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Corporate & Board Management

(Lesson-9: BECG)

Prof. C. Anand Faculty IBS, Hyderabad

This deals with:1. Structure and Composition of the Board 2. Styles of Directors 3. Roles, Functions, Duties, Responsibilities and Liabilities of Directors 4. Executive Management Process 5. Functional Committees of Board 6. Investor Services and Investor Protection Measures

1. Structure and Composition of the Board

The composition (types) and the size of the Board plays a crucial role in the effective functioning of the Board. The composition of the Board can be changed to improve the functioning of the Board.

(a) Types of Board: Executive Directors (Hold positions of both Director and Executive of an organization) Non-Executive Directors (They dont hold executive positions & are outside directors without promoters link) Nominee Directors (of Banks, FIs, major shareholders) Representative Directors (Similar to Nominees but represent stakeholder groups like employees, customers) Alternate Directors (Substitutes to Original Directors) Shadow Directors (They influence Board without being 3 formally present on the Board)

(b) Types of Board Structures:

All-Executive Board (It will have all Executive Directors only and no outside directors E.g. Family-owned businesses and subsidiaries) Majority Executive Board ( Executive Directors will have a majority and Outside Directors represent interests of stakeholder groups like major shareholders, employees, customers, Banks, FIs etc.) Majority Outside Board (This will have a majority of outside, Non-Executive Directors) Two-Tier Supervisory Board (It addresses the concerns for separating Executive Management from Non-Executive Directors. It has two separate Boards: The Non-Executive Supervisory Board and the Executive Management Board. The former monitors the plans/performance of the latter).

2. Styles of Board
C. Styles of the Board (Grid):
Depending on the way the Boards function, their commitment to effective decision making and concern for interpersonal relations, the Boards may be categorized as: Rubber Stamp Boards (Gives little importance to good interpersonal relations or decision making. Board ratifies whatever decisions CEO takes. Ex. Subsidiary Cos.) Representative Boards (They accord high priority to effective decision making and less or no priority to good interpersonal relations among board members) County Club Boards (Maintain cordial interpersonal relations but concern for decision making is least) Professional Boards (Give high importance to both interpersonaal relations and effective decision making)

3. Roles, Functions, Duties, Responsibilities and Liabilities of Directors

(a) Roles of Directors: 1. Performance Role (In this, director performs various activities aimed at improving the overall performance of the corporation like: A source of know-how, expertise and external information; and caters to needs of the corporation for networking, representing and adding status. Outside directors act as specialists in different functions like finance including banking and investment, marketing, law, engineering, HR, environment and general management. Some time they act with the media on behalf of the corporation).

2. Conformance Role : (In this, the director is concerned with ensuring that the company follows the policies and procedures laid down by the board. This is done thru executive management and involves monitoring and evaluating their own performance. The independent evaluation of top managements performance overcomes the danger of adoption of a narrow vision of the executive board.

3. Roles, Functions, Duties, Responsibilities and Liabilities of Directors (contd.)

3. Strategic Role of Directors (Board): 1. To supervise the quality of strategic thinking of the top management/executive committee and take corrective measures to guide them to develop strategies to achieve corporate goals. 2. To develop strategy in the following three levels: Systematic Level Strategy (Boards shall develop knowledge based on national/global environment to guide the company) Structural and Portfolio Strategy (Taking decisions regarding structure of the co. and the business it should enter into) Implementation Strategy (To decide whether the strategies are feasible and to implement such policies and strategies properly) 2. To make policies which cover all functional areas lik marketing, finance, operations, customer relations and R&D. 3. Monitoring and Supervisory Role to ensure right strategic direction.

3. Roles, Functions, Duties, Responsibilities and Liabilities of Directors (contd.)

(b) Functions of Directors: To take responsibility for the performance of Co. To promote interests of shareholders To oversee performance of Co., CEO, top managers. To see accurate reports on financial performance are provided to stakeholders To provide adequate strategic guidance to the co. To maintain good relations with the stakeholders To enact various performance and conformance roles.

3. Roles, Functions, Duties, Responsibilities and Liabilities of Directors (contd.)

Duties of Directors: Exercise care in the discharge of functions as directors Attend board meetings & pay attention to co.s affairs Not to be negligent and not commit legal wrongs Act in the best interests of Co. & stockholders/customers Not to misuse power Protect interests of creditors Maintain confidentiality Not to make secret profits and make good loss, if accrued due to breach of duty, of negligence. Not to exercise powers for a collateral purpose. Not to waste company assets.

