Abstract
In this paper I would like to cover the different committees use for the governance the work of board of director. Also in this i would like to raise the question and answer that why is the need of the different committee in the company? I would like to raise the question “What are the primary responsibilities of the committee and how can be they act as a watchdog?” I’ll be viewing the functions in different committees. ie. audit committee, compensation committee, nomination committee etc.
The next objective is to brief about the stake holder committee and how it is in an agent and principal relationship.
In this paper, I would focus on the board of directors in respect towards the company laws and Companies Act 2013 to answer what is the role of directors towards the company and makes the best use of how to govern the company.
Content
The board committee are the group of working members which have been identified by the board, made for the specific purpose generally formed by the expertise and experienced based person for a specialized working. The committee help the board to improve the company effectiveness by focusing on more technical issues and discussion. The board of director of the company constitute the making of the company and identify the work of each committee in relation with planning and improving it. But the question arise why is the need of the different committee in the company?
As a matter of facts there are different committee which carry out various function helping in achieving goals and in assistance of the company. Some of the committee like audit, inspection, stakeholder, compensation or nomination act as a watchdog for the company and let’s to know the true identification of the company. The basic need and requirement for the committee are as follow-
- To focus on specific area and these areas are handle by specific committees.
- Development of specific expertise on areas like financial, risk management, auditing, inspection etc.
- Working on achieving the objectivity and proper sharing of the responsibility by the board.[1]
One of the basic requirements of the board committees is to focus on specific areas of the work. Every area in the company must have the specialized committee which include expertise, knowledge, and skilful person in that committee. These committees can focused on specific areas like compensation to members or director, auditing of the company, risk management of the company or nomination of the members.
We know that the company required specific committee in the areas in different field of the work like auditing, compensation etc. .It is equivalent important to develop the expertise, skill, labour, trained employees by these committee to manage the operation of the organisation in there respectful areas of their field. So the committees help in development of expertise in specific area of the field for managing the operation of the company.
The third important need for the board committee is sharing of the responsibilities between different expertise areas. It is equitant important that the work done by the expertise person in the specific committee and not by any other member, this will ultimately give rise in development or growth of the company. Also it will help in given the true and exact statistics of the company to the directors as well as help in gaining confidence and trust of the investors. Working with objectivity and proper sharing reduce the chances of miscommunication and together as team, it helps in achieving the goals of the company. Committee focusing on specialized areas to manage and control will ultimately help improving effectiveness and efficiency.
Now the question raises that how these committee work and what are there responsibilities?
Audit committee
Audit committee is the committee which has been established for the purpose of seeing and strengthen the financial position of the company. The section 177 of companies acts, 2013 tell us about having a compulsory audit committee for administers and compliance of rules and legislation in every listed company.[2]
Audit committee must be established for the unlisted company having a paid up capital for 10 crores or more and turnover more than 100 crore.
As forces on specific areas the audit committee help in analysing and gives its opinion on financial reports. The committee help in making the specific policy for the identification and obligatory against the fraud.[3] One of the basic of everything that the audit committee had to do the meet with independent auditor and discussed on quarterly and annually financial report along with news release of earning and giving different views inexternal agency.
Role and responsibility of audit committee –
1. The role of this committee is to look around the financial process and observe all rules and regulations are followed.
2. The committee is responsible for the appointment and salary of the working auditor and also discuss the important matter regarding auditing with them.
3. This committee have its own budget and authority to look in to the matter of the company r so that the committee may have the trust of the investors before releasing the report regarding finances.
4. The committee looks to the different approaches of the internal staff of the auditor[4]. “The coordination, review, function of the organisation in auditing is all approved by the committee as an audit plan in a periodic basis for discussion of the matters of the company.”[5]
Nomination committee
It is one of the important committee that help in evaluating the performance and work of the board of director and help in selection of the best member required for the seat of the member. The committees generally contains of senior independent director, non-executive director etc., which are assigned to role of the committee.
The committee may help in reviewing the work and different policy regarding of corporate governance, which provides framework for achieving the objective of the company. Section 178 of the company act, 2013 tells us about classes of company required to have nomination and remuneration committee[6] –
- All the listed company in the stock market ,along with all public company with ten crore paid up capital
- All public company one hundred Cr turnover or more and loans, debenture or borrowing more than fifty Cr rupees.
Rules and responsibilities of nomination committee
1. The first responsibilities of this committee as a mission to appoint the director, members of nominating committee, identifying the skills and proper candidate for the director appointment.
