Education

Styles and duties of Board of Directors

K. P. SHASHIDHARAN | Updated on November 20, 2011

The Board is expected to integrate ethical values, monitor and oversee the management of the corporate to the best interests of its shareholders.

Fiduciary duties of a director require him to act as an “agent” on behalf of the company and a trustee who controls company assets and uses them for the organisation's best interests.

Quality of corporate governance is a true reflection of the involvement of the Board of Directors (BOD) in strategic management. Pundits find myriad hues in the BOD styles, like chaotic, marionette, entrepreneurial and partnership.

Based on the board's involvement, there are six BOD styles: Phantom Board does not even meet, and if at all the members meet, they seldom know what to do; Rubber-Stamp Board has no agenda except permitting mangers to make all decisions; Minimal Review Board has an agenda to deliberate but is too passive to do so.

The most common model of BOD is Nominal Participation Board. Approximately one fifth BODs are Active Participation Board; functions independently, appoints subcommittees on key decision domains, monitors, conducts its own audits and involves in strategic decision making. Ideal BOD transforms itself into a Catalyst Board, spearheading strategic leadership, involving not only in planning but also in effective implementation of strategic business decisions, ensuring proper accountability of the management, keeping pace with business dynamics.

Duties and powers of directors

Duties and responsibilities of the directors have evolved from varied sources — the common law, statutes, the memorandum and articles of association of the company, service agreements specifically entered between the director and the company, resolutions passed at members' or directors' meetings, changes in Acts and statutes and the rules framed by the regulatory authorities.

Fiduciary duties of a director require him to act as an “agent” on behalf of the company and a trustee who controls company assets and uses them for the organisation's best interests.

Directors owe to the shareholders basically four fiduciary duties: Duty of Loyalty demands entirely fair process in the decision making without any conflict of interest or ‘self-dealing' transactions; Duty of Care is to pay due attention to take good, rational decisions, based on business judgement; Duty of Disclosure binds directors to disclose all material information when shareholders are asked to vote and when the company executes a conflict of interest transaction; Duty of Extra Care expects to take special care in decision making when the company is being acquired based on the concept that the shareholders, and not BOD, should decide the takeover.

The statutory duties of BOD include filing return on allotment, disclosing interest, receipt of compensation from transferee of shares, duty to attend board meetings and to convene statutory AGM and extraordinary general meetings. BOD appoints the first financial and cost auditors of the company, authenticates and approves annual financial reports and places them at the AGM. The memorandum and articles of association are integral to the company and directors should familiarise themselves with these contents as they invariably impose duties on directors.



Liabilities of the board

The shareholders retain ultimate responsibility for the company. They have the power to remove or appoint directors. While delegating certain powers to managers, BOD must impose appropriate restrictions and conditions enabling to be revoked at any time.

BOD has certain liabilities to the company, like breach of fiduciary duty, ultra-virus act, negligence, mala fide act. Its liabilities to third parties cover those liabilities under the Companies Act relating to prospectus, allotment, fraudulent trading, unlimited liability, liability for breach of statutory duties as well as criminal liability. A corporate being legally an artificial person incapable of deciding its own, the Board is expected to integrate ethical values, build requisite capabilities by continuous education and communication process and effectively plan, execute, monitor and oversee the management of the corporate to the best interests of its shareholders.

(The author is Director-General, CAG office.)

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Published on November 20, 2011
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