NTPC School of Business (NSB)

PGDM(EM), Term-3, Batch-5, 2022-24

Corporate Governance
BOARD OF DIRECTOR’S
RESPONSIBILTIES AND
FUNCTIONING
BY: CS NARESH KUMAR SINHA
 BOARD OF DIRECTORS

 The Board of directors is appointed to act on behalf of the shareholders

to run the day to day affairs of the business. The board is directly
accountable to the shareholders and each year the company is required
to hold an Annual General Meeting (AGM) at which the directors must
provide a report to shareholders on the performance of the company,
what its future plans and strategies are and those directors who are due
to retire by rotation also submit themselves for re-election to the board.
 BOARD OF DIRECTORS

 The board of director’s key purpose is to ensure the company’s

prosperity by collectively directing the company’s affairs, whilst
meeting the appropriate interests of its shareholders and other
stakeholders.
 In addition to business and financial issues, board of directors must
deal with challenges and issues relating to corporate governance,
corporate social responsibility and corporate ethics.
 BOARD OF DIRECTORS

 Board of Directors act only as a group. Individuals on Boards should

have no power except that which the individual may be entrusted with
by a majority vote of the Board as a whole.
 RESPONSIBILITIES OF BOARD
OF DIRECTORS
Responsibilities of Board of Directors may be grouped under two broad heads:
I. General Responsibilities of the Board
II. Specific Duties and Functions of the Board
 (i) General Responsibilities of the
Board

Consistent with a director’s three-fold duty of obedience, diligence and loyalty to

the corporation he serves, the Directors should:
i. Act within the scope of power and authority to the company and the Board as
prescribed in the Memorandum of Association, Articles of Association, Bye-
laws of the company and in existing laws, rules and regulations;
 (i) General Responsibilities of the
Board
i. Exercise their best care, skill, judgement and observe utmost good faith in
the conduct and management of the business and affairs of the company;
and
ii. Act in the best interest of the company and for the common benefit of the
company’s stockholders and other stakeholders.
 KEY FUNCTIONS OF A PRESENT-
DAY BOARD INCLUDE:
 Guiding corporate strategy, major plans of action, risk policy,
annual business plans, overseeing major capital expenditures,
acquisitions and disposals.
 Monitoring managerial performance, conflicts of interests of
management, board members and shareholders including misuse
of corporate assets and abuse in related party transactions.
 Achieving adequate returns for shareholders.
 KEY FUNCTIONS OF A PRESENT-
DAY BOARD INCLUDE:
 Compliance with laws and regulations, including maintaining
integrity of accounting and financial reporting systems, internal
and operational controls, systems for evaluating risk
management, etc.
 Interests of Stakeholders, such as employees etc.
 Corporate Social Responsibilities
(ii) Specific Duties and Functions of the
Board
These include:
1. To create the organization’s mission and values statements;
2. To hire, evaluate, support and fire the executive director;
3. To develop company’s policies governing human resource management and
facilitate staff and client governance issues;
4. To review and accept the annual accounts and the audit report thereon and file
the same, after adoption by the members of the company in the AGM, with the
Registrar of Companies;
(ii) Specific Duties and Functions of the
Board

5. Accepting fiduciary responsibility for the company and assuring the

integrity of its financial reports and records;
6. Developing a strategy plan for the company and monitoring
compliance with the goals and objectives of the plan;
7. Periodically reviewing the company’s compliance with its mission and
values statements;
(ii) Specific Duties and Functions of the
Board

8. Maintaining records of board’s activities and decisions;

9. Representing the company to its constituents and stakeholders;
10.To serve on company sub-committees and attend meetings of the
Board as well as of those committees, as scheduled;
(contd.)

11. To represent the ideas, culture, needs and desires of the community it serves;
12. To develop policies and procedures that assures that employees are treated fairly
and within the law;
13. To ensure that the company complies with all relevant laws, rules and
regulations and code of best practices;
14. Identifying the company’s major and other stakeholders and formulate a clear
policy on communicating or relating with them through an effective investor
relations program;
(contd.)

15. Adoption of a system of internal checks and balances and regularly

evaluating its applicability under changing conditions;
16. Identifying key risk areas and key performance indicators and
monitoring these factors with due diligence;
17. Ensuring the continuing soundness, effectiveness and adequacy of the
company’s internal control environment;
(contd.)

