Directors play a pivotal role in the management and governance of a company. Their responsibilities extend beyond mere oversight, encompassing strategic direction, legal compliance, and safeguarding stakeholder interests. This article delves into the duties and obligations of a director in India, providing a comprehensive understanding of their crucial role in corporate governance.
Management and Board Governance
The Board of Directors is central to a company’s decision-making process. It must provide strategic oversight while also evaluating management’s performance. Simultaneously, the Board ensures compliance with legal frameworks, maintains the integrity of financial reporting systems, and promotes transparency through timely disclosures.
Board responsibilities inherently require sound judgment. While corporate governance includes both legal and behavioral norms, written rules cannot cover every situation. Therefore, behavioral norms like informed decision-making, division of authority, and monitoring management are equally important. Directors must act in the best interests of the company and its shareholders.
Obligation to Constitute a Board of Directors
A company must have a Board of Directors as per legal provisions. It must also disclose director information publicly through statutory filings. This obligation extends to the accuracy and regular updating of this information, especially upon appointment, resignation, or any change in director details.
Minimum and Maximum Number of Directors
Law should prescribe minimum director numbers for various company classes. The current requirements are generally adequate. However, the law should allow for specific categories with different minimums as new company types emerge. The company is responsible for maintaining the minimum number of directors. There should be no limit to the maximum number of directors; this should be decided by the company’s Articles of Association. Every company must have at least one director residing in India to ensure accountability.
Appointment, Removal, and Resignation of Directors
The ultimate responsibility for appointing and removing directors rests with the company’s shareholders. Directors must disclose any legal disqualifications. Government intervention in director appointments should be limited in non-government companies. The company should have the freedom to appoint the best-suited individuals, regardless of their residency. The duty to inform the Registrar of Companies (ROC) about director changes lies with the company. Directors, in turn, must disclose their residence and other prescribed details to the company. Resignation is a right of the director and should be recognized as such.
Age Limit for Directors
There should be no legal age limit for directors. However, the company should disclose the director’s age. For public companies, appointing directors beyond 70 years of age should require a special resolution from shareholders, including their term.
Independent Directors
Independent directors enhance corporate governance by bringing objectivity to board processes. This is particularly important for public companies and those with significant public interest. Their independence should be viewed not just from promoter interests but also from the perspective of vulnerable stakeholders. The law should recognize the principle of independent directors, specifying their role, qualifications, and liabilities. The number of independent directors may vary based on the company’s size and type.
A minimum of one-third of the total directors should be independent for companies with significant public interest. This requirement should initially apply to public listed companies and those accepting public deposits. Nominee directors and government appointees should not be considered independent.
Definition of an Independent Director
An independent director is a non-executive director who:
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Has no material pecuniary relationships with the company, its promoters, directors, or senior management.
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Is not related to promoters or management personnel.
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Is not affiliated with a non-profit organization receiving significant funding from the company.
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Has not been an employee of the company in the preceding year.
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Is not a partner or part of senior management of the company’s auditors or legal/consulting firms.
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Is not a material supplier, service provider, or customer of the company.
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Is not a substantial shareholder (owning 2% or more of voting power).
Appointment and Material Transactions
Independent directors should be appointed based on their integrity, expertise, and experience. The term “material pecuniary relationship” should be clearly defined. A transaction exceeding 10% of the recipient’s gross revenue should be considered material. Independent directors must provide a self-declaration of their independence, and the board must disclose this in the Director’s Report.
Number of Directorships
An individual should not hold more than 15 directorships. Alternate directorships should also fall within this limit. An individual should not be an alternate director for more than one director in the same company. An alternate director for an independent director should also be an independent director.
Directors’ Remuneration
Companies should adopt remuneration policies that attract and retain talented directors and employees. Remuneration decisions should be transparent, fair, and based on accountability. There should be a clear link between responsibility, performance, and remuneration. Emphasis should be on disclosures rather than limits. The shareholders should decide on remuneration, considering recommendations from the Remuneration Committee.
Sitting Fees and Disclosure
No limits should be prescribed for sitting fees for non-executive directors. The company can decide on sitting fees with shareholder approval and disclose it in the Directors’ Remuneration Report. All companies should disclose directors’ remuneration in this report, including all elements of the remuneration package.
