The responsibility of the Board of Directors towards stakeholders is a fundamental and multifaceted aspect of corporate governance. Boards play a pivotal role in guiding and overseeing the activities of a company, ensuring that it operates in a manner that not only maximizes shareholder value but also takes into account the interests of various stakeholders. This responsibility has gained increasing importance in recent years as businesses recognize the need for sustainable and socially responsible practices.
Board of Directors plays a critical role in safeguarding and advancing the interests of shareholders. Their responsibilities encompass a wide range of duties aimed at ensuring the company’s prosperity, ethical conduct, and long-term value creation while maintaining transparency, accountability, and compliance with laws and regulations. Effective governance by the board is essential for fostering trust and confidence among shareholders and other stakeholders in the corporate ecosystem.
Meaning of Director’s
What Is a Stakeholder?
Companies Act 2013
Sub-section 2(10) of the Companies Act 2013 ―” Board of Directors” or ―” Board”, in relation to a company, means the collective body of the directors of the company;
SEBI (LODR) 2015
Regulation 2(c) “Board” means the Securities and Exchange Board of India established under section 3 of the Act;
Regulation 2(d) “board of directors” or “board of trustees” shall mean the board of directors or board of trustees, whichever applicable, of the listed entity;
Minimum Directors Required in Company
According to section 149 (1) of the Companies Act,2013, every Company shall have a Board of Directors consisting of Individuals as Directors and shall have-
1. In case of Public Company- Three Directors
2. In case of Private Company- Two Directors
If the Company wants to appoint more than fifteen directors, it can do so after passing a Special resolution.
As per the Regulation 17 of Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulation 2015,
The composition of board of directors of the listed entity shall be as follows:
(a) Board of directors shall have an optimum combination of executive and non-executive directors with at least one-woman director and not less than fifty per cent of the board of directors shall comprise of non-executive directors;
(b) where the chairperson of the board of directors is a nonexecutive director, at least one-third of the board of directors shall comprise of independent directors and where the listed entity does not have a regular nonexecutive chairperson, at least half of the board of directors shall comprise of independent directors:
Provided that where the regular non-executive chairperson is a promoter of the listed entity or is related to any promoter or person occupying management positions at the level of board of director or at one level below the board of directors, at least half of the board of directors of the listed entity shall consist of independent directors.
Types of Directors
1. Residential Director: – As per Section 149(3) of Companies Act,2013 every company shall atone director who has stayed in India for a total Period of not less than 182 days in the Previous calendar year.
2. Independent Director: – As per section 149(6) an independent director in relation to a company, means a director other than a Managing Director, Whole Time Director, or Nominee Director. Companies which have to appoint Independent Director: -As per Rule 4 of Companies (Appointment and Qualification of Directors) Rules,2014 the following class of companies have to appoint at least two independent directors: –
The Act has also introduced Schedule IV which is a Code for Independent Directors.
Every listed public company shall have at least 1/3rd of total number directors as independent directors. In case of unlisted public companies, the Central Government may prescribe the minimum number of independent directors.
An unlisted public company shall have at least two independent directors in its Board if on the last date of the latest audited financial statements it has:
3. Small Shareholders Directors: – A listed Company may have one director elected by small shareholders. May appoint upon notice of not less than 1000 Shareholders or 1/10th of the total shareholders, whichever is lower have a small shareholder director which elected form small shareholder.
4. Women Director: – As per Section 149 (1) (a) second proviso requires certain categories of companies to have At Least One-Woman director on the board. Such companies are any listed company, and any public company having-
Paid Up Capital of Rs. 100 cr. or more, or
Turnover of Rs. 300 cr. or more.
5. Alternate Directors: – As per Section 161(2) A company May appoint, if the articles confer such power on company or a resolution is passed (if a Director is absent from India for at least three months).
6. Additional Directors: Any Individual can be appointed as Additional Directors by a company under section 161(1) of the Companies Act 2013.
So, the Board of Directors leads and controls a Company and effective board is fundamental to the success of the Company.
The process of running a board sometimes called the board process, includes the selection of board members, the setting of clear board objectives, the creation and follow-up of assigned action items.
