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Featured Student Assignments (LawSikho)

Board of directors : composition, structure, duties and powers

April 14, 2024

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This article has been written by Kamal Kishore Krall pursuing a Diploma in US Contract Drafting and Paralegal Studies from LawSikho.

This article has been edited and published by Shashwat Kaushik.

Introduction

Section 149 of the Companies Act of 2013, briefly outlines the appointment and qualifications of the Board of Directors. The Board of Directors is the top-performing decision-making authority of any company. The decisions of the Board of Directors give direction to the company to achieve specific goals in a time-bound manner. The Board Directors are individuals who are elected or appointed by the Board meeting specified criteria such as qualifications and experience as mandated in the Act. The directors appointed to the board have diverse experiences and come from diverse backgrounds. They have exceptional organisational skills and are responsible for the overall performance of the company. They provide strategic direction, ensuring the smooth functioning of all the departments of the company. One of the key responsibilities of the Board of Directors is to safeguard and protect the interests of its stakeholders and act as per the Articles of the Company. The Board of Directors also faces a few challenges, such as meeting regulatory compliances, shareholder’s interests, technology disruption, market competition, filling board vacancies in time, CSR initiatives, and the latest in focus, the ESG factor, i.e., environmental, social, and governance factors, which the Board has to cover up in its Board Report. For effective implementation of the board’s decisions, the Company Act 2013 outlines procedures for conducting board meetings, the outcome of which, in the form of a resolution, applies to the board members and all the employees of the company. To effectively convey its decisions, the Board of Directors constitutes and organises committee meetings such as the appointment committee, audit, finance, and risk management committee, etc. The Appointment Committee also has the power to declare dividends, and appoint or remove key executives and/or any Board Director after having the Board’s consensus, which is in the form of a voting/ballot paper and includes stakeholders/shareholders’ votes as well.

There are a few consequences for not forming a board as mandated under the Companies Act 2013. Which may broadly include mismanagement of assets, improper financial statements, divulged and misguided strategic plans, legal complications, depleted investor’s confidence, lack of proper governance, casual vacancies, quorum issues, and lastly, declaring the company insolvent or dissolution of the company by the respective authority. In totality, the Board of Directors plays a vital role in ensuring the success and sustainable growth of an organisation, and organisations need to prioritise the formation, composition, and governance of their Board to drive success and mitigate risks.

Appointment and qualifications of directors

Chapter XI of the Companies Act 2013, Section 149, Sub Section (I), states that:

“Every company shall have a Board of Directors consisting of individuals as directors and shall have: (a) a minimum number of three directors in the case of a public company, two directors in the case of a private company, and one director in the case of a One company; and (b) a maximum of fifteen directors.”

The Act also mandates compliance with the above directions and fulfilling criteria within one year from the commencement/inception of the company or business. The Board can increase the number of directors by passing a special resolution with the mandate of appointing at least one female director to the Board of Directors. Section 149 Sub Section (3) of the Companies Act also states that every listed company shall have at least one director who has stayed in India for a total period of not less than one hundred and eighty-two days in the previous calendar year.

The Act mandates filling up the vacant position of Director by the Articles of the company. The vacancy(ies) may arise due to resignation, removal of an Independent Director, or retirement by rotation. Such vacancy(ies) is/are to be filled up within a period of not more than one hundred and eighty days from the date of such resignation or removal, as mandated in Schedule IV, Paragraph VI (2) of the Companies Act 2013.

An individual who desires to apply for the Board of Directors post needs to meet certain criteria as laid down under Section 153 of the Companies Act 2013. One such criterion is possession of a Director Identification Number (DIN), which can be obtained from the Ministry of Corporate Affairs (MCA) of the Government of India by applying for the allotment of DIN along with depositing the prescribed fee.

Generally, the board announces the vacancy of an independent director in their organisation; however, the applicant is also expected to keep an eye on the vacancy and apply before the deadline for consideration of his/her candidature.

Section 149 (4) Subsection (4) of the Act further mandates that every listed public company have at least one-third of the total number of directors as independent directors.