2. The nomination committee has to be conscious and must looked closely towards the recruitment of the members for the board committee as these members leads the company towards new opportunities and achieve the goals of the company. And maintain the operation cycle of the company.
3. The role of nomination committee is not only to recruitment or appointment of a the director or any other board member, the committee also have a responsibilities to trained these members for the future working at the company so that they could have the financial and work knowledge.
4. The nomination committee also leads to see the risk management of the company. “The EY notes 15% of the risk management, including governance has been given by company to the nomination committee.”[7] “The committee has the responsibilities to plan risk management for the business continuity, strategies, product safety etc.”[8]
Compensation committee
This is the type of committee which is used to see the check and balances and ensure that the employees and other worker get fair amount of money for their work. The committee help to grow the company and maintain the fair policy for the people who are working in the company. The compensation committee plays an important role in appointment; removal of the members of the company .The role of the compensation in administrative field is to know about the different plans regarding rules and regulation of industries, identifying the studies and different alternatives to execute the plans.
In the compensation committee the independent directors appointed by board act as industries expertise and enhance business skills. They solely managed the operation of the committee and act as trusty to all the employees and the board for the compensation. The compensation committee has authority to compensate on the basis of the salary, long term incentives, bonuses, perquisites etc.[9]
The duties and responsibilities of compensation committee are –
1 The first duty of the compensation committee is to maintain the record of the ratio of salary, benefits, and perquisites for compensation making a philosophy and moral effect on the employees.
2 The committee is responsible to make a contact or a link between the CEO and issue of the board towards administrative or resources.[10]
3 The committee key work is to make sure the funds are available for the compensation plans .They must be working on evaluation of budget along with the audit committee to make sure the compensation is available to the people.
4 the committee focuses on identifying the faults regarding the matters of the compensation and discuss with the board.[11]
5 the compensation committee observe and look into the changes if needed by discussing with board on compensation package’s to the employees, CEO, Director by the compensation committee.
Example of the Tata motors in board committee
Taking an example of the Tata motors from its annual report, the company constitute 6 committee audit, nomination, stakeholder, compensation etc. “ The audit committee focused on giving the branch audit, cost audit, secretarial audit. Focusing on statutory audit contain remuneration for the CEO or managing director amounting 2.2 Crore and further 1.70 Crore to the non-executive independent director.”[12]
The example of Tata motors, the board of director are elected by the recommendation of the nomination committee in the Tata motors under the provision of the Sebi listing regulation in the annual general meeting of the company. Mr Thierry Bolloré, Mr Kosaraju V Chowdary, Mr Mitsuhiko Yamashita all these members are elected at the annual general meeting[13]. The nomination committee plays an important role in appointment of these director and they help in reviewing the work of these members in the company and provide the training to these members for the execution of the work as director in the company.
Brief about the stake holder committee and how it is in an agent and principal relationship.
Focusing on the principle and agent relation of the stake holder committee the committee is formed under section 178 sub-sec(5) of the company act 2013 .The committee is formed when there is more than 1000 shareholder or debenture holder in the company.
The committee act as the principle and agent between the shareholder and company by resolving the issue and grievances between the shareholder and company. The members of the committee especially look into the matter of each and try to reduce the grievance between the company and shareholders. “If the company does not comply this committee there shall be fine of RS1 lakh on the company which can be extend to 5 lakhs [14], Along with it the officers in the company shall be punished for in imprisonment for 1 years and fine up to 250000 for the punishment[15].
Moving towards the board of director the in respect of the company laws
The terms directors are the persons who are generally appointed for the supervising, control administers the company, they are elected by the shareholder on the recommendation of the nomination committee. We know the company is governed by the natural persons who act as a director, these director forms a management or a body called as the “board of director”. “The section 149 of company act 2013 mention that the public company must have at least 3 directors and private company must at least 2 directors to govern the company.”[16] The maximum number of director appointed by the company is about 15 and special resolution if pass, it can have more director as from the given prescribed under the company act.
Section 149(6) Of the companies act 2013 talks about the independent director which says an independent director should be having a relevant experience in his field and should not be promoter of the company or its subsidiary. The independent director must not have any relationship or relatives holding a key position in the company.
“Sec 149 also talks about having the independent director of the company in which one third of the total director are appointed as independent director in the company”.[17] Generally the director are been appointed by the proportional representation in the annual general meeting by a system of voting under section 163 of companies act 2013 and the other method is by the tribunal under 242(J) of companies’ act 2013.
