corporate boards

8/10/2019 Corporate Boards

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Corporate BoardsTheory, Law and Practice

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Corporation: An ingenious device for obtaining individual profit without individualresponsibilityAmbrose Bierce, in Devils Dictionary

The truth of the matter is that you always know the

right thing to do. The hard part is doing it.- General H. Norman Schwarzkopf


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Corporate Board

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Subject to the corporate law, the corporate board

is the supreme authority for governing thecompany, and is answerable to the shareholderswho appoint them. They are required to run thecompany and its business in the best interests ofthe company.

Founded on the basis that a group of respectableand trustworthy people, including perhaps thedominant shareholding group, should look afterthe interests the non-participating or absentee

shareholders of the company. Corporate board as fiduciarythe responsibility

of the board collectively and the directorsindividually to protect and promote the interests of

those whose funds, faculties and facilities theyare entrusted to manage to optimal advantage


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Corporate Boards

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Franklin Gevurtz (2004) offers four possiblereasons that may justify the concept of board

1. The need for central management

2. The superiority of decision making by groups ofpeople rather than a single individual

3. The need for mediating and adjudicating bodyto resolve conflicting claims, and

4. The need to monitor executive managementand minimise agency costs.


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Corporate control and corporateboards

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Berle and Means derived five types of corporatecontrol

1. Absolute control through complete ownership

2. Control through a straightforward majority in thecompanies voting stock

3. Control through legal devices namelyPyramiding, issuing non-voting stocks, issuing

some controlling shares with excessive votingpowers, or creating a voting trust

4. Minority control but still could dominate

5. Management control, where the ownership is

widely spread.


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Triple dimensions of board role

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Contributing dimension - where directors bring tobear their expertise and experience to enhance

the companys wealth-creating capabilities

Counselling dimension - where directors counselon the approaches the CEO plans to adopt with

respect to specific initiatives, so that the wealth-

creating processes are smooth and within the

companys values

Controlling dimension - where the boardexercises its surveillance functions to ensure

created wealth passes through to the rightful

claimants without undue leakage


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Board as steward

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Stewardone who manages anothers property,finances or other affairs - fiduciary

Stewardship, trusteeship and righteousness inrelationship between people

Isa Upanishadadmonishes the individual not tocovet anothers property

Tenth commandment in the old testament

The foundation of Buddhism, is based on therighteousness in human behavior

Mahatma Gandhi on Trusteeship


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Accountability and Responsibility

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The Kings Report One is liable to render anaccount when one is accountable and one isliable to be called to account when one isresponsible

The company and its board collectively, and itsdirectors individually, are all accountable to theshareholders, in their long-term sustainableinterest. In the discharge of this duty, they need to

meet and manage the expectations of all relevantstakeholders, partly on the basis of relativenegotiating equations, and partly on the basis ofacknowledged international best practices

appropriate to the country of its operation.


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Residual Claimant Theory

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The legal basis for shareholder primacy ispredicted upon this theory which broadly derivesfrom the principles of private property along withthe rights and risks attached to its ownership

As residual claimants, shareholders have the rightto make discretionary decisions and bear theirconsequences.

Shareholder vs stakeholder controversy

Margeret Blair on firm-specific investmentplatformcreditors under chapter 11 andemployees. Ada Demd and Fred Neubauer

identify sixproviders of funds, employees,ublic, Govet, customers and su liers.


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Board Composition, Structure andEvaluation

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In my Opinion, a mans legs ought to be longenough to reach the ground! Abraham Lincoln


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Board Composition

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Board of Directors

ExecutiveNon-Executive

Managing Director

Whole time Directors

Independent

Non-Independent

Nominee Directors* ConstituencyDirectors Others

*unless specified otherwise


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Board Structure

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Structure

Boards

Committees

SizeBalanceDiversity

Chair/CEO DualityLead DirectorInterlocks/MultipleDirectorships

AuditMonitoring anddisclosure

CompensationExec payNominationBoard

RenewalGovernance - Stewardship


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Board Structure

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Agency Theory Approachoverly loaded in favor ofmonitoring and assurance mechanismsindependent directors, whistle blower mechanisms etc

Stewardship Theory Approachstrongly favor insiderdominated boards, with fewer outsiders and reducedfocus on control

Resource dependence Approachprefer to co-optindividuals who can provide necessary linkages toexternal environment to sub serve their objectives

Firm Complexityas structure determinant Internal complexitiestechnology, capital investment, labour,

security of information and process, CEO dominance etc

External ComplexitiesCompetitive structure, geographicaland segmental spread of the business, regulatory, stock pricevolatility, reputational vulnerability etc


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Board Independence

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Independence rests on three pillars1. The balance between executive and non-

executive members including their diversityCadbury, Hampel(1998), The combined code of

2000, Higgs review of 2003, OECD principles,Birla committee, companies Act, Clause 49 ofSEBI.

2. The independence of board chair with chair/CEO

duality, and the concept of lead directors3. Independence and objectivity of individual

directors


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Board Diversity

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Diversitycountry specificethnic minorities(blacks, Hispanics and immigrants in US,aborigines in Australia, native africans in SA),religious minorities, economically backward

communities, civil society organizations, socialscientists, academics, former bureaucrats,journalists, environmentalists, foreign nationals,etc


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Board Structure

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Structure

Boards

Committees

SizeBalanceDiversity

Chair/CEO DualityLead DirectorInterlocks/MultipleDirectorships

AuditMonitoring anddisclosure

CompensationExec payNominationBoard

RenewalGovernance - Stewardship


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Board Evaluation

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Self appraisal on specified measurement criteriaattendance and participation at board andcommittee meetings, preparedness level both ininterest and contribution, involvement in company

affairs such as time commitment, familiarity withenvironment etc, role as ambassador,professional and specialist skills in areas of valueto company.