If the minimum no. of Directors are not satisfied then there are no board in the company.
The board are directly accountable to the shareholders and each year the company holds an Annual General Meeting (AGM) at which the directors must provide a report to the shareholders on the performance of the company, what its future plans and strategies are and also submit themselves for re-election to the board.
It is important that board meeting are held periodically so that directors can discharge their responsibility to control the company’s overall situation, strategy and policy, and to monitor the exercise of any delegated authority, and so that individual directors can report on their particular areas of responsibility.
THE BOARD MUST CONSIDER AND ADDRESS THESE DIVERSE INTERESTS WITHOUT COMPROMISING THE COMPANY’S OVERALL PERFORMANCE AND INTEGRITY.
The Fiduciary Duty:
One of the fundamental responsibilities of the Board is to act in the best interests of the company and its shareholders. This duty, often referred to as the fiduciary duty, requires the Board to make decisions that maximize shareholder value over the long term. However, this does not imply that other stakeholders are ignored or disadvantaged in the process.
Balancing Stakeholder Interests:
Effective corporate governance entails striking a delicate balance between the interests of different stakeholders. While shareholders seek profitability and value appreciation, employees desire job security and fair treatment, customers expect quality products and services, and communities look for responsible and sustainable practices. The Board must consider and address these diverse interests without compromising the company’s overall performance and integrity.
Ethical and Responsible Leadership:
The Board sets the tone for the company’s ethical and responsible conduct. It establishes a corporate culture that promotes transparency, accountability, and compliance with legal and ethical standards. It is essential for the Board to lead by example and ensure that ethical behavior is upheld throughout the organization.
Risk Management and Sustainability:
Stakeholders, including shareholders, are increasingly concerned about the long-term sustainability of companies. Boards are responsible for identifying, assessing, and mitigating risks that may impact the company’s ability to deliver sustainable returns and fulfill its obligations to all stakeholders. This includes environmental, social, and governance (ESG) factors that have gained prominence in recent years.
Engagement and Communication:
Open and effective communication between the Board and stakeholders is crucial. Shareholders and other stakeholders should have access to relevant information about the company’s performance, strategy, and decision-making processes. Engaging with stakeholders through channels such as annual meetings, reports, and feedback mechanisms helps build trust and transparency.
RIGHTS OF SHAREHOLDER
As per the Regulation 4(a) of the Securities Exchange Board of India (Listing Obligation and Disclosure Requirement) Regulation 2015
The rights of shareholders: The listed entity shall seek to protect and facilitate the exercise of the following rights of shareholders:
RESPONSIBILITIES OF BOARD OF DIRECTORS
As per the Regulation 4(f) of Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulation 2015,
Responsibilities of the board of directors: The board of directors of the listed entity shall have the following responsibilities:
(i) Disclosure of information:
(1) Members of board of directors and key managerial personnel shall disclose to the board of directors whether they, directly, indirectly, or on behalf of third parties, have a material interest in any transaction or matter directly affecting the listed entity.
(2) The board of directors and senior management shall conduct themselves so as to meet the expectations of operational transparency to stakeholders while at the same time maintaining confidentiality of information in order to foster a culture of good decision-making.
(ii) Key functions of the board of directors-
(1) Reviewing and guiding corporate strategy, major plans of action, risk policy, annual budgets and business plans, setting performance objectives, monitoring implementation and corporate performance, and overseeing major capital expenditures, acquisitions and divestments.
(2) Monitoring the effectiveness of the listed entity’s governance practices and making changes as needed.
(3) Selecting, compensating, monitoring and, when necessary, replacing key managerial personnel and overseeing succession planning.
(4) Aligning key managerial personnel and remuneration of board of directors with the longer-term interests of the listed entity and its shareholders.
(5) Ensuring a transparent nomination process to the board of directors with the diversity of thought, experience, knowledge, perspective, and gender in the board of directors.
(6) Monitoring and managing potential conflicts of interest of management, members of the board of directors and shareholders, including misuse of corporate assets and abuse in related party transactions.
