Role of Board of Directors

This article was written in 2010.

The Government being the majority shareholder in public sector undertakings makes the appointment of members of Board of Directors in public sector undertakings.  Board of public sector undertakings normally includes Chief Executive, Functional Directors, and part-time Government as well as Non-Official Directors.  The articles of association of public sector undertakings provide for the maximum and minimum number of directors, depending upon the activities of PSUs and the structure of Board of Directors of PSUs differs from company to company.  In some companies, further sub-committees of Board are formed to look after certain functions and the proceedings of such committees are governed by the provisions of the Companies Act.

The decisions in respect of companies are taken by Board of Directors actively, the Board exercises general supervision over the affairs of the companies, meet periodically and give directions and sanctions to the Management.  For carrying day to day activities, The Board of Directors normally delegates certain administrative and financial manpower to Chief Executive of the company, who functions under the control and supervision of Board of Directors.

Though, the Board is required to formulate policies with respect to the business of the companies, besides long-term strategy based on the mandate of the company and vision outlined by the shareholders.  Yet, the Board of public sector undertakings are hardly policy-making bodies which are generally decided by the Government, be it relating to the business of the company, expansion of the company into related or unrelated areas or relating to salary structure of employees.

With every change in Board members, the continuity of business is affected because new Board members bring their own thoughts and ideas into practice.  While new ideas and new initiatives should always be welcomed, generally in practice, these ideas have a very shallow thinking behind them, because Directors appointed by the Government rarely have time, energy or inclination to really put them into the shoes of an effective director responsible for the duties as enshrined in the law or by conventions.   The Directors are appointed by Government, at times, they much thought being given whether there is a conflict of interest in such appointments and when such appointments are made, the Directors instead of putting a cap on their head for the company which they are representing, rather think in terms of their principal responsibilities.  At times, some Board of Directors get influenced all other exterior influences and this can cause company’s dear.  This compromises the Board’s independence & authority and also disrupts the proper dynamics of the Board.

A lot is said about independent Directors, their role and contribution ineffective corporate governance in PSUs. Yet, their role has largely remained vague and ambiguous. The issue here is whether independent Directors are really working in “independent fashion or working under any personal or moral obligation either to the Appointing Authority or to any other individual or agency”.  In such cases, they can be and have been adverse consequences as the loyalty to the company takes a back seat.  For a board to function in a cohesive manner, the Board members need to really look after the interest of the company and keep their prejudices whether right or wrong separate so that the public sector undertakings can flourish and achieve the objectives for which these have been set up.

The moment a person accepts the position of Director in a company, such a person ought to know what is expected from him/her and what steps need to be taken to fulfill that responsibility and what powers/facilities he or she can exercise to carry out the assigned function. Merely accepting the position of independent director on a company’s Board and allowing the company to decorate its Board with prominent names only, will be misleading and will lack bona-fide, as the investors and the outside world public place strong reliance on the acumen, expertise, bona-fide, and impartiality of such independent Directors. Thus, once an individual assumes the position of Director in a company, he occupies the position of a trust and is expected to perform his fiduciary duty to protect the overall interests of the company concerned and to protect the interest of all the shareholders, creditors and other stakeholders. For this, he is empowered to exercise real power and influence in adherence to good corporate governance practices, howsoever disagreeable it may be to the Promoters Group. Therefore, a company Director cannot be allowed to say later on that “I had no way of knowing what the position was”. He cannot betray the trust and confidence placed on him by the shareholders and creditors of the company and by the Regulatory Authorities to ensure due to compliance with the law not only in letter but in spirit too. Any casual approach and negligence in performing this duty of trust and confidence by the Directors, be they whole time executive Director or independent Directors, can be termed as a betrayal of the trust and such failure may result in unjustified and unreasonable losses on the shareholders and creditors and may help the Promoters Group to illegal wealth creation methods and for losses, the shareholders and other stakeholders involved in the company can legitimately file cases against all the Directors of the Company including the independent Directors and any talk of immunity to independent Directors from such prosecution seems illogical and contrary to the well known cannons of justice and good governance.

Though the term “independent Director” has emerged in the Indian Corporate Laws and there is a great demand for professionals to be inducted as “Independent Directors” in companies, yet there seems to have been no conscious efforts by the Indian Legislature to incorporate provisions of the Companies Act, 1956 to deal with the role, responsibility and liability of this new set of Directors termed as “Independent Directors” and on whom great expectations are being placed by not only the investors in general but by the Government and all others concerned with good corporate governance.

In so far as the management of the affairs of the company is concerned, as per Section 291 of the Companies Act, 1956, the Board of Directors of the Company is empowered to exercise all the powers in the Management of the affairs of the company and no limitation has been put on the exercise of powers by the company Directors whether they be independent director and a whole time Executive Director. Though the Companies Act 1956 enables appointment of “Managing Director” who exercises substantial powers of management of the affairs of the company, such powers are exercised under the supervision and control of the Board of Directors as a whole and as per the provisions of the Companies Act and as per its Memorandum and Articles of Association. Hence, it would not be fair to suggest that as soon as a Managing Director is appointed by a company, all other remaining Directors become “functus officio” or their powers become ineffective. Further, even though Section 5 of the Companies Act, 1956 defines who all are the ‘Officers in Default’, yet it does not exclude the outside independent Directors from the purview of the ‘Officers in Default’.