Limitations of independent directors under the board

An independent director in a company means a director other than a managing director, a whole-time Director or a nominee director who, in the opinion of the board, is a person holding integrity and possesses relevant expertise and experience. As per Rule 4 of the Companies (Appointment and Qualifications of Directors) Rules, 2014, there is a mandate to appoint a minimum of two independent directors in the company on a specific ground. The Companies Act 2013 Schedule IV has mandated independent directors adhere to certain codes of professional conduct regarding their responsibilities towards the company.

Unlike the responsibilities of management people who can be transferred to different departments depending upon the need or urgency of the matter, the directors appointed (including independent directors) on the Board of Directors panel do not have such powers. In other words, the directorship is non-transferable, and any contravention of this arrangement attracts suitable action under the Act, which may include imprisonment and/or a fine as notified from time to time. Further, Section 161 of the Act goes deeper in filling up the vacant position by appointing an additional director, alternate director, and/or nominee director until the regular director joins the board. The Board shall inform all its members to adopt this alternative arrangement for filling the vacancy.

Under certain circumstances, independent directors may not be able to render their duties to the organisation and may encounter limitations that hinder their ability to deliver their services to the board, as under:

An independent director who is or was, and is not related to a promoter of the company or its holding, subsidiary or associate company.
An independent director who neither he/herself has held or has held the position of key managerial personnel nor had/has been an employee of the company, its holding, subsidiary or associate company in any of the three financial years immediately preceding the financial year in which he is proposed to be appointed.
The Independent Director is not in possession of the Director Identification Number (DIN) issued by the Ministry of Corporate Affairs, Government of India.
The Independent Director has not mentioned (DIN) while furnishing any return under the Companies Act 2013.
Further to the above conditions, an independent director shall not be entitled to any stock option and may receive remuneration by way of a fee provided under sub-section (9) of Section 149 of the Companies Act.
Under Section 249 of the Companies Act 2013, under certain circumstances, an individual will be restricted from applying for the directorship candidature, such as, if the company has changed its name and/or has shifted its registered office from one state to another during the previous three months. Also if the company is being wound up, whether voluntarily or by the Tribunal.
The maximum term of an independent director on the board of directors is two consecutive terms, wherein each term is five years. The Independent Director shall be eligible for reappointment for the second term upon completion of the first term, subject to the passing of a special resolution by the Board and disclosure of such appointment in the Board’s report.

Disqualifications for appointment of directors

The Companies Act 2013 under Section 164 has outlined certain circumstances under which a person shall not be eligible for appointment as a director in a company; these may include:

Found with an unsound mind and declared incompetent to handle the charge of directorship of the company as declared by the competent court.
Declared insolvent.
Has not filed annual returns or financial statements for three consecutive years.
Has been disqualified from appointment as a director by an order passed by a court or tribunal, and the order is in force.
Has been convicted by a court of any offence, including imprisonment not less than six months and a period of five years not elapsed from the date of expiry of the sentence.

Composition of a board

Size and structure

The size of the board varies depending on factors such as the size of the company and the type of industry. Typically, public companies are mandated to appoint a minimum of three Directors. However, the optimal number of directors in both the internal and external director categories is eight to ten, with a mix of executive and non-executive directors. However, a smaller board can be more agile and efficient, while a larger Board can offer diverse perspectives. Apart from that, in small establishments, there may be only one director on the board panel.

Types of directors

Directors on the Board can be classified into various types based on their roles, responsibilities, and relationships with the company. Below are some common types of Directors:

Managing directors: MDs are responsible for the day-to-day smooth operations of the company.
Executive directors: EDs are full-time directors of the company directly involved in the day-to-day operations and have higher responsibility for implementing board decisions.
Non-executive directors: These directors are without executive roles and are not involved in the routine/everyday working of the company. They provide independent oversight and an objective perspective and, at times, challenge management’s assumptions.
Independent directors: IDs are non-executive directors and hold no materialistic financial or personal relationships with the company. IDs are brought in to provide unbiased decision-making, ensuring the Board’s objectivity and credibility.
Lead director: An independent director who chairs board meetings in the absence of the Chief Executive Officer, facilitating communication and fostering the board’s effectiveness.
Residential director: A director who resides in the same country as the company.

