the

in all Member

States.

Shareholders may prefer to remove the incumbent directors and appoint new ones, rather
than applying to the courts.

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