18. Adopting procedures for the directors, either individually or as a

group, in furtherance of their duties, to take independent professional
advice and to have access to the management;
19. Keeping board’s authority within the powers of the institution as
prescribed in the Articles of Incorporation, bye-laws and in existing rules
and regulations;
 (contd.)

20. Approval of items reserved to the board, such as, but not limited to
(a) Annual Report and Financial Statements
(b) Dividends
(c) Financial Policies
(d)Budget
 (contd.)

(e)Retirement Plan and selection/appointment of Trustees

(f) Safety /Asset Integrity Matters
(g) Others
21. Providing sound strategic policies and guidelines to the corporation on
major capital expenditures. Establishing programs that can sustain its long-
term viability and strength. Periodically evaluating and monitoring the
implementation of such policies and strategies, including business plans,
operating budgets, and management’s overall performance
(CONTD.)

22. Formulation and implementation of policies and procedures

that would ensure the integrity and transparency of related party
transactions between and among the corporation and its parent
company, joint ventures, subsidiaries, associates, affiliates, major
stockholders, officers and directors, including their spouses,
children and dependent siblings and parents
 (CONTD.)

23. Establishing rules for an alternative dispute resolution system in the

corporation that can amicably settle conflicts or differences between
the corporation and its stockholders, and the corporation and third
parties, including the regulatory authorities.
(CONTD.)

24. Appointment of a Compliance Officer who shall have a rank of at-

least a vice-president. In the absence of such appointment, the
Corporate Secretary, preferably a lawyer may act as Compliance
Officer.
25. Performing such other functions which may be required under
existing laws, rules and regulations.
 HOW A BOARD CAN ENSURE
GOOD GOVERNACE?
Susan F. Shultz, founder of SSA Executive Search International, author of several best sellers on
the subject and a member of several boards of directors suggested the following to have a
strategic board for ensuring good governance:
1. SMALL SIZE OF THE BOARD: The smaller the size of the board, the greater will be the
involvement of its members. This will lead to a more cohesive functioning and decision making
could be expedited, all of which add to the efficiency of the organization.
2. INDEPENDENCE OF THE BOARD: Independence should be the essence of the strategic
boards. To achieve this end, there should be less number of insiders and more of outsiders on the
board.
 HOW A BOARD CAN ENSURE
GOOD GOVERNACE?
3. DIVERSITY OF THE BOARD: It is of great importance that the board of
composed of the members with varied experience and expertise and diverse
professional qualifications, but also of people of different ethnic and cultural
background.
4. A WELL-INFORMED BOARD: Effectiveness and efficiency of the board depends
on the intelligent, timely, appropriate comprehensive and accurate information.
 HOW A BOARD CAN ENSURE
GOOD GOVERNACE?
5. THE BOARD SHOULD HAVE A LONGER VISION AND BROADER
RESPONSIBILITY: The concerns of the CEO will centre around his immediate
tasks on hand to enable a company solve its problems and tackle issues that would lead
to the profitability of the firm in the current financial year. The board, on the other
hand, especially when it is composed of several outside directors, will work out long
term strategies, take investment decisions and such other policy perspectives that
would ensure not only the secular interests of the firm, but also of all the stakeholders.
FUNCTIONING OF THE
BOARD OF DIRECTORS
 (a.) MEETINGS OF THE
BOARD:
Section 173 of the Companies Act, 2013 contains the following provisions in this regard: -
 Every company is required to hold the first meeting of the Board of Directors within 30
days of the date of its incorporation. It must hold a minimum no. of four meetings of its
Boards of Directors. Gap between two board meetings must not exceed 120 days.
 The participation of directors in a meeting of the Board may be either in person or through
video conferencing or other audio-visual means, as may be prescribed, which are capable of
recording and recognizing the participation of the directors and of recording and storing the
proceedings of such meetings along with date and time.
 (a.) MEETINGS OF THE BOARD:
 Minimum 7 days’ notice of the meeting must be given in writing to every director at his address
registered with the company. The notice may be sent by hand delivery or by post or by electronic
means.
 QUORUM FOR THE MEETING: The quorum for a meeting of the Board of Directors of a company
shall be one-third of its total strength or two directors, whichever is higher. Participation of the
directors by video conferencing or by other audio-visual means shall also be counted for the purposes
of quorum.
 Where a meeting of the Board could not be held foe want of quorum, then , unless the articles of the
company otherwise provide, the meeting shall automatically stand adjourned to the same day at the
same time and place in the next week or if that day is a national holiday, till the next succeeding day,
which is not a national holiday, at the same time and place.
 (B.) ADEQUATE AND TIMELY
INFORMATION