Diversity and inclusivity

For improved performance and meeting stakeholders’ expectations, boards prioritise diversity in terms of gender, ethnicity, skills and experiences from various geographical zones to offer broader perspectives and enhance decision-making.

Board structure and committees

The board structure refers to the organisation and composition of the board of directors within a company/organisation. It encompasses the number of directors, their roles, responsibilities, and relationships among board members and how they interact to fulfil their duties. The board structure and committees vary depending on factors such as the size of the company, industry, corporate governance practices, and regulatory requirements. Typically, some of the key components of the board structure include the following:

Standing committees

These committees usually run continually and deal with key issues facing the company, including:

Audit committee: Oversees all the financial reporting, internal controls, and independent audits, ensuring financial integrity and compliance.
Nominating and Governance Committee: The role of this committee is to identify and nominate qualified candidates for board vacancies, form board composition, and structure, and review the board’s performance.
Compensation Committee: Sets the compensation packages of senior executives aligned with competitive pay based upon performance and company strategy.

Specialised committees

Committees are formed to perform specific tasks or specific situations, such as:

Risk Management Committee: This committee is formed to oversee risk identification, risk assessment, and the design of mitigation strategies.
Mergers and Acquisitions Committee: This committee evaluates potential merger or acquisition opportunities and gives recommendations.

Corporate Social Responsibility Committee

A company having a net worth of rupees five hundred crores or more, a turnover of rupees one thousand crores or more or a net profit of rupees five crores or more during any financial year is mandated by the Act to constitute a Corporate Social Responsibility Committee of the Board consisting of three or more Directors, out of which at least one Director shall be appointed as an Independent Director.

Task Force Committee

These Committees are formed to address specific challenges or opportunities for achieving desired outcomes for a set duration.

Advisory Committee

This Committee is formed to provide advice and guidance to address critical matters of the company requiring the Board’s attention for informed decision-making.

Steering Committee

These committees are formed to provide leadership, governance, and strategic direction to the project from inception.

Executive Committee

This committee is formed to address the urgent and sensitive nature of the situation of the project and act on behalf of the board.

Duties and responsibilities of the board

The Board of Directors acts under the Articles of the Company. The board has to govern and guide the company to achieve its strategic goals. The Board’s prime duty is to work in transparency and provide fair and independent judgement on the matters. None of the board members should have any personal, direct or indirect interest that may be against the company’s reputation or create a conflicting situation. The board members found involved in any personal gain, interest or likewise are found guilty of their misconduct under the Companies Act and are liable to pay an amount equal to that gain to the company, which is also punishable with a fine ranging from Rs. 1 lakh to Rs. 5 lakh.

The board plays a fiduciary role in achieving the strategic goals of the company. Typically, the responsibilities include:

Setting strategic direction

One of the key responsibilities of the Board of Directors is to define the organization’s Vision, Mission, Policies, and long-term goals. The Board shall safeguard the interests of the stakeholders, particularly the minority shareholders.

Overseeing management

The Board of Directors delegates and oversees the management of the company, which broadly includes appointing executives, determining compensation, and monitoring and evaluating the performance of the executive team on agreed metrics and goals of the organisation. The Board is also responsible for ensuring the protection of confidential information, including commercial secrets, technologies, and sensitive information.

Ensuring financial accountability with regulatory requirements

The Board of Directors is also responsible for overseeing the company’s financial performance and ensuring the accuracy and integrity of financial statements. In the interest of the company, the board is expected to attend all the audit committee meetings and be aware of the legal and regulatory financial compliances to address the matter accordingly.

Protecting stakeholder interests

The Board serves as a link between management, shareholders, stakeholders, employees, and customers. Acting within its authority, the Board is obligated to assist in protecting the legitimate interests of the company, its shareholders and its employees. This includes working with transparency, ensuring accountability, and promoting a culture of ethical behaviour within the organisation.