Peer appraisal

For directors, for board and committee chairs andboard, collectively.


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Candour in the cockpit - Deloitte

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A recent research into flight safety has thrownastounding factmany crashes that were named aspilot errors could actually be traced back to cultural

dynamics in the cockpit: lack of teamwork and

communication, and critically excessive deference tothe captains authority. Black box recordings have

shown that co-pilots or engineers failed to challengethe captains decisions, even in an emergency

situation. Look at the board room as the cockpit of a companyis it any mystery then that ineffective boards todaypose the biggest risk to Indian companies?


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If Indian boardrooms had black boxes, therecordings would be

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Directors who sit on a dozen boards and are unable to attend all the

meetings, and contribute little during meetings they do attend. Boards which are comprised overwhelmingly of an old-boys network

and gets paid handsomely to remain silent

Selective or incomplete information provided to the board on criticalissues facing the company

Independent directors who are viewed by management either asrubber stamps or super-cops, rather than significant contributors toSHV.

Info on threats, risks and their monitoring is not systematicallycommunicated to the board

Directors who are independent but unable to provide insights becausethey lack the requisite experience or understanding of the business

The existing regulations, rules and codes are like aircrafts flight manual. It

outlines the way things ought to be done.

Rubber stampcheck the box or strategic asset?Evolution of board and thelevel of effectiveness.

Rubber Stamp Check the Box Strategic Asset


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Rubber Stamp Check the Box Strategic Asset

Directors are friends ofCEOs

Directors do not providemeaningful contribution tothe business

Effective teambuild ontrust and capability,strategic in nature

Communication is a oneway street

Board fulfill regulatoryexpectations via a check-thebox approach to CG

Hold themselvesaccountableperformanceoriented culture at the boardlevel

Meetings are not organized

and managed effectively

IDs dont have significant

leadership roles withinboard

IDs provide both oversight

and insight

Management provides veryselective information to thefull board

Directors bring value in theform of new ideas,networks, perspectives,

formal and informal adviceManagement views outsidedirectors as Watchdogs

Outside directors workclosely with the mgmt team,even outside the boardroom

Board meetings are

planned, organised andconducted effectively


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Eff ti b d b i t


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Effective board members in promoterdriven businesses:

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Provide independent, third party perspective onimportant issues

Act as devils advocate in key discussions

Fill competency gaps thru expertise and experience

Encourage promoters to obtain different perspectivesfrom academia, governance and industry experts

May provide valuable inputs on strategy, succession

planning and leadership assessment, compensationand risk management

Understand the value they bring to the board

Dont overlook but oversee.. Being risk intelligent.


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A review of academic research in the Asian regionshows that in the presence of controlling

shareholders, strong CG practices have a positiveimpact on firm value. The literature providesevidence that strong CG practices and theappointment of INEDs on the board can increase

firm value and decrease the cost of capital, therebyreducing financial costs. On a country level, theevidence is that these practices can also increaseforeign investment in local companies and , thereforehelp the development of capital marketsCFAInstitute Centre for Financial market Integrity


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AuditCommittee

RemunerationCommittee

OtherCommittees

Board Committees

Strategy

Board of Directors Achievement of strategic objectives and value creation

Fulfil responsibilities and duties in law and prescribed functions

BoardOpe

rations

Chairman

Board

Meetings

Reporting&

Disclosure

Internal Controls& Assurance

ExecutiveCommittee

Internal Audit External AuditOther Assurance

ProvidersManagement

Combined Assurance Model

Governance

System and

Controls

Corporate Policies & Procedures

Board Governance Instruments

Monitoring and Evaluation KeyAreasofR

esponsibility

CEO & Management

Shareholders

Informatio

nandCommunication

CorporateSecretary

Source: KPMG

Board Governance Framework


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Directors as fiduciaries

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Members of company boards are fiduciaries whomust act in the best interest of the company andits shareholders and are accountable to the

shareholder body as a whole. As fiduciaries,directors owe a duty of care and diligence to, andmust act in the best interests of, the company.

Derived from: ICGN Global Corporate Governance Principles


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Effective board behavior

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a) The board has independent leadership;b) That the chair works to create and maintain a

culture of openness and constructive challengewhich allows a diversity of views to be

expressed;

c) That there is a sufficient mix of relevant skills,competence, and diversity of perspectiveswithin the board to generate appropriatechallenge and discussion;


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d) That the independent element of the board issufficiently objective in relation to the executivesand dominant shareholders to provide robustchallenge without undermining the spirit of

collective endeavor on the board;e) That the non-executive element of the board

have enough knowledge of the business andsources of information about its operations to

understand the company sufficiently to contributeeffectively to its development;


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f) That the board is provided with enoughinformation about the performance of thecompany and matters to be discussed at theboard, and enough time to consider it properly;

andg) That the board is conscious of its accountability

to shareholders for its actions.


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Duties of the board

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The boards duties and responsibilities and keyfunctions, for which they are accountable,include:

a) Reviewing, approving and guiding corporate

strategy, major plans of action, risk policy,annual budgets and business plans; settingperformance objectives; monitoringimplementation and corporate performance; and

overseeing major capital expenditures,acquisitions and divestitures.


