Board of Directors - A Powerful Instrument in Governance

CHAPTER 7
BOARD OF DIRECTORS A POWERFUL

INSTRUMENT IN GOVERNANCE
The separation of ownership from active direction
and management is an essential feature of the
company form of organisation. To manage the affairs
of the company, shareholders elect their
representatives called the Directors of the
company. A number of such directors constitutes the
Board of Directors.
Corporate Management Structure
The board may be expected to lay down policies,
procedures and programmes, but may not be able
to secure their implementation under their
guidance and continuous supervision, or
communicate their decision to the rest of the staff
and for that purpose board forms executive
committee.
The CEOs who include Managing Directors and

managers receive instructions from the board and
disseminate them to executives in charge of various
departments.
Fig 1 : CORPORATE MANAGEMENT STRUCTURE
Shareholders
elect
Board of forms
Directors
Executive
Committee
appoints
Chief Executives and Senior

Executives
Who is a Director?
A director includes any person occupying the position of
director by whatever name called. The important factor to
determine whether a person is or is not a director is to refer
to the nature of the office and its duties. It does not matter
by what name he is called. If he performs the functions of a
director, he is a director.
Directors are collectively referred to Board of Directors or

simply the board.
Directors Appointment
The Articles of Association of a company usually
name the first set of directors by their respective
names or prescribe the method of appointing them.
If first set of directors are not appointed in the above

manner, the subscribers of memorandum who are
individuals become directors of company. They shall
hold office until directors are appointed in first
general meeting.
I. THE ROLE OF DIRECTORS
(1) An efficient and independent board should be
conscious of protecting the interests of all stakeholders
and not concerned too much with the current price
of the stock.
(2) Another important function of the director is to set
priorities and to ensure that these are acted upon.
(3) A director is also expected to have the courage of
conviction to disagree.
(4) Directors have great responsibility in the matter of
employment and dismissal of the CEO.
(5) One of the toughest challenges confronted by boards
arises while approving acquisitions.
I. THE ROLE OF DIRECTORS (contd.)
(6) An efficient board should be able to anticipate

business events that would spell success or lead to
disaster if proper measures are not adopted in time.
(7) The directors have a duty to act bona fide for
the benefit of the company as a whole.
Kinds of Directors
A director may be a full time working director,
namely, managing or whole time director covered
by a service contract who is incharge of day-to-day
conduct of affairs of company.
A company may also have non-executive directors

who do not have anything to do with the day-to-day
management of the company but attend board
meetings.
Shadow directors(deemed directors) acquire their

status by virtue of their giving instructions
according to which appointed directors are
accustomed to act.
Legal Position of a Director
They have been described variously as agents,
trustees, or managing partners of the company.
The legal position of the directors as agents and

trustees emanate from the fact that a company
being an artificial person cannot act in its own
person.
Duties and Responsibilities of Directors
The directors have certain duties to perform.

These are:
(i) Fiduciary duties
(ii) Duties of care, skill and diligence;
(iii) Duties to attend board meetings;
(iv) and duties not to delegate their functions except to the
extent authorised by the Act or the constitution of the company
and to disclose his interest.
Qualifications and Disqualifications of Directors
No corporate, association or firm can be appointed as
directors of a company.
A director must:
(a) be an individual;
(b) be competent to enter into a contract; and
(c) hold a share qualification if so required by the Articles of
Association.
Qualifications and Disqualifications of
Directors (contd.)
The following persons are disqualified for appointment as
directors
(i) A person of unsound mind;
(ii) an undischarged insolvent or one whose petition for
declaring himself so is pending in a Court;
(iii) a person who has been convicted by a Court for any
offence involving moral turpitude;
(iv) a person whose calls in respect of shares of the
company held for more than six months have been in
arrears; and
Qualifications and Disqualifications of Directors
(contd.)
(v) a person who is disqualified for appointment as director

by an order of the Court on grounds of fraud or
misfeasance in relation to the company and, of course,
directors can be removed from office by
(i) the shareholders;
(ii) the Central (Federal) Government ;and
(iii) the Company Law Board.
Board of Directors
The board of directors of a company is authorised to exercise
such powers and to perform all such acts and things as the
company is entitled to.
Subject to two conditions:

(1)The board shall not do any act which is to be done in general
meeting of shareholders; and
(2)The board shall exercise its powers subject to the provisions

contained in the Articles or the Memorandum or in the
Federal Acts concerned with companies or any regulation
made by the company in any general meeting.
The Board of Directors (contd.)
(c) to borrow in excess of capital;

(d) to contribute to charitable and other funds not
relating to the business of the company or the welfare
of its employees beyond a specified amount;
(e) to invest, compensation amounts received on
compulsory acquisition of any of company properties;
and
(f) to appoint a sole selling agent.
The Directors Liability to the Company
(1) Ultra vires Acts:

(2) Negligence:
(3) Breach of Trust:
(4) Misfeasance:
ROLE OF BOARD IN ENSURING CORPORATE
GOVERNANCE
Role of the Board
The quality of directors, their competence, commitment,

willingness and ability to assume a high degree of obligation to the
company and its shareholders as members of the board alone
drives the value of any board. A strategic board with broad
governing responsibilities rather than one that acts in response to
the demands of the CEO has become the need of an intensely
competitive world.
SNAPSHOT
(1) Small Size of the Board
(2) Independence of the Board
(3) Diversity of the Board
(4) A Well informed Board
(5) The Board should have a Longer Vision and Broader

Responsibility
Reazul. Kabir. Asif

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CHAPTER 7

BOARD OF DIRECTORS A POWERFUL

The CEOs who include Managing Directors and

Chief Executives and Senior

Directors are collectively referred to Board of Directors or

If first set of directors are not appointed in the above

(6) An efficient board should be able to anticipate

A company may also have non-executive directors

Shadow directors(deemed directors) acquire their

The legal position of the directors as agents and

The directors have certain duties to perform.

(v) a person who is disqualified for appointment as director

Subject to two conditions:

(2)The board shall exercise its powers subject to the provisions

(c) to borrow in excess of capital;

(1) Ultra vires Acts:

The quality of directors, their competence, commitment,

(2) Independence of the Board

(3) Diversity of the Board

(4) A Well informed Board

(5) The Board should have a Longer Vision and Broader

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