BOARD OF DIRECTORS

• Board of Directors is a group of people elected to represent the interest of a company’s

stakeholders and to oversee a company’s operations and make strategic decisions.

• The BOD plays a vital role in ensuring a company’s success, ethical conduct, and long-term
sustainability.

• Section 2 (10) of the Companies Act, 2013 defined that “Board of Directors” or “Board”, in
relation to a company, means the collective body of the directors of the company.

• As per Chapter XI, Section 149 of the Companies Act 2013, it is mandatory for every company to
have a Board of Directors, the composition should be as follows:

1. Public Company: Minimum 3 and maximum 15 nos. of Directors; at least 1/3rd number of
Independent Directors

2. Private Company: Minimum 2 and maximum 15 nos. of Directors

3. One person Company: minimum 1 director

4. At least 1 woman director

5. At least 1 Director who has stayed in India for minimum 182 days in the previous calendar year.

KINDS OF DIRECTORS
1. Executive Directors

2. Non-executive Directors

3. Representative Directors

4. Shadow Directors

5. Nominee Directors

6. Professional Directors

7. Independent Directors

1. Executive Directors-
 Otherwise known as inside directors.

 They are employees of the company and working under a contract.

 They perform a wide range of responsibilities like developing strategic policies, representing the
company in public forums and implementing long-term and short-term business goals

 They are appointed by the shareholders and are responsible like any other director.

 They are often responsible for steering the organization, carrying out its mission, and managing
its operations.
Role & Responsibilities

 Set the organization's strategic direction & Strategic decision making

 Oversee various departments

 Ensure that targets are met

 Maintain quality standards

 Adhere to budgets

 Create, monitor, and report on departmental business plans

 Assess project performance

 Guide in corrections and corrective actions

Types of Executive Directors

a. Chief Executive Officer (CEO)-

Highest ranking executive in a company responsible for overall management and strategic decisions.

b. Chief Operating Officer (COO)-

Oversee company’s operational functions and ensure efficient processes and systems.

c. Chief Financial Officer (CFO)-

Managing financial activities including budgeting, forecasting and financial reporting.

d. Chief Technology Officer (CTO)- Includes innovation, IT management,

2. Non-Executive Directors-
 A board member who is not part of the executive team.

 The Board assigns some special duties to these part-time directors.

 They are given some fees for the work performed by them.

 They cannot participate in the day-to-day management of the firm.

 He is an independent board member who advises a company on strategy and policy, and
monitors the executive team

 Also called external directors / independent directors/ outside directors

Role & Responsibilities

 Planning: Help develop the company's strategy and policies

 Monitoring: Oversee the management team and ensure they are acting in the company's best
interests
  Risk management: Develop frameworks to manage and regulate risks

 Performance review: Evaluate the management team's performance

 Public relations: Help promote the company's positive image

3. Representative Directors
 They are appointed by the board to represent the interests of stakeholders such as workers,
consumers, Government departments, and employees.

 Board representation is when investors or employees have someone to represent them on the
board of directors.

 It can be a director appointed by a large shareholder to sit on the board of a company they have
invested in

 Eg: a director appointed by LIC in the board of IDBI bank.

Role & Responsibilities

• Selecting and overseeing leadership: Hiring, evaluating, and compensating the CEO and other
senior executives.

• Financial oversight: Reviewing financial statements, approving budgets, and monitoring

financial performance.

• Risk management: Identifying potential risks and implementing strategies to mitigate them.

• Compliance and ethics: Ensuring the company adheres to all relevant laws, regulations, and
ethical standards.

• Stakeholder engagement: Communicating with shareholders, investors, and other stakeholders

to address concerns and provide updates.

4. Shadow Director
 A shadow director is someone who performs the duties of a company director without being
officially appointed to the board.

 They can influence the company's strategy and are responsible for ensuring the company is run
legally and efficiently.

 The Companies Act, 2013, defines a shadow director as "any person in accordance with whose
directions or instructions the Board of Directors or any one or more of the Directors is or are
accustomed to act".

Role & Responsibilities

• Controlling influence: They exert substantial control over the board's decision-making by
providing instructions, guidance, or advice that the board largely follows.
 • No formal title: Unlike a regular director, a shadow director is not officially appointed to the
board and their role may not be publicly disclosed.

• Legal responsibility: Despite not being formally listed, a shadow director is still legally liable for
their actions and must act in the best interests of the company, adhering to the same
responsibilities as a regular director.