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Duties of the board

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b)Overseeing the integrity of the companysaccounting and financial reporting systems,including the independent audit, and thatappropriate systems of control are in place; in

particular, financial and operational control, andcompliance with the law and relevant standards.

c) Ensuring a formal and transparent boardnomination and election process.

d) Selecting, remunerating, monitoring and, whennecessary, replacing key executives andoverseeing succession planning.


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Duties of the board

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e) Aligning key executive and board remunerationwith the longer term interests of the company andits shareholders.

f) Overseeing a formal risk management process,

including holding an overall risk assessment atleast annually;

g) Monitoring and managing potential conflicts ofinterest of management, board members,shareholders, external advisors and other serviceproviders, including misuse of corporate assetsand related party transactions.


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Duties of the board

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h) Monitoring the effectiveness of the companysgovernance practices and making changes asneeded to align the companys governance

system with current best practices.

i) Carrying out an objective process of self-evaluation, consistently seeking to enhanceboard behavior and effectiveness.

j) Overseeing the process of disclosure andcommunications,

and being available for dialogue with shareholders.


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Composition and structure of the board

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Skills and experience

Time commitment Independenceindependent judgment without

external influence. Independent directors aredirectors who apart from receiving directors

remuneration do not have any other materialpecuniary relationship or transactions with thecompany, its promoters, its managements or itssubsidiaries, which in the judgment of the boardmay affect their independence or judgment.Further all pecuniary relationship or transactionsof the NEDs should be disclosed in the annual

report.


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Not all NEDs are independent. Among the factorswhich can impact the independence of non-executive directors are the following:

a) Former employment with the company, unlessthere is an appropriate period of years between theend of the executive role and joining the board;

b) Personal, business or financial relationshipsbetween the directors and the company, its keyexecutives or large shareholders;

c) Length of tenure; and

d) The receipt of incentive pay which aligns thedirectors interests with those of the executivesrather than the shareholders.

Composition and structure of the board

Composition and structure of the


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Composition and structure of theboard

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Composition of board committeesEvery company should establish separate boardsubcommittees for audit, remuneration andgovernance or nomination matters. Companies

should also give due consideration to establish aseparate and independent risk committee. The remit,composition, accountability and working proceduresof all board subcommittees should be well-definedand disclosed.


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Composition and structure of theboard

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The members of these key board committeesshould be solely non-executive directors, and inthe case of the audit and remunerationcommittees, solely independent directors. All

members of the nominations committee should beindependent from management and at least amajority independent from dominant owners.

Role of INEDs

Board size


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Board composition across the globe

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Dutch / German - two tier Japantwo tier - loyal employees

Asiadiversified Business groups / crossholding

Indiafounding families Chinacommunist party officials

USwide and diverse

EUfewer larger SHscross holdings

British / Swisssingle tiermgmt dominated


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Role of the chair

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This role will be most effectively carried out wherethe chair of the board is neither the CEO nor aformer CEO. Furthermore, the chair should beindependent on the date of appointment as chair

and should not participate in executiveremuneration plans. If the chair is notindependent, the company should adopt anappropriate structure to mitigate the problems

arising from this. Where the chair is notindependent, the company should explain thereasons why this leadership structure isappropriate, and keep the structure under review.


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Role of the chair

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The chair of the board should neither be the CEOnor a former CEO and should be independent onthe date of appointment of chair and should notcompensate on executive compensation plans.

The chair should be available to shareholders fordialogue on key matters of the companys

governance and where shareholders haveparticular concerns. Such meetings may need to

be held with the deputy chair or lead independentdirector either as an alternative or additionally. Allboard members should make themselvesavailable for meetings with shareholders when an

appropriate request is made.


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Lead independent director

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Where the chair is the CEO or former CEO or isotherwise not independent on appointment,companies should appoint an independent deputychair or lead independent director.

The lead independent director in such a contextwill have a key role in agreeing the agenda forboard meetings and should have powers to callboard meetings and otherwise act as aspokesperson for the independent element of the

board. The lead independent is also a crucial conduit for

shareholders to raise issues of particular concernand should make him- or her-self available to

shareholders appropriately in order to fulfill this


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Related party transactions andconflicts

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Related party transactions, SATYAM ($1.6bn asagainst mere $225mnFontanella-khan,2009)

conflicts of interest, FT is also the promoter ofMCX. Therefore, approving trade by IBMA in

MCX clearly indicates that FT was aware ofconflict of interest and has violated governmentdirectives in this regard.


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Provisions Cited in Companies Act-2013 for Better Governance

New Provisions for Better Governance:

Requirement to constitute Remuneration and Nomination Committee andStakeholders.

Grievances Committee.

Granting of More powers to Audit Committee.

Specific clause pertaining to duties of directors.

Mode of appointment of Independent Directors and their tenure.

Code of Conduct for Independent Directors.

Rotation of Auditors and restriction on Auditor's for providing non-auditservices.