(7) Ensuring the integrity of the listed entity’s accounting and financial reporting systems, including the independent audit, and that appropriate systems of control are in place, in particular, systems for risk management, financial and operational control, and compliance with the law and relevant standards.
(8) Overseeing the process of disclosure and communications.
(9) Monitoring and reviewing board of director’s evaluation framework.
(iii) Other responsibilities:
(1) The board of directors shall provide strategic guidance to the listed entity, ensure effective monitoring of the management and shall be accountable to the listed entity and the shareholders.
(2) The board of directors shall set a corporate culture and the values by which executives throughout a group shall behave.
(3) Members of the board of directors shall act on a fully informed basis, in good faith, with due diligence and care, and in the best interest of the listed entity and the shareholders.
(4) The board of directors shall encourage continuing directors training to ensure that the members of board of directors are kept up to date.
(5) Where decisions of the board of directors may affect different shareholder groups differently, the board of directors shall treat all shareholders fairly.
(6) The board of directors shall maintain high ethical standards and shall take into account the interests of stakeholders.
(7) The board of directors shall exercise objective independent judgement on corporate affairs.
(8) The board of directors shall consider assigning a sufficient number of nonexecutive members of the board of directors capable of exercising independent judgement to tasks where there is a potential for conflict of interest.
(9) The board of directors shall ensure that, while rightly encouraging positive thinking, these do not result in over-optimism that either leads to significant risks not being recognised or exposes the listed entity to excessive risk.
(10) The board of directors shall have ability to ‘step back’ to assist executive management by challenging the assumptions underlying: strategy, strategic initiatives (such as acquisitions), risk appetite, exposures and the key areas of the listed entity’s focus.
(11) When committees of the board of directors are established, their mandate, composition and working procedures shall be well defined and disclosed by the board of directors.
(12) Members of the board of directors shall be able to commit themselves effectively to their responsibilities.
(13) In order to fulfil their responsibilities, members of the board of directors shall have access to accurate, relevant and timely information.
(14) The board of directors and senior management shall facilitate the independent directors to perform their role effectively as a member of the board of directors and also a member of a committee of board of directors
As per the Section 166 of the Companies Act 2013 the duties of Directors as follows —
(1) Subject to the provisions of this Act, a director of a company shall act in accordance with the articles of the company.
(2) A director of a company shall act in good faith in order to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees, the shareholders, the community and for the protection of environment. 105
(3) A director of a company shall exercise his duties with due and reasonable care, skill and diligence and shall exercise independent judgment.
(4) A director of a company shall not involve in a situation in which he may have a direct or indirect interest that conflicts, or possibly may conflict, with the interest of the company.
(5) A director of a company shall not achieve or attempt to achieve any undue gain or advantage either to himself or to his relatives, partners, or associates and if such director is found guilty of making any undue gain, he shall be liable to pay an amount equal to that gain to the company.
(6) A director of a company shall not assign his office and any assignment so made shall be void.
(7) If a director of the company contravenes the provisions of this section such director shall be punishable with fine which shall not be less than one lakh rupees but which may extend to five lakh rupees.
ROLE AND DUTIES OF INDEPENDENT DIRECTORS
As per the SCHEDULE IV read with section 149(8) of the Companies Act 2013 Role and functions:
The independent directors shall:
(1) help in bringing an independent judgment to bear on the Board‘s deliberations especially on issues of strategy, performance, risk management, resources, key appointments and standards of conduct;
(2) bring an objective view in the evaluation of the performance of board and management;
(3) scrutinise the performance of management in meeting agreed goals and objectives and monitor the reporting of performance;
(4) satisfy themselves on the integrity of financial information and that financial controls and the systems of risk management are robust and defensible;
(5) safeguard the interests of all stakeholders, particularly the minority shareholders;
(6) balance the conflicting interest of the stakeholders;
(7) determine appropriate levels of remuneration of executive directors, key managerial personnel and senior management and have a prime role in appointing and where necessary recommend removal of executive directors, key managerial personnel and senior management;
(8) moderate and arbitrate in the interest of the company as a whole, in situations of conflict between management and shareholder‘s interest.
Duties : The independent directors shall—