Powers of the board of directors

The Board, through its Directors, is entitled to exercise such powers and to do all such acts and things crucial to its strategic approach. The Board of Directors, depending on the requirement, exercises powers on behalf of the company by passing resolutions at the board meetings. The resolutions may include:

Approving major decisions: The Board authorises significant financial transactions such as investments, acquisitions, and capital expenditures.
Appointing and removing key executives: The Board is responsible for hiring, evaluating, and dismissing senior executives, including the CEO.
Declare dividends: The Board decides on distributing profits to the shareholders and manages capital allocation.
Issuing new shares: The Board controls the increase in share capital to finance growth or operations.
Mergers and acquisitions: The Board also oversees the process of combining with other entities to ensure strategic alignment and value creation.

Challenges in board governance

The role of the Board of Directors in a company is of paramount importance. The board’s decision and strategy can elevate the company from a lowly start to soaring heights; concurrently, non-adherence to the directives as enacted in the Act can spoil the reputation among stakeholders and keep the company’s status at risk. In other words, the Board of Directors faces lots of challenges in implementing decisions and strategies for effective governance. Let’s dive in to know the challenges faced by the Board members:

Board composition, diversity and dynamics

The Board of Directors operates with limited positions, and every member of the Board of Directors is responsible for performing all roles and responsibilities within the framework. The primary challenge faced by the board is the formation of its composition. The members of the Board of Directors should possess extensive experience, knowledge, and skills and have a thorough understanding of the subject matter.

Further, ensuring diversity among board members and hiring niche talent with exceptional and overarching perspectives can benefit the organisation. The other challenge here is to invite professionals from cross-border countries, creating a culture that values diversity and inclusion. Ensuring their voices are heard and considered, will foster the expansion of the business globally. However, challenges like gender, race, ethnicity, language, etc. may arise in the selection process.

Elements like effective communication, interaction, and collaboration among board members also play a crucial role in nurturing the organisation and fostering international exposure. However, initial challenges may arise in understanding and delivering the desired outcomes. Overcoming these challenges will also ensure bringing a broader perspective and reputation to the board and the organisation as a whole.

Increasing focus on environmental, social, and governance factors and their challenges

Boards are facing growing pressure to integrate ESG factors into their decision-making. This is a result of changing market dynamics, regulatory changes, and demand-driven stakeholders’ requirements.

Technological advancements and disruption, and their challenges

In today’s era, the technology disruption is pervasive, and companies are operating their businesses through e-commerce platforms. The Board of Directors has to remain vigilant around the clock to address threats such as data breaches and the leak of confidential information to competitors. To overcome these challenges, Boards adapt by introducing technological advancements that also influence Boardroom dynamics in several ways

Evaluating the board and meeting compliances and regulations

The Companies Act 2013 provides certain guidelines for evaluating the conduct of the Board of Directors. The Act mandates the evaluation of the independent director by the entire board, excluding the director being assessed. The evaluation criteria encompass the board’s composition, diversity, skills, independence, decision-making processes, risk oversight, and strategic guidance. Additionally, it also includes strategy formulation, risk management, financial oversight, compliance with laws and regulations, stakeholder engagement, and ethical conduct.

Based on the satisfactory performance of these indicators, the Board determines the extension or termination of the Directors. The evaluation process may involve gathering feedback from stakeholders, including shareholders, employees and regulators.

The evaluation process thus enhances governance practices, improves decision-making and ensures effective delivery of fiduciary duties by the Director under the Act.

Succession planning and ethical dilemmas

The board is only functional when all of the positions are filled and there is no vacancy on the board of directors. The Companies Act 2013 also mandates filling up the vacant positions before the next general meeting of the board, which also fosters long-term sustainability of the organisation. For this purpose, a smooth transition in leadership is essential when filling any vacant position on the board. During the selection process, the board may face ethical dilemmas and/or conflicts of interest. This ought to be the biggest challenge for the Board of Directors to reach a final decision balancing the interests of all board members and addressing conflicts of interest, including those of stakeholders/shareholders.