5. Nominee Director
 A nominee director is a person appointed to act as a director of a company on behalf of another
person or entity. The person or entity that appoints the nominee director is known as the
nominator.

 The nominee director acts as a director of the company, but doesn't necessarily play an active
role in the company.

 The nominator provides instructions and requests to the nominee director regarding the roles
for company’s development.

Responsibilities

• Represent interests: Represent the interests of the nominating party, such as a parent
company, lender, or shareholder

• Meet legal requirements: Help the company meet legal requirements and regulatory duties

• Attend board meetings: Attend board meetings and be answerable for actions taken through
board processes

• Maintain legal responsibilities

6. Professional Directors
 A professional director is a company director who has professional qualifications and no
financial interest in the company. They are often non-executive directors who are experts in a
particular field.

 He is a board member who possesses specialized expertise in a particular field, often not directly
related to the company's primary business.

 Large companies often appoint professional directors to use their expertise in managing the
company.

7. Independent Director
 One who is not related to promoters or management at the board level or at one level below
the board; has not been an executive of the company in the immediately preceding financial
years.

 The purpose of appointing independent director on the Boards of listed companies is to ensure
adherence to good corporate governance standards and to check diversion of funds.
Responsibilities

• Uphold ethics: Uphold ethical standards of integrity and probity

• Make informed decisions: Help the board make informed decisions and develop long-term
strategies

• Promote transparency: Ensure that organizational activities are conducted with clarity and
openness

• Uphold accountability: Hold management accountable for decisions impacting shareholders and
stakeholders

• Safeguard stakeholder interests: Safeguard the interests of all stakeholders, particularly the
minority shareholders

• Monitor management performance: Scrutinize the performance of management in meeting

agreed goals and objectives

• Oversee risk management: Oversee risk management and internal controls

• Navigate complexity: Offer critical guidance in navigating regulatory, financial, and market
challenges

General Powers of Board of Directors

1. The power to make calls on shareholders in respect of money unpaid on their shares.

2. The power to authorize the buy-back of shares

3. The power to issue debentures.

4. The power to borrow money other than debentures

5. The power to invest funds of the company.

6. The power to make loans.

Powers exercised at the Board Meeting

1. The power of filling casual vacancies in the Board.

2. Sanctioning of a contract in which a director is interested.

3. The power to recommend the rate of dividend to be declared by the

company at the AGM subject to the approval by the shareholders.

Powers of BOD only with the Consent of Shareholders in General Meeting

1. Sale, lease or otherwise dispose of the whole, or whole of the undertaking of the company.

2. Remit or give time for repayment of any debt by a directors.

 3. Borrow money exceeding the aggregate of the paid up capital of the company and its free
reserves.

4. Contributions to charitable and other non-profit activities.

Duties of Board of Directors

 Statutory Duties

 To file returns of allotments in case of issue of securities

 To disclose the extent of interest in contracts entered into by the company

 Not to issue irredeemable preference shares or shares redeemable after 10 years.

 To disclose receipt from transfer of property

 Duty to attend board meetings

 Duty to convene general meetings

 To prepare and place Balance sheet and Profit& Loss A/C at the Annual general Meeting

 Duty to make declaration of solvency in the case of members’ voluntary winding up.

 General Duties

 Duty of Good Faith

The directors shall act in the best interest of the company. They are not suppose to create any

secret profits

 Duty of Care and Caution

A director shall display in performance of the work assigned to him.

 Duty not to Delegate

A director being an agent of the company cannot delegate his duty to anyone in the capacity of a

director

APPOINTMENT OF DIRECTORS – Section 152

• General provisions relating to appointment of directors
1. Except as provided in the Act, every director shall be appointed by the company in general meeting.

2. Director Identification Number is compulsory for appointment of director of a company.

3. Every person proposed to be appointed as a director shall furnish his Director Identification Number
and a declaration that he is not disqualified to become a director under the Act.
4. A person appointed as a director shall on or before the appointment give his consent to hold the
office of director in physical form DIR-2 i.e. Consent to act as a director of a company.

5. Articles of the Company may provide the provisions relating to retirement of the all directors. If there
is no provision in the article, then not less than two-thirds of the total number of directors of a public
company shall be persons whose period of office is liable to determination by retirement by rotation
and eligible to be reappointed at annual general meeting.

Key Regulatory Framework:

• Companies Act, 2013:

• Section 149 of the Companies Act, 2013, lays down the provisions related to the
appointment of independent directors.

• It defines the criteria for independence and specifies the requirements for their
appointment.