 To enable the members of board to properly fulfil their duties

and responsibilities, management should provide them with
complete, adequate and timely information about the matters to
be taken in their meetings.
 The members, either individually or as a board, and in
furtherance of these duties and responsibilities, should have
access to independent professional advice at the corporation’s
expense.
Powers of the board
Section 179 of the companies act, 2013

 Section 179 of the Companies Act, 2013 confers general powers

on the Board of Directors.
 In other words, the Board of directors of a company shall be
entitled to exercise all such powers, and do all such acts and
things, as the company is authorized to exercise and do.
Section 179 of the companies act, 2013

 However, this general power of the Board of directors is subject

to the following limitations:
 Restrictions on the powers of the Board contained in this Act,
or in the memorandum or articles, or any regulations including
regulations made by the company in general meeting.
 Any power, act or thing reserved to be exercised or done by
the company in general meeting.
(CONTD.)

 Subject to the aforesaid, Section 179 empowers the Board of Directors of a

company to exercise the following powers on behalf of the company by
means of resolutions passed at meetings of the Board, namely:-
 to make calls on shareholders in respect of money unpaid on their shares;
 to authorize buy-back of securities under section 68;
 to issue securities, including debentures, whether in or outside India;
 to borrow monies;
(CONTD.)

 to invest the funds of the company;

 to grant loans or give guarantee or provide security in respect of
loans;
 to approve financial statement and the Board’s report;
 to diversify the business of the company;
 to approve amalgamation, merger or reconstruction;
(CONTD.)

 to take over a company or acquire a controlling or substantial stake in

another company;
 any other matter which may be prescribed
 The Board is further authorized by a resolution passed at a meeting, to
delegate to any committee of directors, the managing director, the
manager or any other principal officer of the company or in the case of a
branch office of the company, the principal officer of the branch office,
the powers specified in clauses (d) to (f) on such conditions as it may
specify:
 Powers of the individual director

 Section 179 provides for general powers of the Board. Unless the
Act, or the articles otherwise provide, the decisions of the Board
are required to be the majority decisions only. Individual
Directors do not have any general powers. They shall have only
such powers as are vested in them by the Memorandum or
Articles or otherwise by the Board of Directors.
CERTAIN OTHER POWERS OF BOARD

Besides the powers specified in Section 179 of the Companies Act, 2013,
there are certain other powers also which can be exercised by the Board at a
meeting of the Board. These powers include: -
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 annual general meeting, subject to the approval by the
shareholders.
4. The power to make political contributions.
Role, responsibilities and
accountability of
independent directors
 Who is an independent director?

 An Independent Director ( also sometimes known as an outside

director or non-executive director) is a director of a board of
directors who does not have a material or pecuniary relationship
with company or related persons, except sitting fees.
 Independent Directors do not own shares in the company.
 Definition of independent director as per
the Companies Act, 2013

An independent director in relation to a company, means a director other than a managing

director or a whole-time director or a nominee director,—
 who, in the opinion of the Board, is a person of integrity and possesses relevant expertise
and experience;
 (i) who is or was not a promoter of the company or its holding, subsidiary or associate
company;
(ii) who is not related to promoters or directors in the company, its holding, subsidiary or
associate company;
 Definition of independent director as per
the Companies Act, 2013
 who has or had no pecuniary relationship, other than remuneration as such director or having
transaction not exceeding ten per cent. of his total income or such amount as may be
prescribed, with the company, its holding, subsidiary or associate company, or their promoters, or
directors, during the two immediately preceding financial years or during the current financial year;
 none of whose relatives—
(i) is holding any security of or interest in the company, its holding, subsidiary or associate
company during the two immediately preceding financial years or during the current financial year:
Provided that the relative may hold security or interest in the company of face value not exceeding
fifty lakh rupees or two per cent. of the paid-up capital of the company, its holding, subsidiary or
associate company or such higher sum as may be prescribed;
 Definition of independent director as per
the Companies Act, 2013

(ii) is indebted to the company, its holding, subsidiary or associate company or their promoters, or directors, in excess of such
amount as may be prescribed during the two immediately preceding financial years or during the current financial year;