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DEFINITIONS


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Director

Director appoin ted by board of

comp any Section 2(34)

Board of Directors

Or

Board

Col lect ive body of director s of the

comp any Section 2(10)

DEFINITIONS

ROLES OF DIRECTOR


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ROLES OF DIRECTOR

Managing Director

Key Managerial Personnel

Whole time Director

Officer who is in Default

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MANAGING DIRECTOR

Managing Directo r

Director

Art ic les Agreements Sharehold ings

By

+

Entrusted with sub stant ial powers of m anagement

+

Occup ying posit ion o f managing director by whatever name

called


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MANAGER

Manager

Indiv idual

Subject to

Superintendence

Contro l

Direct ion of the BoD

Having Management of whole of af fairs of the Company

Includ es director occupy ing posit ion o f manager by whatever name cal led

and

KEY MANAGERIAL PERSONNEL


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CEO OR Managing Director

Company

Secretary

Who le t ime DirectorCFO+ +

OR

Such o ther off icer as may be

prescr ibed

KEY MANAGERIAL PERSONNEL

Key ManagerialPersonnel

OFFICER IN DEFAULT


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Whole t ime DirectorKMPs &

If no KMPs

All Directors if no one appointedDirectors appointed as OD Or

Any Person Author ized by

Board or KMPs

Any Person w ho advices,

d i rects or inst ructs BoD

Every Director w ho is aware of

Contravent ion

For Issue or transfer of Shares

Share Transfer Agent Registrar to Issue Merchant Banker

OFFICER IN DEFAULT

BOARD FRAMEWORK


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The Act now prescribes the duties of the directors towards the company

Matters to be considered in the Board Meeting provided for in detail

Act provides for constitution of the Audit committee by every listed companyor other prescribed class of company

Constitution of Nomination and Remuneration Committee by listed and otherprescribed class of the companies

Stakeholders Relationship Committee for companies which consist of morethan 1000 shareholders, debenture-holders, deposit-holders and othersecurity holders at any time during a FY

BOARD FRAMEWORK

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BOARD FRAMEWORK


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BOARD FRAMEWORK

Directors also covered under Officers in Default

Public and private companies cannot give any loan or provide any security orguarantee in connection with a loan to a Director or any interested person,

except by way of passing a special resolution

Voting in electronic mode allowed

AGM- Listed Company AGM to be reported to ROC

ADDITIONAL/ALTERNATE/NOMINEE DIRECTOR


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NOTIFIED - (SECTION 161)

Person who fails to get appointed as a director in a general meeting cannot beappointed as an Additional Director

Alternate director can only be appointed in case director leaves India for periodof not less than 3 months

Subject to Articles, Board can appoint director nominated by any institution inpursuance of any law or agreement has been specified in the law specifically

Person to be appointed as Alternate Director shall be a person other than oneholding any alternate directorship for any other Director in the Company

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WOMAN DIRECTOR & SMALL


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As per the Draft Rules: Listed Companies, andevery other public company with paid up capital> Rs 100 cr; or turnover > Rs 300 cr.

At least 1 woman director

for prescribed class or

classes of companies. 2nd

pro viso to Section 149(1)

As per Draft Rules: A listed company may suomoto or upon the notice of > 500 or 1/10thof thetotal number of small shareholders, whichever islower, elect a small shareholders director fromamongst the small shareholders)

Companies with prescribednumber of smallshareholders or paid upcapital and listed

Companies to have 1director elected by SmallShareholders

Sectio n - 151

WOMAN DIRECTOR & SMALL

SHAREHOLDER DIRECTOR

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DIRECTORS OTHER REQUIREMENTS


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DIRECTORSOTHER REQUIREMENTS

(As per Draft Rules: Rules

prescribe for manner of notice of

candidature of a person for

directorship)

Amount to be deposited along with notice

of nomination of any person to the office

of director has been increased from Rs

500 to Rs 100000 or such higher amount

as may be prescribed

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RESIDENT DIRECTOR (Secti on 149 (2)

At least 1 director to be a person who has

stayed in India for atleast 182 days in the

previous calendar year

NUMBER OF DIRECTORS (SECTION 149)


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Board of Directors consisting individuals as directors.

Private Company : 2 Directors

Public Company : 3 Directors

One Person Company : 1 Director

Maximum number :15 (earlier 12)

NUMBER OF DIRECTORS(SECTION 149)

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NUMBER OF DIRECTORSHIPS


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Director in maximum 20 companies

Directorship to include alternate directorship

Of these 20 companies, cannot be a Director in more than 10public companies (including private companies which are

holding or subsidiary companies of public companies)

No. of members specify lesser number by passing specialresolution

Penalty for contravention: Minimum Rs. 5,000, and Maximum Rs.25,000 for every day during which the default continues

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NUMBER OF DIRECTORSHIPS(SECTION 165)

APPOINTMENT OF DIRECTOR


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Appointment of Managing Director, Whole Time Director or Manager to beapproved by special resolution in a General Meeting

Appointment to be Voted individually (Notified). Section 162

Consent for appointment to be filed by directors of private company tothe ROC

When appointment not in accordance with Schedule V, approval ofCentral Government also required

Independent directors not to be included in the total number of directorswhile calculating retiring directors i.e. 2/3rdof the total number ofdirectors

(SECTION 152)

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Until the director duly appointed as per provisions in the OPC,individual being member shall be deemed to be its first director

Whole Time Director shall not be appointed for more than 5 years

Provisions to apply to Private Companies as well

In case of default the Company, such individual or director to bepunishable with imprisonment upto 6 months or with fine which shallnot be less than fifty thousand rupees but which may extend to fivehundred rupees for every day after the first during which the defaultcontinues.

