LESSON 3: BOARD EFFECTIVENESS

Introduction
The institution of board of directors was based on the premise that a group of trustworthy
and respectable people should look after the interests of the large number of shareholders who
are not directly involved in the management of the company. The position of the board of
directors is that of trust as the board is entrusted with the responsibility to act in the best interests
of the company.

A board of directors is a body of elected or appointed members who jointly oversee the
activities of a company. The Board of Directors plays a pivotal role in ensuring good
governance. The contribution of directors on the Board is critical to the way a corporate conducts
itself.

Role of the Board of Directors

The board’s role is to provide entrepreneurial leadership of the company within a framework of
prudent and effective controls which enables risk to be assessed and managed. An effective
board develops and promotes its collective vision of the company’s purpose, its culture, its
values and the behaviours it wishes to promote in conducting its business.

Types of Directors Under Companies Act 2013

1. Executive Director
The term executive director is usually used to describe a person who is both a
member of the board and who also has day to day responsibilities in respect of the affairs
of the company. Executive directors perform operational and strategic business functions
such as:
→ managing people
→ looking after assets
→ hiring and firing
→ entering into contracts
2. Non Executive Director
Non executive directors are not in the employment of the company. They are the
members of the Board, who normally do not take part in the day-to-day implementation
of the company policy.
3. Shadow Director
 Shadow Director is a person who is not formally appointed as a director, but in
accordance with whose directions or instructions the directors of a company are
accustomed to act. This is a concept adopted from English law.
4. Woman Director
A board composed of directors representing a range of perspectives leads to an
environment of collaborative discussion which is the essence of good governance.
Organizations that aim to deliver the highest standards of leadership require a diversity of
thought, skills, experience, working style and talent capability. It is increasingly being
recognized that by bringing together men and women from diverse background and
giving each person the opportunity to contribute their skills, experience and perspectives,
the corporates are able to deliver the best solutions to challenges and sustainable value to
their stakeholders.
5. Resident Director
Section 149 (3) of the Act has provided for residence of a director in India as a
compulsory i.e. every company shall have at least one director who has stayed in India
for a total period of not less than 182 days in the previous calendar year.
6. Independent Director
Independent Directors play a pivotal role in maintaining a transparent working
environment in the corporate regime. Independent Directors constitute such category of
Directors who are expected to have impartial and objective judgment for the proper
functioning of the company.
7. Nominee Director
A nominee director belongs to the category of non-executive director and is
appointed on behalf of an interested party. It is pertinent to mention here that there is a
divergent view as to whether a nominee director can be considered independent or not.
8. Small Shareholders Director
Every listed company may have one director elected by “small shareholders”. For
the purpose of this section, “small shareholder” means a shareholder holding shares of
nominal value of not more than twenty thousand rupees or such other sum as may be
prescribed.

Composition and Structure of Board

Board composition is one of the most important determinants of board effectiveness.

Beyond the legal requirement of minimum directors, a board should have a judicious mix of
internal and independent directors with a variety of experience and core competence. The
potential competitive advantage of a Board structure comprising executive directors and
independent non-executive directors lies in its combination of – the depth of knowledge of the
business of the executives and the breadth of experience of the non- executive/independent
director.
Selection and Appointment of Directors

1. Has a proper understanding of, and competence to deal with, the current and emerging
issues of the business.
2. Exercises independent judgement.
3. Encourages enhanced performance of the Company.
4. Can effectively review and challenge the performance of management.

Duties of Directors

The Duties and Responsibilities can be broadly classified into two categories:
a.) The duties, liabilities and responsibilities which promotes corporate governance through the
sincerest efforts of directors in efficient management and swift resolution of critical corporate
issues and sincere and mature decision making to avoid unnecessary risks to the corporate entity
and its shareholders.
b.) Keeping the interests of company and its stakeholders ahead of personal interests.

Other Good Practices To Enhance Board Effectiveness

• Appointment of Lead Independent Director

• Separation of Role of the Chairman and Chief Executive Officer
• Succession Planning
• Performance Evaluation of the Board Management