Board of Directors
What are 'Board of Directors'
The Board of Directors (BoD) is the primary governing body of a corporation or organization. While the shareholders own the company and the managers run the day-to-day operations, the Board sits in the middle to set strategy, oversee management, and ensure the company acts in the best interest of its owners and the law.
Official Definition of 'Board of Directors'
The official definition identifies the Board as a collective body of individuals, elected by the shareholders, to exercise oversight and strategic control.
Under the Companies Act, 2013, the "Board of Directors" or "Board", in relation to a company, means the collective body of the directors of the company. It is important to note that the law treats the Board as a single unit; individual directors generally do not have the power to act on behalf of the company unless specifically authorized by the Board.
'Board of Directors' as defined in Legislations
Companies Act, 2013.
- Section 2(10): Formally defines "Board of Directors" as the collective body of directors.[1]
- Section 149: Mandates that every company shall have a Board of Directors consisting of individuals as directors. It specifies that a public company must have at least 3 directors, a private company- 2, and a One Person Company (OPC)- 1.[2]
'Board of Directors' in International Instruments
- OECD Principles of Corporate Governance: These provide the international benchmark for Boards. They define the Board's role as providing strategic guidance, effective monitoring of management, and accountability to the company and shareholders.[3]
'Board of Directors' in Official Government Report(s)
The Uday Kotak Committee Report on Corporate Governance (2017)
A SEBI-appointed committee to help improve the standards of corporate governance of listed companies in India.[4]
- Separation of Roles: Proposed the mandatory separation of the roles of the 'Chairperson' and the 'Managing Director' to ensure the Board remains independent of management.
- Board Diversity: Emphasized the need for at least one woman independent director on every Board.
- Minimum Meetings: Proposed increasing the minimum number of board meetings to five per year.
'Board of Directors' as Defined in Case Law(s)
Official Liquidator v. P.A. Tendolkar, (1973)
The Court held that while the Board acts collectively, a director cannot escape liability for the Board's actions by claiming ignorance of the company's affairs if they failed to exercise reasonable care.
Dale & Carrington Invt. (P) Ltd. v. P.K. Prathapan, (2005)
The Supreme Court defined the Board's power to issue shares as a fiduciary power, which must be exercised "bona fide" (in good faith) for the benefit of the company, and not to preserve the directors' control over the company.
S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla (2005)
Regarding cheque bouncing (Section 138 of NI Act), the court ruled that to hold a director liable, the complaint must specifically state how the director was "in charge of and responsible to the company" for the conduct of its business at the time of the offense.
Sunil Bharti Mittal v. CBI (2015)
The Supreme Court held that a director cannot be held vicariously liable for the company's criminal acts unless the statute specifically provides for it or there is evidence of the director’s "active role" with criminal intent. Merely holding a title (like Chairman or MD) is not enough to prove guilt.
Tata Consultancy Services Ltd. v. Cyrus Pallonji Mistry, (2021)
The Supreme Court of India reiterated that the Board of Directors is a "collective body" and emphasized that the removal of a Chairman by the Board is a matter of internal governance, provided the procedure established by the Articles of Association is followed.
Types of Directors
Directors on the Board can be classified into various types based on thier roles, responsiblities and relationship with the company.[5] Such types of directors are listed below:
- Managing Directors: MDs are responsible for the day-to-day smooth operations of the company.
- Executive Directors: EDs are full-time directors of the company directly involved in the day-to-day operations and have higher responsibility for implementing board decisions.
- Non-executive Directors: These directors are without executive roles and are not involved in the routine/everyday working of the company. They provide independent oversight and an objective perspective and, at times, challenge management's assumptions.
- Independent Directors (IDs): IDs are non-executive directors and hold no materialistic financial or personal relationships with the company. IDs are brought in to provide unbiased decision-making, ensuring the Board's objectivity and credibility.
- Lead Directors: An independent director who chairs board meetings in the absence of the Chief Executive Officer, facilitating communication and fostering the board's effectiveness.
- Residential Directors: A director who resides in the same country as the company.
References
- ↑ The Companies Act, 2013, S 2(10), Available at: https://www.indiacode.nic.in/show-data?abv=CEN&statehandle=123456789/1362&actid=AC_CEN_22_29_00008_201318_1517807327856§ionId=185§ionno=2&orderno=2&orgactid=AC_CEN_22_29_00008_201318_1517807327856
- ↑ The Companies Act, 2013, 149, Available at: https://www.indiacode.nic.in/show-data?abv=CEN&statehandle=123456789/1362&actid=AC_CEN_22_29_00008_201318_1517807327856§ionId=49078§ionno=149&orderno=153&orgactid=AC_CEN_22_29_00008_201318_1517807327856
- ↑ OECD, Corporate Governance, Available At: https://www.oecd.org/en/topics/policy-issues/corporate-governance.html
- ↑ SEBI, Report on Corprate Governance (2017), Available at: https://www.sebi.gov.in/sebi_data/attachdocs/oct-2017/1509102194616.pdf
- ↑ Ipleaders, Board of Directors Blog, Available at: https://blog.ipleaders.in/board-of-directors-composition-structure-duties-and-powers/