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(SECTION 152)

DISQUALIFICATION & REMOVAL


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NEW DISQUALIFICATIONS FOR DIRECTORSSECTION 164

Conviction for offence dealing with Related Party Transaction anytimeduring previous 5 years

Not having obtained Director Identification Number

Conviction for any offence and sentenced for an imprisonment extendingto 7 years or more

No power to central government to exempt the application of particulardisqualification on any person

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REMOVAL OF DIRECTOR- SECTION 169

Notice of Removal can be given only by the following:

In Company Having Share Capital:

Member(s) having not less than 1/10th

of the total voting power or

holding shares the aggregate value of which is not less than Rs. 5 lakh

In any other Company:

Member(s) having not less than 1/10thof the total voting power

In case of default, company and every director or employee who isresponsible for such contravention to be punishable with fine which shall

not be less than Rs. 50,000 but which may extend to Rs. 5 Lac


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INDEPENDENT DIRECTOR


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SECTION 149

Every listed public Company to have at least one-third of the total number

of directors as Independent Directors (ID)

Central Government to prescribe the minimum number of Independent

Directors in case of any class or classes of public Companies.

(As per Draft Rules: Public Companies having paid up share capital of Rs.

100 cr or more, Public Companies having turnover of Rs. 300 cr or more,

Public Companies which have, in aggregate, outstanding loans or

borrowings or debentures or deposits, exceeding Rs. 200 cr)

Every existing company to have IDs within one year from commencementof

the Act or from the date of notification of the Rules (whichever is first)

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BOARD TO ENSURE - Appropriate balance of skills, experience and knowledge inone or more fields of finance, law, management, sales, marketing, administration,research, corporate governance, technical operations other disciplines related to thecompanysbusiness AND DISCLOSE IN BOARD REPORT

DATA BANK with details of the person eligible and willing to be appointed asindependent director to be prepared by any body, institutions as authorized by CG(as may be notified by CG).

Responsibility of due diligence for appointment of independent directors to beon company.

As per the draft rules :



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Appointment of Managing Director, Whole Time Director or Manager to beapproved by special resolution in a General Meeting

Appointment to be Voted individually (Notified). Section 162

Consent for appointment to be filed by directors of private company tothe ROC

When appointment not in accordance with Schedule V, approval ofCentral Government also required

Independent directors not to be included in the total number of directorswhile calculating retiring directors i.e. 2/3rdof the total number ofdirectors

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(SECTION 152) . NOTIFIED



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Until the director duly appointed as per provisions in the OPC,individual being member shall be deemed to be its first director

Whole Time Director shall not be appointed for more than 5 years

Provisions to apply to Private Companies as well

In case of default the Company, such individual or director to bepunishable with imprisonment upto 6 months or with fine which shallnot be less than fifty thousand rupees but which may extend to fivehundred rupees for every day after the first during which the defaultcontinues.

(SECTION 152) . NOTIFIED

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SITTING FEE OF DIRECTORS


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A Director may receive remuneration by way of fee for attending meetings of the board orcommittee

Independent director shall not be entitled to any stock options

Reimbursement of expenses for participation in the board and other meetings and profit relatedcommission as may be approved by the members

As per the draft rules-

Amount of sitting fees payable to a director for attending meetings of the Board or committees tobe a maximum of Rs.1 lakh per meeting of the Board or committee

Board may decide different sitting fee payable to independent and non-independent directorsother than whole-time directors

SECTION 197

DECISION MAKING BY DIRECTORS


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DECISION MAKING BY DIRECTORS

DECISION MAK ING BY DIRECTORS

Board meeting

Resolution by circulation

Committee meetings

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BOARD MEETING SECTION 173


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BOARD MEETINGSECTION 173

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First Board Meeting to be held within 30 days of incorporation.

Notice of Board meeting shall be given to all directors, whether he is in India oroutside India by hand delivery or by post or by electronic means.

At least one independent director to be present at a Board Meeting called at shorter

notice to transact urgent business.

In case of absence of independent directors from board meeting, decisions taken atmeeting shall be circulated to all the directors and shall be final if ratified by aindependent director.

Director can participate in the Board meeting through video conferencing or otheraudio visual mode as may be prescribed.

Draft Rules provide for the procedure and manner of such process

BOARD MEETINGS: VIDEO CONFERENCING


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The procedure of conduction of Board Meetings through Video Conferencing isspecifically provided for, with major responsibilities casted upon the Chairman of theCompany and Company Secretary.

BOARD MEETINGS: VIDEO CONFERENCING

An important provision provides that every director who attended the meeting,whether personally or through video conferencing or other audio visual means,shall confirm or give his comments, about the accuracy of recording of theproceedings of that particular meeting in the draft minutes, within seven days afterreceipt of the draft minutes failing which his approval shall be presumed.

This provision is very important as far as the liability of Directors is concerned.

MATTERS NOT TO BE DEALT IN MEETING THROUGH VIDEO

CONFERENCING To approve the annual financial statements; and To approve the boardsreport.



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At least 4 Board meetings should be held each year, with a gap of not more

than 120 days between two Board meetings

No requirement of holding the Board Meeting in every quarter

For One Person Company (OPC), small company and dormant company atleast 1 Board meeting must be held in each half of a calendar year with a gapof not less than 90 days between two Board Meetings

In case of only One Director in OPC, requirement of holding meeting will notapply

Resolution by circulation shall be approved if consented by majority ofDirectors instead of the requirement of consent of all Directors present inIndia or by majority of them (as was provided in the Companies Act 1956)


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MATTERS TO BE DISCUSSED IN

BOARD MEETINGS ONLY


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BOARD MEETINGS ONLY (SECTION 179)

To issue securities whether in India or outside.