Consequences for non-formation of the board under the Companies Act 2013

Not forming a Board of Directors in a company under the Indian Companies Act, 2013 can have several consequences, as the Board provides strategic direction to the company in governance and decision-making. In the absence of a proper board, there may be consequences that the board of directors or the company may face, such as:

Casual vacancy

If the number of directors falls below the minimum required by the law or the company’s Article of Association due to death, resignation, or other reasons, it creates a casual vacancy on the board. In such cases, the Board may be unable to fulfil its duties and pass resolutions necessary for effective governance until the vacancy is filled.

Quorum issues

A board must have a minimum quorum (usually a certain number of directors) to cast votes for conducting board meetings to be valid and legally binding to convey its decisions (Section 174). In the event of quorum issues, all the discussion and decisions taken in the meeting by the board are unethical, invalid, illegal, non-binding, and unenforceable. In other terms, this is a violation of the Companies Act, 2013.

Legal non-compliance and penalties

The Indian Companies Act 2013 mandates the formation of a Board of Directors for all registered companies. The company was established based on guidelines under the Companies Act of 2013. The non-compliance on one side badly affects the reputation of the company but the violation also leads to a levy of heavy penalties. The consequences of legal non-compliance may include the following:

Non-submission or falsified annual returns, resulting in fines for the board of directors and the company.
Involving in fraudulent practices such as misleading disclosures, financial fraud, etc. leads to heavy penalties and imprisonment in certain cases.
Non-adherence to statutory provisions can lead to penalties and legal proceedings under the Act.
Non-compliance with ESG and CSR can lead to penalties and reputational consequences.
Non-compliance may lead to depleted shareholders’ trust, destroying the company’s reputation.

Operational challenges

Without a proper board, critical decisions related to strategy, financial stability, and governance may be delayed or compromised. One of the operational challenges includes CSR compliance, wherein a prescribed percentage of profit has to be spent on CSR activities. If not complied with, consequences under the Act are liable to be initiated against the defaulting board of directors and the company.

Loss of stakeholder’s trust

One of the key benefits of forming a Board in a company is the limited liability protection it offers to its shareholders. If the trust is breached, this could result in severe reputational damage to the company. This could further translate to financial losses in the form of declined sales, reduced market scope, etc. There could even be the termination of contracts and the loss of stakeholder support.

Inability to access capital

Many investors, lenders, and financial institutions require companies to have a properly constituted Board of Directors as part of their due diligence process. Failure to meet this requirement may hinder the company’s ability to raise capital or secure financing.

Conclusion

The Board of Directors plays a pivotal role in the organisation, with the prime goal of seeing the organisation reach new heights. The Board of Directors in an organisation has a very competitive and challenging role, shouldering significant responsibilities ranging from setting strategic trajectories to overseeing management matters, financial accountability, and safeguarding stakeholder interests. The board’s responsibilities are not only limited to appointing the board directors but also to fostering crystal clear and transparent governance within the organisation. However, these responsibilities come with lots of challenges that the board faces. This may include regulatory compliance, conducting board meetings and addressing shareholder’s concerns. There are even complexities that come in the way of the performance of the board, such as setting strategic direction, implementing decisions, overseeing management’s performance, addressing technology disruption, and market competency concerns. The timely filling of the board’s vacancy and the latest focused topic, compliance with ESG standards, underscore the board’s multifaceted responsibilities.

Where the Board Directors’ performances ought to be very decisive, the Companies Act 2013 provides stringent guidelines for the evaluation of the entire Board and has strict guidelines for their continuity in the Board’s position. Consequences of failing to adhere to guidelines may include asset mismanagement, compromised financial reporting, legal complications, diminished shareholder confidence, and a lack of proper governance. Additionally, casual vacancies and quorum issues may loom and may culminate in the company’s insolvency or dissolution under the Act. Therefore, the board’s approach to tackling these challenges with dedication maintains organisational ethics and values and promotes sustainable growth for the company.