• Schedule IV of the Companies Act, 2013, provides a code for independent directors,
outlining their guidelines of professional conduct, roles, functions, and duties.

• SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR):

• SEBI LODR Regulations provide additional requirements for listed companies regarding
the appointment and role of independent directors.

• These regulations aim to enhance corporate governance standards in listed entities.

Independent Directors-Key Roles and Responsibilities

1. Providing Independent Oversight

• Their primary function is to offer an unbiased perspective on the company's affairs.

• They help ensure that the interests of all stakeholders, especially minority shareholders, are
protected.

2. Enhancing Corporate Governance

• Independent directors contribute to establishing and maintaining high standards of

transparency, accountability, and ethical conduct.

• They play a key role in ensuring compliance with relevant laws and regulations.

3. Strategic Input and Decision-Making

• They bring valuable expertise and experience to board discussions, offering insights on strategic
direction, risk management, and performance evaluation.

• They challenge management's assumptions and ensure that decisions are made in the best
interests of the company.
4. Risk Management and Audit Oversight

• They play a crucial role in overseeing the company's financial reporting, internal controls, and
risk management processes.

• Often, they serve on audit committees, providing independent scrutiny of financial

information.

5. Succession Planning and Executive Compensation

• Independent directors contribute to succession planning for key management positions and
help determine fair and reasonable executive compensation.

6. Safeguarding Stakeholder Interests

• They work to balance the often conflicting interests of various stakeholders, ensuring fair and
equitable treatment.

Importance of independent director

1. Objectivity and Independence

• They offer an unbiased perspective, free from conflicts of interest that can arise from close ties
to management.

• This objectivity is vital for fair decision-making.

2. Enhanced Corporate Governance

• They strengthen accountability and transparency, ensuring that the company operates ethically
and responsibly.

• They contribute to robust risk management and oversight of financial reporting.

3. Strategic Guidance

• They bring diverse expertise and experience to the board, enriching strategic discussions.

• They can challenge management's assumptions and provide valuable insights.

4. Protection of Stakeholder Interests

• They act as a safeguard for the interests of all stakeholders, including shareholders, employees,
and customers.

• They help to balance competing interests and ensure fair treatment.

5. Increased Investor Confidence

• Their presence enhances the company's credibility and reputation, fostering trust among
investors.

• This can lead to improved access to capital and a stronger financial position.
 The Benefits of Having Independent Directors
1. Objective assessment of a company

Independent directors provide a fresh perspective and objectively assess the company’s strategy, goals
and situation. They can make objective evaluations and supervise management decisions because they
have no hierarchical relationship with inside directors. The lack of previous and existing relationships
within the company allows for better prevention of conflicts of interest and insider control.

2. Diverse experience and expertise

Independent directors may have specific experience and expertise different from the current board of
directors. This can contribute significantly to creating company strategies and decisions.

3. Credibility

Having an independent director safeguards the interests of investors, stakeholders and the public, thus
adding credibility to the company. The independent directors with no ties to the company can help
reduce insider control on the board, enhance supervisory function and reduce overlap between
decision-making and operating powers.

4. Governance Insights

NON EXECUTIVE DIRECTORS

Non-executive directors (NEDs) play a vital role in strengthening corporate governance by providing
independent oversight and strategic guidance. Their role is crucial for ensuring that companies operate
ethically, transparently, and in the best interests of their stakeholders.

Role or Core Functions of Non Executive Directors

1. Independent Oversight and Scrutiny

• NEDs provide an objective and unbiased perspective on the company's affairs, free from the
conflicts of interest that can arise from executive management.

• They scrutinize management's decisions and actions, ensuring accountability and preventing
potential abuses of power.

2. Strategic Guidance and Counsel

• NEDs bring diverse expertise and experience to the board, enriching strategic discussions and
contributing to informed decision-making.

• They offer valuable insights on industry trends, market dynamics, and potential risks and
opportunities.

3. Risk Management and Control

• NEDs play a critical role in overseeing the company's risk management processes, ensuring that
effective controls are in place to mitigate potential risks.
 • They contribute to the development and implementation of risk management strategies.

4. Corporate Governance and Compliance

• NEDs are instrumental in upholding high standards of corporate governance, promoting

transparency, accountability, and ethical conduct.

• They ensure that the company complies with relevant laws, regulations, and best practices.

5. Protection of Stakeholder Interests:

• NEDs act as a safeguard for the interests of all stakeholders, including shareholders, employees,
customers, and the community.

• They help to balance competing interests and ensure fair and equitable treatment.