To grant loans or give guarantee or provide security in respect of loans;

To approve financial statement and the directors report;

To diversify the business of the company;

To approve amalgamation, merger or reconstruction;

To take over a company or acquire a controlling or substantial stake inanother company

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Other matters prescribed in Draft Rules-

To make political contributions; to fill a casual vacancy in the Board; to enter into a jointventure or technical or financial collaboration or any collaboration agreement;

To commence a new business; to shift the location of a plant or factory or the registeredoffice;

To appoint or remove key managerial personnel (KMP) and senior managementpersonnel one level below the KMP;

To appoint internal auditors;

To adopt common seal;

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To take note of the disclosure of directors interest and shareholding;

To sell investments held by the company (other than trade investments),constituting five percent or more of the paidup share capital and free

reserves of the investee company;

To accept public deposits and related matters and;

To approve quarterly, half yearly and annual financial statements.

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MEETINGS AND RELATED MATER


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GS

General Meetings

Quorum

Proxies

Statement to be annexed with notice

Postal ballot

Resolution requiring special notice &closure of register of members

GENERAL MEETINGS


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OPC not required to hold AGM

First AGM to be held within 9 months fromclosure of first FY

AGM to be held on between business hoursi.e. 9 AM to 6 PM

Notice of GM may be sent through electronic mode

To be sent to all Directors

21 clear days notice to be given

In case of AGM Shorter notice can be given by consentof 95%of members who are entitled to vote (like forEGM)

Secretarial Standards mandated

Report of AGM, prepared in prescribed manner, tobe filed with RoC

REPORT ON AGM(S 121)


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(Sec 121)

Every Listed Public Company to prepare a Report on each AGM.

Report to contain confirmation that the meeting was convened, held andconducted as per the provisions of the Act / Rules.

The company to file the Report with the Registrar within 30 days of the conclusionof the AGM.

Proceedings at the AGM of a listed co. thus becomes a public document.

QUORUM FOR MEETINGS


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Publ ic Company

5 members personal ly

present 1000 members


present

> 1000 members bu t

5000 members


present > 5000 mem bers

Private Company 2 members personal lypresent

PROXIES (SECTION 105)


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Single person not to be proxy for more than 50 members

Proxy cannot vote by show of hands

Member of Private Limited company cannot appoint more than 1proxy to attend on same occasion

POSTAL BALLOTSECT 110


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Postal ballot applicable to all companies

Postal Ballot resolutions to be prescribed by CG. (Other thanany businesses in which directors/auditors have the right to beheard at the meeting and ordinary business)

To maintain minutes

COMMITTEE OF BOARD


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AUDIT COMMITTEESECTION 177


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Every listed company and such other class of company shall constitute an

Audit committee. (As per Draft Rules: Audit Committee of the Board for everylisted company , and every other public company having paid up capital of Rs.100 cr or more; or which have, in aggregate, outstanding loans or borrowingsor debentures or deposits exceeding Rs. 200 cr)

Committee shall consist of minimum three director with the independentdirector forming majority

Auditors and KMP have right to be heard in the meeting of committee

Boards report to disclose

1. Composition of the audit committee and

2. Any recommendation which has not been accepted by the board.

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AUDIT COMMITTEE.VIGIL

MECHANISM


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MECHANISM

Every listed company or such class of companiesshall establish a vigil mechanism

As per Draft Rules: Companies which acceptdeposits from public and Companies which haveborrowed money from banks and public financialinstitutions > Rs 50 Cr

Mechanism facilitates directors and employees toreport genuine concerns

Adequate safeguards against victimisation ofpersons who use such mechanism

Provision for direct access to the chairperson ofthe audit committee

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Whistle

Blower (a

non

mandatory

item as perCl 49) is

now made

mandatory,

in the name

of Vigil

Mechanism

DUTIES OF DIRECTORS


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DUTIES OF DIRECTORS- SECTION 166


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A director to act in accordance with the articles of the company

A director to act in good faith in order to promote the objects of the company for the benefit ofits members as a whole, and in the best interest of the company, its employees, theshareholders, the community and for the protection of environment.

A director to exercise his duties with due and reasonable care, skill and diligence and shallexercise independent judgment

A director not to get involved in a situation he may have direct or indirect interest that conflicts,or possibly may conflict, with the interest of the company

A director not to achieve or attempt to achieve any undue gain or advantage either to himself orto his relatives, partners, or associates

- SECTION 166

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RISK MANAGEMENT


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Evaluation of internal financial controls andrisk management systems

The Boards report to contain a statementindicating development and implementation of

risk management policy. Sectio n 134 (3)(n)

Board Report to contain statement indicating themanner in which formal annual evaluation hasbeen made by the Board of its own performanceand that of its committees and individualdirectors. Sectio n 134 (3)(p)

(As per Draft Rules: This is applicable for everylisted company and public company having paidup share capital of Rs. 25cr or more, calculatedas at the end of the preceding FY)

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GOVERNANCE - ENHANCINGSTAKEHOLDER PROTECTION


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STAKEHOLDER PROTECTION

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GOVERNANCE


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For protection of shareholders concept of ClassAction suitinserted

Exit opportunity by the promoters to the dissenting shareholders in caseof variation in the terms of the contracts or in objects of prospectus

Provision for Internal audit of certain companies

Provision for rotation of auditors in listed and in certain other class ofcompanies

Onus on the Independent Director for the fulfillment of conditionsspecified in the Act for the appointment casted on the board to specify inthe explanatory statement for such appointment

GOVERNANCE


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Onus to ensure compliance with all applicable laws has been casted on the

board of directors of a company

Along with the members and auditors, even directors are required to be sentnotices of the meeting