(iii) has given a guarantee or provided any security in connection with the indebtedness of any third person to the company,
its holding, subsidiary or associate company or their promoters, or directors of such holding company, for such amount as
may be prescribed during the two immediately preceding financial years or during the current financial year; or

(iv) has any other pecuniary transaction or relationship with the company, or its subsidiary, or its holding or associate
company amounting to two per cent. or more of its gross turnover or total income singly or in combination with the
transactions referred to in sub-clause (i), (ii) or (iii);
 (CONTD.)

 who, neither himself nor any of his relatives—

(i) holds or has held the position of a key managerial personnel or is or has been employee of
the company or 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;
Provided that in case of a relative who is an employee, the restriction under this clause shall
not apply for his employment during preceding three financial years.
 (CONTD.)

(ii) is or has been an employee or proprietor or a partner, in any of the three financial years
immediately preceding the financial year in which he is proposed to be appointed, of—
(A) a firm of auditors or company secretaries in practice or cost auditors of the company or its
holding, subsidiary or associate company; or
(B) any legal or a consulting firm that has or had any transaction with the company, its
holding, subsidiary or associate company amounting to ten per cent. or more of the gross
turnover of such firm;
 (CONTD.)

(iii) holds together with his relatives two per cent. or more of the total voting power of the
company; or

(iv) is a Chief Executive or director, by whatever name called, of any nonprofit

organization that receives twenty-five per cent. or more of its receipts from the company,
any of its promoters, directors or its holding, subsidiary or associate company or that
holds two per cent. or more of the total voting power of the company; or
 who possesses such other qualifications as may be prescribed.
 Need for independent directors on the
board

Independent Directors in the Board can:

 Ensure legal and ethical behavior at the company, while strengthening accounting
controls.
 Counterbalance management weaknesses in a company.
 Extend the “reach” of a company through contacts, expertise, and access to debt and
equity capital.
 Ba a source of well-conceived, binding, long-term decisions for a company.
 Help companies survive, grow, and prosper over time through improved succession
planning through membership in the nomination committee, etc.
 Manner of appointment

 Appointment process of independent directors shall be independent of the company management; while selecting
independent directors, the Board shall ensure that there is appropriate balance of skills, experience and knowledge
in the Board so as to enable the Board to discharge its functions and duties effectively.
 The appointment of independent director(s) of the company shall be approved at the meeting of the shareholders.
 The explanatory statement attached to the notice of the meeting for approving the appointment of independent
director shall include a statement that in the opinion of the Board, the independent director proposed to be
appointed fulfills the condition specified in the Act and the rules made thereunder and that the proposed director
is independent of the management.
 Manner of appointment

 The terms and conditions of appointment of Independent Directors shall be open for
inspection at the registered office of the company by any member during normal business
hours.
 The terms and conditions of appointment of independent directors shall also be posted on the
company’s website.
 The re-appointment of independent director shall be on the basis of report of performance
evaluation.
 Resignation or removal

 The resignation or removal of an independent director shall be in the same manner as is provided
in sections 168 and 169 of the Companies Act, 2013.
 An independent director who resigns or removed from the Board of the company shall be
replaced by a new independent director within a period of not more than 180 days from the date
of such resignation or removal, as the case may be.
 Where the company fulfils the requirement of independent directors in the Board even without
filling the vacancy created by such resignation or removal, as the case may be, the requirement of
replacement by a new independent director shall not apply.
 Separate meetings

 The independent directors of a company shall hold at least one meeting in a year, without the attendance of non-
independent directors and members of management
 All the independent directors shall strive to be present at such meeting;
 The meeting shall:
(a) Review the performance of non- independent directors and the Board as a whole.
(b)Review the performance of the Chairperson of the company, taking into account the views of executive
directors and non-executive directors
(c)Assess the quality and timeliness of flow of information between the company management and the Board
that is necessary for the Board to effectively and reasonably perform their duties.
 EVALUATION MECHANISM

1. The performance evaluation of independent Directors shall be done

by the entire Board of Directors, excluding the director being
evaluated.
2. On the basis of the report of performance evaluation, it shall be
determined whether to extend or continue the term of appointment of
the independent director.
 Remuneration

 Section 149(9) of the Companies Act, 2013 provides that an independent director
shall not receive any stock option and may receive remuneration complying section
197 and 198, reimbursement of expenses and profit related to commission.
 A director may receive remuneration by way of fee for attending meetings of the
Board or Committee thereof, or for any other purpose as may be decided by the
Board. The amount of such fee shall not exceed the amount as may be prescribed.
 Term of office