6. Enhancing Board Effectiveness:

• NEDs contribute to the overall effectiveness of the board by fostering open communication,
constructive debate, and a culture of accountability.

• They often will be part of committees like the audit committee, remuneration committee, or the
nomination committee.

7. Succession Planning:

• NED's will often be involved in the important process of succession planning, to help ensure
that the company has a smooth transition of leadership.

Key Benefits of NEDs in Corporate Governance

1. Increased Transparency and Accountability

Their independent oversight enhances transparency and holds management accountable.

2. Improved Decision-Making

Their diverse perspectives lead to more informed and balanced decisions.

3. Enhanced Risk Management

Their scrutiny of risk management processes helps to mitigate potential risks.

4. Strengthened Stakeholder Confidence

Their presence builds trust and confidence among stakeholders.

5. Better long term company performance

Good corporate governance, assisted by NED's, correlates to better long term company performance
INDEPENDENT DIRECTORS VS NON-EXECUTIVE DIRECTORS

Key Responsibilities of Directors in Risk Management

1. Risk Awareness

Directors are responsible for fostering a culture of risk awareness throughout the organization. This
involves demonstrating a commitment to ethical conduct and sound risk management practices.

1. Defining Risk Appetite

The board must determine the level of risk the company is willing to accept in pursuit of its strategic
objectives. This "risk appetite" guides management's decisions.

3. Overseeing Risk Management Frameworks:

Directors ensure that effective risk management systems are in place. This includes establishing policies,
procedures, and controls to identify, assess, and mitigate risks.

4. Monitoring and Reviewing Risks:

The board regularly monitors the company's risk profile and reviews the effectiveness of its risk
management processes. This involves staying informed about emerging risks and assessing the
adequacy of mitigation strategies.

5. Ensuring Compliance:

Directors must ensure that the company complies with relevant laws, regulations, and industry
standards.
Factors Determining Effectiveness of Risk Management
 Board Competence and Engagement

• Directors must possess the necessary expertise to understand and evaluate complex
risks.

• Active engagement in risk discussions and a willingness to challenge management's

assumptions are crucial.

 Clear Risk Appetite and Tolerance

• A well-defined risk appetite provides a framework for decision-making.

• Understanding the company's tolerance for different types of risk allows for appropriate
mitigation strategies.

 Robust Risk Management Framework

• Effective frameworks include clear roles and responsibilities, established risk assessment
methodologies, and ongoing monitoring processes.

• The framework should be adaptable to changing business environments.

 Effective Communication and Information Flow

• Open and transparent communication between the board, management, and other
stakeholders is essential.

• Accurate and timely information allows for informed decision-making.

 Strong Risk Culture:

• A culture that encourages risk awareness and accountability is vital.

• Employees at all levels should understand their role in risk management.

 Independent Oversight:

• Independent directors and committees play a crucial role in providing objective

oversight of risk management.

• This helps to ensure that risk assessments are unbiased.

 Adaptability and Continuous Improvement:

• Risk management practices should be regularly reviewed and updated to reflect

evolving risks and best practices.

• A commitment to continuous improvement is essential for long-term effectiveness.

Challenges to Effective Risk Management
• Complexity of Risks

Modern businesses face increasingly complex and interconnected risks, making them difficult to assess
and manage.

• Information Overload

Boards can be overwhelmed with information, making it challenging to identify and prioritize key risks.

• Cognitive Biases

Directors may be subject to cognitive biases that can impair their judgment and decision-making.

• "Check-the-Box" Compliance

Focusing solely on compliance requirements can lead to a superficial approach to risk management.

Corporate Criminal Liabilities

• Corporations are treated as "legal persons," they have rights and responsibilities under the law,
separate from their individual members. This legal personhood allows them to enter into
contracts, own property, and also be held liable for criminal offenses.

• Corporate criminal liability is a vital aspect of modern legal systems, designed to ensure that
corporations are held accountable for their actions.

• Corporate criminal liability is essential for holding corporations accountable for their actions and
deterring corporate wrongdoing.

• It protects the public interest and ensure that corporations operate within the bounds of the
law

• Corporate criminal liability refers to the legal concept that a corporation itself can be held
criminally responsible for the actions of its employees or agents.

• This is a complex area of law, and its application varies across different jurisdictions.

Types of Corporate Crimes:

Corporations can be held liable for a wide range of criminal offenses, including:
• Fraud
• Environmental violations
• Antitrust violations
• Money laundering
• Workplace safety violations
• Bribery and corruption