3. Roles, Functions, Duties, Responsibilities and Liabilities of Directors (contd.)

(d) Responsibilities of Directors:

Responsibilities to shareholders (Through policies and proceedings and monitoring top managements performance) Obligation to maintain honesty and integrity. To give the shareholders regular reports and accounts, besides being honest with the shareholders in their dealings and decisions that will benefit the organization.

3. Roles, Functions, Duties, Responsibilities and Liabilities of Directors (contd.) (e) Liabilities of Directors: 1. Misrepresentations in offer documentations and annual accounts 2. Failure to refund subscription monies to investors 3. Contravention of Law


4. Executive Management Process

The Executive Management of a company is generally comprised of the Chief Executive, Executive Directors, and the Key-Managers involved in day-to-day management of the company. They are professionals with substantial experience in the concerned professional areas in related industries, both within India and across the world ( in case of MNCs). The executive management team is guided in the execution of the Company's strategy by the Board of Directors comprising individuals who have distinguished themselves in the private and public sectors. It directly reports to the Board and administers the day-today affairs of the company as per the powers delegated to 13 it by the Board.

5. Functional Committees of the Board

The board relies on independent outside directors to monitor management performance. Such committees are: (a) Audit Committee: It consists of independent directors who report to the board. These committees act as a link between the board and external auditors. Its functions are: To sort out audit problems To review interim & final accounts To inform board about effectiveness of internal controls, quality of financial reporting, audit fees, selection and replacement of auditors.

5. Functional Committees of the Board (contd.)

(b) Remuneration Committee: Board sets up this committee to objectively review the remuneration packages of the EDs and other top managers. The committee, made up of independent directors, chalks out a reasonable and transparent remuneration policy and checks unreasonable increase of executive remuneration (c) Nomination Committee: It is set up to select the new non-executive directors and is headed by the Chairman and shortlists and interviews the final candidates.

Executive Committee of the Board

The Executive Committee is responsible for exercising all of the powers and authority of the Board of Directors during intervals between Board meetings, except for those powers delegated to the other committees of the Board.


6. Investor Services and Investor Protection Measures

A. Investor Services:

Investor Services include share registration and other related services. Generally, the Investor Service Centers (ISCs), operated by a dedicated and trained team of professionals backed by state-of-theart infrastructure, are registered with SEBI as Share Transfer Agents. ISCs shall have a very high degree of control in respect of compliance with statutory and regulatory requirements and a very effective and efficient Complaint Redressal Mechanism. ISCs deal with the share related matters, including Dematerialization, Rematerialization, Transfer, Transmission of Shares, Sub-division or Consolidation of Shares, Issue of Duplicate Share Certificates, Dividend etc, or for redressal of any grievance in this regard.

B. Investor Protection Measures

SEBI has issued investor protection guidelines known as SEBI (Disclosure & Investor Protection) Guidelines, 2000. It deals with the following:Eligibility norms for cos. issuing securities Pricing by cos. issuing securities Promoters contribution and lock-in requirements Pre-issue obligations Contents of offer documents Post issue obligations Compliance by Lead Merchant Banker

B. Investor Protection Measures (cond.)

Guidelines on advertisement Guidelines for Issue of Debt Instruments Guidelines for Book-Building Guidelines for Issue of IPOs by designated DFIs. Guidelines for Preferential Issues Guidelines for OTCEI issues Guidelines for Bonus Issues Operational Guidelines Miscellaneous

Some Important Schedules to SEBI (Disclosure & Investor Protection) Guidelines

MOU between Lead MB and Issuer Co. Inter Se Allocation of Responsibilities Due Diligence Certificate to be given by Lead Merchant Banker Promoters Contribution & Lock-in Period Formats of Due Diligence Certificates Financial Statements (P&L, B/S, Tax Shelter Statement, Capitalization Statement) Formats of Auditors Statement for Profit Forecast

Some Important Schedules to SEBI (Disclosure & Investor Protection) Guidelines (contd.)

Basis for Issue Price Post Issue Monitoring Reports Underwriting Devolvement Statement Basis for Allotment Procedure Format to Reporting Agency Book Building Model Draft and Final Offer Documents Format Formats of Hly. Reports to be submitted by MBs (The End)