Law –Related Expectations

The Indian Companies Act does not define the Board of Directors (BoDs). Even ‘Director’ is simply defined as ‘it includes any person occupying the position of Director, by whatever name called’ [sec.2 (13)]. With the help of this open definition of Director, we may infer that a Board of Directors is a group of individuals each of whom is labeled as ‘Director’ (or by any other title with identical substantive intention). No person is to hold more than 20 directorships.

Section 269 says that, the commencement of the Companies (Amendment) Act, 1988, certain specified public companies or private companies which are subsidiaries of public companies, shall have a Managing or Wholetime Director, a Manager, and each such appointment must be made with prior approval of the central Government.

What is a BoDs suppose to do? This again we can know inferentially by referring to a definition of ‘Manager’ and ‘Managing Director’ in section 2 of the Act, and also Sections 291-93. Both these incumbents have to exercise their powers of management’s ‘subject to the superintendence, control and direction of the Board’. Thus, the BoDs, in broad terms, is expected to perform the role of overseeing the running of the enterprise by its chief executive.

On whose behalf does the BoDs perform this role of overseeing? It is expected to do this on behalf of the shareholder. It is they who elect the directors on the board. And it is the BoDs, which, in turn, selects the Chief Executive.

The directors individually have no powers in the eyes of law. It is only the collective body of directors, i.e., the board, which has a superior total power over the Chief Executive. The intent of the Indian Companies Act appears to include only outside non-employee directors on the board. Otherwise, if internal Wholetime Executive, say the MD were to be the directors on the board, how could they exercise ‘superintendence, control and direction’ over themselves?

Section 291 stipulates that the BoDs shall be entitled to exercise all such powers, and to do all such acts and things as the company authorizes to exercise and do, except those things which can be done in a general meeting of the company. The powers exclusive to the BoDs (sec. 292) are:

• To make calls on shareholders in respect of money unpaid on their shares
• To issue debentures
• To borrow money otherwise than through debentures
• To invest the funds of the company
• To make loans

Correspondingly, section 293 restricts the powers of the BoDs, by making them subject to the consent of general meeting of the company, in respect of selling, leasing or disposing of the property of the company; remitting debt due by the director; borrowing money to an extent which exceeds the net worth of the company etc.

The Board of Directors is expected to meet once in a quarter and the quorum for a valid meeting of the board is one –third of the total strength or two directors, which is higher. The power to declare dividends is exclusive to the BoDs.

Section322 of the companies Act allows ‘ memorandum of association ‘ of a limited company to provide for a director or directors with unlimited liability.

Managerially –Derived Expectations

The dimension relating to the managerially derived expectations of the Board of Directors role seems to be of relatively recent origin. In more than two decades or so, industrial development had been marked by far-reaching technological changes, leading to equally fundamental competitive reorientation at the global level. As a result, many erstwhile great names in the industry have been humbled. With such rapidly mounting changes and uncertainties, the role of BoDs has begun to be viewed from much wider and long –term perspective beyond the minimum requirements of the law. Probably, upto 1970’s, the duty of BoDs to superintend, control and direct had gone by defaults. Stable environment had helped this key role to remain dormant. What is then the renewed ramifications of this role at present? These are meant to ensure that.

• The enterprise continues to remain effective on the standpoint of technology parameter.
• The enterprise continues to achieve healthy market growth in competitive conditions.
• Divestments and diversification take place on sound lines.
• Long-term productivity and quality are never sacrificed at the alter of short term profitability
• Judicious earnings retention policy is adopted for financing growth, modernization, etc.
• Serious and sustained attention is adopted towards building a sound system of human values and exalted corporate culture.

It is a common observation that BoDs function rather passively. Often the members are selected not because of their knowledge and competence but because of their compatibility, prestige or esteem in the community. Usually, the Chief Executive Officer or the group of promoters has free reign in choosing the directors and in having them elected by the shareholder. The directors thus selected often feels that they should go along with any proposal made by the CEO and his group. Interestingly, the board members find themselves accountable to the very management they are expected to oversee.

Over the recent past, however, lending institutions, financial media and corporate analysts have seriously questioned the role of BoDs. The investors and government in general are better aware of the role of the BoDs. Though the Companies Act throws some light on the powers of the BoDs and the restrictions placed on those powers, it does not specify to whom they are responsible and what for. However, there is a broad agreement that BoDs appointed or elected by the shareholders are expected to:

• Oversee the management of the company’s assets
• Establish or approve the company’s mission, objective, strategy and policies
• Review management actions and financial performance of the company
• Hire and fire the principal executive and operating officers of the company

An important issue in this context is: should BoDs merely direct or may they manage also? Many experts and practicing top managers say that BoDs should only oversee and direct, and never get involved with the detailed management. There are others who feel that, for direction to be realistic and sensible, some in-depth involvement with details is necessary. The majority view, however, is in favour of directors directing the affairs of the company and not managing them.