 An independent director shall hold office for a term up to 5 consecutive years on the
Board of a company and shall be eligible for reappointment on passing of a special
resolution by the company and disclosure of such reappointment in the Board’s Report.
 No independent director shall hold office for more than 2 consecutive terms, but such
independent director shall be eligible for appointment after the expiration of 3 years of
ceasing to become an independent director.
 Provisions of retirement of directors by rotation shall not be applicable to appointment of
independent directors.
 Liability of independent directors

Section 149(12) of Companies Act, 2013 makes an independent

director liable only in respect of such acts of omission or
commission which has occurred with his knowledge, attributable
through Board processes, and with his consent or connivance or
where he had not acted diligently.
 Role of independent directors

 Responsibility of independent directors for the prevention and detection of fraud

 Supervisory Role: The independent directors play the role of bringing objectivity to
the decisions made by the Board of directors by playing a supervisory role.
 Role and responsibilities of independent directors arising out of clause 49 of listing
agreement:
 Oversight of company financial reporting process and disclosure of its financial
information.
 Recommending to Board on the appointment, re-appointment and if required
replacement or removal of statutory auditor and fixation of audit fees.
 Role of independent directors

 Review with management, the annual financial statements before approval by the
board with particular reference to Directors Responsibility Statement, changes in
accounting policy, major accounting estimates, audit findings adjustments,
compliance with listing and other legal requirements, disclosure of related party
transactions and qualification in the draft audit report.
 Review of quarterly financial statements.
 Review with management, performance of statutory and internal auditors, adequacy
of internal control systems, adequacy of internal audit function including their
structure, frequency, reporting.
(contd.)

 Discussing significant finding of internal auditors, including internal investigations made by them into
areas of fraud, irregularities or major failures of internal control systems.
 Discussing with auditors on the scope of the audit.
 Reviewing reasons for defaults into payments.
 Reviewing the whistle blower mechanism
 Review of related third-party transactions and internal control weaknesses.
 Review of financial statements of subsidiary companies with special attention to investments made by
them.
 Review uses/application of funds from public issues, rights issues, preferential issues etc.
 Duties and responsibilities of an
independent director
It is necessary for the independent directors to:
1. Furnish information in the prescribed form to the company about directorships in other companies and changes, if
any, as and when they take place.
2. Provide a list of his relatives as defined in the Companies Act and their directorship and interest in other concerns.
3. Prepare himself thoroughly for the meeting.
4. Be objective in forming sound decisions relating to the company and its business.
5. Be open minded, free and frank in expressing their opinions and at the same time, be be willing to engage in
meaningful debates.
6. To act in good faith and in the interest of the company
7. To acquire proper understanding of the business of the company
 (contd.)

8. Continuously seek information from within and if required outside professional knowledge to keep abreast
with the latest developments in the areas of company’s operations.
9. Be informed on laws and regulations influencing their functioning as directors.’
10. To act within the parameters laid down by the Memorandum of Association and Articles of Association and
by applicable law and regulations.
11. Not be a Director of more than fifteen Companies.
12. If member of Audit Committee, learn about the obligations of Audit Committee and perform responsibly.
13. To act in the larger genuine interest of true growth and development of the company.
 CHALLENGES BEFORE independent
directors

Companies Act, 2013 contains a number of requirements relating to independent directors and their functioning. These
include:
 Segregation of the CEO and the Board Chair roles
 Certificate of independence
 Requirements relating to nominations and remuneration committees.
 Limits on the tenure and number of directorships
 Performance evaluation of board of directors, committees and individual directors.
 Specific responsibilities for the Audit Committee with respect to related party transactions and appointment of
auditors (internal and external)
 Requirement for independent directors to act as whistle-blowers.
 Lead independent director

 The Lead Independent Director leads the group of independent directors and functions as a link between them
and the executive directors.
 Role of the Lead Independent Director may include:
1.Identify the most critical issues for the board to deal with;
2.Help the board in achieving consensus on important issues;
3.Act as a facilitator outside the board room especially on contentious issues;
4.Work with the CEO to identify the priority areas, set the agenda and enable it to focus on substantive issues;
5.Provide candid feedback to CEO, CFO after an executive session.