Set up of Investor Education and Protection Fund (IEPF) for transferamount lying in unpaid dividend accounts of the company to such fund

To minimize risks, certain restrictions has been implied on the board ofcompany which were earlier not mentioned in the Companies Act, 1956

Establishment of Serious Fraud Investigation Office (SFIO)

RESTRICTIONS FOR DIRECTORS


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RESTRICTION ON NON-CASH TRANSACTIONSINVOLVING DIRECTORS APPLICABLE TO:

(NOTIFIED) SECTION 192

Any Director of a company; or

Director of the Holding Company; or

Any person connected with such person

Director cannot acquire assets for the consideration other than

cash from the company & vice versa without the approval in

general meeting

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PROHIBITION ON FORWARD DEALING IN SECURITIES(NOTIFIED) SECTION 194

Director and KMP prohibited w.r.t. to following in a Company, or its

holding, subsidiary or associate Company

Right to call/make for delivery at specified price and within a specified

time, of a specified number of relevant shares /debentures.

Right to call for delivery or make delivery at a specified price and within

a specified time, of specified number of relevant shares/debentures.

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PROHIBITION ON INSIDER TRADING OF SECURITIES

(NOTIFIED) SECTION 195

Director and KMP shall not enter into act of insider trading concerning

Subscribing, buying, selling, dealing or agreeing to subscribe, buy,

sell or deal in any securities either as principal or agent if such person

is reasonably expected to have access to any non- public price

sensitive information in respect of securities of company

Counseling about, procuring or communicating directly or indirectlyany non- public price sensitive information to any person.

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LOAN TO DIRECTORSNOTIFIED SECTION 185


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Public and private companies cannot give any loan or provide any security

or guarantee in connection with a loan to a Director or any interestedperson, except to MD & WTD under prescribed circumstances

No exemption for giving loan, guarantee or providing security by holdingcompany to its subsidiary

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However, Section 186 (Not yet notified)empowers the company to give loan or

guarantee or provide security in

connection with the loan to any

person; hence Directors may also beincluded here. It prescribes the limit,

sanctioning authority and fulfillment of

other prescribed terms thereof.

RELATED PARTYNOTIFIED SECTION 2(76)


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NOTIFIED SECTION 2(76)

i. Director or his relative;

ii. A key managerial personnel or his relative

iii. A firm, in which a director, manager or his relative is a partner;

iv. A private company in which a director or manager is member ordirector ;

v. A public company in which a director or manager is a directoror holds along with his relatives more than 2%. Of its paid up

capital

vi. Any body corporate whose Board of Directors, managingdirector or manager is accustomed to act in accordance with the

advice, directions or instructions of a director or manager;

RELATED PARTYNOTIFIED SECTION 2(76)


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vii. Any person on whose advice, directions or instructions a

director or manager is accustomed to act:

Provided that nothing in sub-clauses (vi) and (vii) shall applyto the advice, directions or instructions given in a

professional capacity

viii. Any company which is-

A holding, subsidiary r an associate company of such company; or

A subsidiary of a holding company to which it is also a subsidiary;

ix. Such other persons as may be prescribed

O S C O ( 6)

RELATED PARTY TRANSACTIONSECTION 188


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Disposing of, or

buying, propertyLeasing of property

Restriction on non cash

transaction

Appointment of any

agents

Appointment of

any related party

to any office or

place of profit

Contract for underwriting

the subscription of

securities or derivatives

Board approval required for following RPTs

Companies with the prescribed Capital require approval

by Special resolution for entering into defined related

party transactions

FRAUD


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Criminal liability for fraud for mis- statement in

prospectus- Liability of every person who authorizesissue of misleading prospectus.

Promoter, director, expert or any other person whohas either assented to be director of the company orwho has authorized the issuance of prospectus, to be

held liable for fraud.

Definition Officer in Default includes KeyManagerial Personnel

In case of frauds, all the professionals and expertsrendering independent services to the Company areto be held liable.

CLASS ACTION SUITS(Sec 245)


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( )

Suit may be filed by members or depositors or any class of them;

If management or conduct of the affairs of the company are being conducted in amanner prejudicial to the interest of the company, its members or depositors;

Suit may be filed by more than

100 in number or

more than a percentage of the total number of depositors, whichever is less,

or any depositor or depositors to whom the company owes such percentage of

total deposits of the company.

Damages or compensation or any other suitable action from or against

The company or its directors for any fraudulent, unlawful or wrongful act or

omission.

Any expert or advisor or consultant or any other person for any incorrect or

misleading statement or for any fraudulent, unlawful or wrongful act or conduct.

TRANSPARENCY AND DISCLOSURE


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Every listed company to prepare a report on AGM, such report to containconfirmation that the meeting was convened, held and conducted as per theprovisions of the Act / Rules

Requirement for Enhanced Disclosures in prospectus has been incorporated inthe Act of 2013

Contracts with managing and whole time directors required to be kept atregistered office, which shall be open for inspection by members of the company

Disclosure of interest of all directors

ANNUAL RETURN - Contents(Sec 92)


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Registeredoffice, principal

business

activities

securities and

shareholding

pattern

Indebtedness

Members and

debenture

holders

Promoters,directors, key

managerial

personnel

Meetings of

members

Meeting of

board and

committees

Remuneration

of directors

and KMP

Penalty or

punishment &

details of

compounding

shares held by

or on behalf of

the FIIs

other matters

as may be

prescribed.