On a specific relationship between company and director, the director act as an agent to the company by taking the decision or signing on behalf of the organization. The director will not be liable for its acts on behalf of the company; it will be the company liable as there is principle and agent relation between them.
Now the leading case law for this “ Indian overseas bank vs Rm Marketing”[18], this is an important case law which observed that the director cannot be wholly liable for the company as he has not given any personal guarantee on loan taken on behalf of the company .
The director must also acts as the trustee to the company. They have been appointed to see the financial or company related affairs. The board of the director take decision on behalf of the company for its operation and working. The director of the company cannot be acts as the trustee for the shareholder but instead he act as the trustee of the company in its operation.
The director also acts as the organs of the corporate body, this means that the directors are basically the minds of the company and see all the working and take action on behalf of the company whenever there is the need. The director may act as organs of the company like similar to the “organs of the body” of humans. The directors are persons through whom the whole company control its operation.
Conclusion
To conclude the paper I would like to give my opinion that the committee of boards plays an important pillar for company in field of governance. The committee are been formed by the director, they look into the more specialized work and help to gain the confidence to the investors and acts as the trustee to them. The committee have their own responsibilities and accordingly they have to act to maintain criteria in there respected field. The committee must have the appropriate members who are qualified in their work and must be essential work accordingly in the committee. As we focused on specific committee like audit, compensation, nomination or risk all these committee must work with objectivity and together to have the goals fulfilled. The director also plays a significance role in the company as they are the actual runner of the company. The director has to act as an agent, trustee and organs of the corporate body in relation with company.
Bibliography
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[1] sanjana sahu, ‘Board Committees And It’s Importance – Academike’ (Academike, 2021) <https://www.lawctopus.com/academike/board-committees-importantce/> accessed 20 November 2021.
[2] Company Act 2013 (2013) <https://www.mca.gov.in/Ministry/pdf/CompaniesAct2013.pdf> accessed 15 November 2021.
[3]corporate finance institute, ‘Audit Committee’ (Corporate Finance Institute, 2021) <https://corporatefinanceinstitute.com/resources/knowledge/accounting/audit-committee/> accessed 15 November 2021.
[4] cfa institute, ‘Audit Committee Role & Responsibilities’ (CFA Institute, 2021) <https://www.cfainstitute.org/en/advocacy/issues/audit-committee-role-practices#sort=%40pubbrowsedate%20descending> accessed 16 November 2021.
[5] Ibdi 4
[6] Nishish Mishra Rajnish, ‘Role Of The Nomination And Remuneration Committees’ <https://blog.ipleaders.in/role-nomination-remuneration-committees/> accessed 15 November 2021.
[7] Nick Price, ‘What Is The Role Of The Nomination Committee? | Boardeffect’ (BoardEffect, 2021) <https://www.boardeffect.com/blog/what-role-nomination-committee/> accessed 15 November 2021.
[8] Ibdi 7
[9] Nicholas J Price, ‘The Role Of The Compensation Committee | Diligent’ (Diligent Insights, 2021) <https://insights.diligent.com/compensation-committee/the-role-of-the-compensation-committee/> accessed 15 November 2021.
[10] Jason Gordon, ‘Compensation Committee – Explained’ (The Business Professor, LLC, 2021) <https://thebusinessprofessor.com/en_US/business-governance/compensation-committee-definition> accessed 15 November 2021.
[11] Ibdi10
[12] tata motors, ‘Tata Motors -76Th Integrated Annual Report 2020-21’ (2021) <https://www.tatamotors.com/wp-content/uploads/2021/06/28075755/annual-report-2020-21.pdf> accessed 15 November 2021.
[13] Ibdi12
[14] BOARD COMMITTEES A HAND BOOK The Companies Act, 2013 Series (1st edn, THE INSTITUTE OF COMPANY SECRETARIES OF INDIA 2021) <https://www.icsi.edu/media/webmodules/companiesact2013/BOARD%20COMMITTEES.pdf> accessed 15 November 2021.
[15] Ibdi14
[16] Company Act 2013 (2013) <https://www.mca.gov.in/Ministry/pdf/CompaniesAct2013.pdf> accessed 15 November 2021.
[17] Pankhuri Anand, ‘Position, Appointment & Powers Of Directors Under The Companies Act, 2013’ <https://blog.ipleaders.in/director-companies-act-2013/> accessed 15 November 2021.
[18] Indian Overseas Bank vs M/S RM Markethttps://wwwcitethisformecom/ing And Services [2001] Delhi High Court (Delhi High Court).
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