Incidentally, the Companies Act, 1956 recognizes that proceedings may be initiated against the Company Directors for negligence, default, breach of trust, misfeasance. Section 633(1) of the Companies Act 1956 stipulated that if it appears to the Court hearing the case that an Officer of the Company (which of course includes a Director as per definition clause4 2(30) of the Companies Act, 1956), he is or may be liable in respect of the negligence, default, breach of duty, misfeasance or breach of trust, but that such an accused has acted honestly and reasonably and that having regard to all the circumstances of the case, he ought fairly to be excused, the Court may relieve him either wholly or partly from his liability on such terms as it may think fit. The said Section further provides that in a criminal proceeding under this subsection, the Court shall have no power to grant relief from any civil liability which may attach to an officer in respect of such negligence, default, breach of duty, misfeasance or breach of trust. It is obvious that under Section 633(1) of the Companies Act, 1956, the world “proceeding” does not indicate that it is confined only to civil proceedings or that it excludes criminal proceedings and that it has been used in a comprehensive sense.

In other words, irrespective of whether a person is an executive Whole-time Director or outside independent Director, the law allows such persons to be dragged to the Court for negligence, default, breach of trust, breach of duty, misfortune etc.  But in a PSU, rarely any action is taken against Government nominees of Board, at whose instance, any decisions are taken with apparently malafide intentions, which even ruin the company or destroy its fabric or compromise with its vital interests. Now, if the outside independent Directors who are part of the Audit Committee and/or of the Remuneration Committee of the Company fail to notice anything amiss in the financial figures presented by the Promoters Group or the Management of the company and if such “independent Directors” blindly rely on the verbal statements of the Management about the Bank Balance Certification and the Sales figures etc. without making any independent enquiry or by asking searching questions or by taking help of outside consultants, which they are entitled to do under the Companies Act, 1956, it tends to suggest that due diligence was not exercised fairly and the duty of care and caution was neglected. In such circumstances, if the shareholders point out fingers to such “Directors” for causing loss, then no fault can be found in the initiation of such a move.

It is well known that Section 291 of the Companies Act provides for the general powers of the Board of Directors of a Company and that the powers exercised by Independent Directors can be related to this general provision of the Companies Act, 1956. Further, if one analyzes the definition of “officer who is in default” as given in Section 5 of the Companies Act, 1956, it becomes quite clear that with the consent of certain officers, they can be made responsible for certain specified legal compliances in the context of the working of companies and in that eventuality the rights of vicarious liability of directors cannot be fastened onto the “Independent Directors”. Besides, only where a particular Board fails to fix responsibility on officers/directors for the corporate compliances, then and only then, the whole Board including the independent Directors can face prosecutions and can be held responsible.

As is well known, as per existing Companies Act, 1956, substantial powers of management and control over the affairs of the Company vests with the Managing Director and the role assigned to the outside independent directors is merely advisory and such outside independent directors do not exercise control and powers as the Managing Director or other Whole-time Directors of the Company exercise. Therefore, simply stated when it is possible to hold the Managing Director and other Whole-time Directors responsible for day-to-day affairs of the company and the outside independent directors may possibly feign ignorance in arriving at important decisions like huge investments of company funds, and may plead to be exempted from prosecution by the regulating agencies, in a case where the interested promoter-directors abstain from the Board Meeting wherein important investment decisions are taken, how the outside independent directors can shirk their responsibility is a question which continues to baffle the corporate analysts.

As per Sections 291 to 293 of the existing Companies Act 1956(in short “The Act”) for the conduct of the affairs of the company, the Board of Directors of a company is empowered to take all such actions and to do all such acts, deeds and things which are necessary to carry on the affairs of the company in a lawful manner, subject of course, to the provisions of the Companies Act itself, and the Memorandum of Articles of Association of the Company. In this regard, the company can appoint Managing Director and/or Whole-time Directors and qualified professionals like Chartered Accountants and Company Secretaries to assist the Board in the assigned role. Thus, the role and responsibility of an individual Director in the management of a company is a question of fact and how diligent they were in performing their duties can be gathered from the facts and circumstances of each case. While it is not mandatory for the company directors including the outside independent Directors to attend all the Board meetings or Committee meetings but how much care, caution, and attention was given to them in management of the affairs of the company, are questions which will have to be answered by them to the appropriate authorities at appropriate time. However, having once accepted the position of outside independent director on the Board of a listed public company, they cannot abdicate their responsibilities and expect the Management-n-control to take all the decisions and perform their assigned role as “outside independent director” by merely giving their seal of approval to authenticate the major important decisions.

Further, if one analyzes the definition of “officer who is in default” as given in Section 5 of the Companies Act, 1956, it becomes clear that all the Directors, including independent outside director, can be hauled up as “officer in default” as per the categorization is given in the said section. Also, a reading of Section 633 of the Companies Act, 1956 makes it clear that only when certain responsible officials of the company give “consent” and only when the accused Director can satisfactorily show that he/she exercised due diligence and care and caution in performing his/her function as a company director, then the rigors of liability fastened on such Director can be minimized and relief can be granted by the Court. However, in most of the cases, in order to get this relief, the concerned accused Director has to first face the trial, show how he/she exercised due diligence, care, and caution in performing his/her duties as director of the company and why the Court should consider his/her plea for exclusion from the array of accused Director. The relief from facing prosecution is not automatic.

While too much interference and control from the Government in corporate management may not be desirable to keep the bad elements out. There seems to be a huge gap between professing good corporate governance and its actual practice. The independent outside directors can play an effective role in good corporate governance and in fulfilling the corporate social responsibility to take the Indian companies to a new high.

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