BOARDS REPORT


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Extract of

Annual Return

No. of BMs

Declaration by

Independent

Director

Directors

Responsibility

Statement

Comments/expl

anation by BOD

on Secretarial

Audit Report

Particulars of

loan/guarantee/investment

Particulars ofcontracts/arran

gements with

related party

Material

changes from

end of FY todate of Report

Statement on

risk

management

policy

Details of CSR

policy

developed and

implemented

BOD/Committe

es performance

evaluation

Other such

matters

BOARDS REPORT:OTHER MATTERS PRESCRIBED


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financial

summary/highlights

change in the

nature of

business,

Details of

directors or KMPCompanies ceased

to be Subsidiaries,JVs or associate

companies;Details relating

to Deposits

Details of significant

and material orderspassed by the

Regulators or courts

DIRECTORS RESPONSIBILITYSTATEMENT (Section 134)


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DRS to also include the following:

In the case of listed companies, director had laid down internalfinancial controls which have been complied with.

The directors had devised systems to ensure compliance withprovisions of applicable laws

PROMOTERS STAKE CHANGES(Section 93)

Listed companies required to file Return with the Registrarregarding change in the number of shares held by thePromoters and top ten shareholders within 15 days of change.

CORPORATE SOCIAL RESPONSIBILITY


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PROMOTING WELFARE

INITIATIVES

CORPORATE SOCIAL RESPONSIBILITY(SECTION - 135)


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Every Company having net worth of rupees five hundred croreor more, or turnover of rupees one thousand crore or more or anet profit of rupees five crore or more during any financial yearto constitute a Corporate Social Responsibility Committee ofthe Board consisting of three or more directors, out of which atleast one director shall be an independent director

The Boards report to disclose the composition of the CorporateSocial Responsibility Committee

CORPORATE SOCIAL RESPONSIBILITY(SECTION - 135)


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Committee shall formulate and recommend to the Board, a CSR Policyindicating the activity or activities to be undertaken by the Company as

specified in Schedule VII of the Law

Recommend the amount of expenditure to be incurred on the activities aboveand

Monitor the Corporate Social Responsibility Policy of the Company from timeto time

CORPORATE SOCIAL RESPONSIBILITY(SECTION 135)


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Based on recommendations from CSR Committee, Board of such Companyto approve the CSR Policy for the Company and disclose contents of suchPolicy in its report and on the Companyswebsite

Every year in the Boards Report, details about the policy developed andimplemented by the Company on CSR initiatives taken during the year to beincluded

CORPORATE SOCIAL RESPONSIBILITY(SECTION 135)


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Board shall ensure that at least two per cent of average net profits of the Companymade during three immediately preceding financial years is spent in every financial

year on such policy

For spending the amount earmarked for CSR activities the Company shall givepreference to the local area and areas around it where it operates.

If a Company fails to provide or spend such amount, the Board to specify reasonsfor not spending the amount in its report

Companies require to comply with CSR shall give additional Information by way ofnotes to the Statement of Profit and Loss regarding aggregate expenditure incurredon corporate social responsibility activities.

Clause 49 on BoD


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114

Independence50% independent directors ifchairman is an executive director or 33% if the

chairman is a non-executive Definition of independenceno material pecuniary

relationship or transactions with the company, itspromoters, its management or its subsidiary, not

related to board or one level below board and noprior relationship with the company for the last threeyears

Nominee directors of financial institutionsconsidered independent

Board requirements & Limitations

Meet 4 times in a year (max. 3 months betweenmeetings)

Current status on corporate governance


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Current status on corporate governance

Comparison of Board structureIndian top 50 Vs U.S. top 50Key Findings

Parameter India (Nifty Fifty companies) US (top 50 out of NYSE 100 index)

Ownership pattern 48% of Indian companies have largest shareholder

holding over 50%

Largest shareholder holds less than 10%

in all cases

Board size Largest board size17. smallest5 Largest board size 18. smallest10

44% of the top 50 companies have more than 12

directors

66% of the top 50 companies have more

than 12 directors

Board independence 58% of companies have a board majority of

independent directors

12% have less than 1/3rdof their directorsindependent

All companies have a board majority of

independent directors

Executive directors in board In 35 companies 50% of the directorsor moreare

executive directors

Boards of 49 companies out of 50 have

less than 25% executive directors

Chairman and CEO 60% have separate Chairman and CEO Only 20% have separate Chairman and

CEO

Lead independent director 3 companies have lead independent directors 20 companies have lead independent

directors

Board committees All companies have audit committees54% havefully independent Audit Committees

33 companies have remuneration committeesof

these 14 fully independent and 16 have majority

independent committees

9 companies have nomination committees6 are

fully independent and 3 have majority independent

committees

All companies have fully independentaudit remuneration and nomination

committees

115

Source: Crisil Report on Corporate Governance

Restoring Integrity and Trust


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Boards must re-establish and enforce the standard that risks are to be

undertaken for the benefit of their constituents, not for the personal gainof management.

George VojtaChairman of the Advisory Board of the Yale School of Management Millstein Center for Corporate

Governanance and Performance and Former Vice-Chairman, Bankers Trust Corp.

116


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15 Elements of good CG


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15 Elements of good CG

Dispersed Ownership Transparent

Ownership

One Share / one vote

Antitakeover defenses Meeting notification

Board size

Outside directors Independent directors

Written boardguidelines

Board committees

Disclosure

Accounting standards Independent Audit

Broad disclosure

Timely disclosure

corporate boards

Documents