Board Committees
Certain core areas require specific Board Committees to provide recommendations. These include:
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Audit Committee: Majority of members should be independent directors, with at least one member having financial expertise. The chairman should also be independent.
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Stakeholders’ Relationship Committee: Required for companies with a combined shareholder/deposit holder/debenture holder base of a thousand or more.
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Remuneration Committee: Mandatory for public listed companies and those accepting deposits, comprising non-executive directors, including at least one independent director.
Duties and Responsibilities of Directors
Directors have a wide spectrum of duties, including:
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Obedience to the company’s constitution and lawful decisions.
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Loyalty to the company and promoting its success.
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Exercising independence of judgment, care, skill, and diligence.
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Disclosing conflicts of interest and seeking shareholder approval.
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Not exploiting company assets for personal purposes.
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Special care when the company is facing insolvency.
The law should include certain basic duties, such as duty of care, good faith, and consideration of employee interests.
Disqualification of Directors
The conditions for disqualification should be prescribed in the Act. Directors must declare they are not disqualified. Disqualification for failing to repay deposits or debentures should be retained. However, this should not apply to new directors joining sick companies for rehabilitation purposes.
Vacation of Office
Failure to attend board meetings for a continuous year should be grounds for vacation of office.
Resignation of Directors
Resignation is a director’s right. Proof of delivery of resignation to the company is sufficient to discharge liability. The company must inform the ROC of the resignation. If the number of directors falls below the minimum due to resignations, the remaining directors can co-opt additional directors. If all directors resign, the promoters should act as directors until new directors are appointed.
Liabilities of Independent and Non-Executive Directors
Non-executive and independent directors should be liable only for contraventions with their knowledge and where they have not acted diligently. Knowledge should stem from Board processes, with dissent recorded in meeting minutes.
Directors and Officers (D&O) Insurance
Companies may take out D&O insurance to mitigate potential personal liability. The premium paid by the company should not be treated as a perquisite unless a wrongful act is established.
Rights of Independent/Non-Executive Directors
Independent and non-executive directors should have the right to:
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Call for due diligence or records.
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Inspect company records.
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Review legal compliance reports.
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Record dissent in meeting minutes.
Meetings of Directors
Meetings should be held at least every three months, with a maximum gap of four months between meetings. Electronic participation in meetings should be allowed, with those participating counted for attendance and quorum.
Quorum for Emergency Meetings
For companies with independent directors, notice of meetings should be given well in advance. Short-notice meetings should require the presence of at least one independent director. Decisions made without an independent director present should be subject to ratification by at least one independent director.
Matters to be Discussed at Board Meetings
Board meetings should provide sufficient time for discussing important matters. Certain vital issues should be mandatory for board discussion and not left to resolution by circulation.
Restrictions on Board’s Powers
Shareholder approval through a special resolution should be required for certain items, such as selling a significant portion of the company’s assets. “Whole or substantially whole” should mean 20% of the total assets.
Meetings of Members
Companies should be permitted to transact business through postal ballots, except for certain items like annual accounts, dividend declaration, director appointments, and auditor appointments. Electronic voting should be allowed. The AGM may be held at a place other than the registered office if at least 10% of members reside there.
AGM in Small Companies
Small companies may be given an option to dispense with the requirement of holding an AGM and to transact business through postal ballots.
Demand for Poll
The threshold for demanding a poll should be reviewed to balance minority interests with orderly business conduct.
Other Recommendations
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A higher deposit amount should be required for nominating a director.
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Shareholders of de-listed companies should have a buy-back offer within three years.
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Key Managerial Personnel (CEO, CS, CFO) should be recognized by law.
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The appointment and removal of Key Managerial Personnel should be by the Board.
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Key Managerial Personnel should be in the whole-time employment of only one company.
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Managing and whole-time directors should not be appointed for more than five years at a time.
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Companies should be encouraged to seek independent assessments of poll conduct.
Conclusion
Directors shoulder significant responsibilities in a company, encompassing legal, ethical, and strategic duties. Understanding these responsibilities is essential for effective corporate governance and the success of the company. This comprehensive overview provides a clear understanding of the obligations and expectations placed upon directors in India.