Board of Directors: Composition and Committees under The Board

This article is divided into three parts. The first part deals with the meaning and types of Directors of Companies. The second part deals with the roles and composition of Board of directors. The third pard explains the composition, remuneration of Committees of Board of Directors.
Estimated Reading Time: 9 minutes

Introduction 

According to the provisions of section 2(34) of the Companies Act, 2013, “A director is a person appointed to perform the duties and functions of director of a company according to the provisions of the Companies Act, 2013.” According to the Companies Act 2013, there are different kinds of directors that could be appointed in a firm. The roles of each of these directors are also different. 

Section 149(1) of the Company Act, 2013 requires a Private limited company to have a minimum of 2 directors. Likewise, in the case of public companies, the operations of the company could only be started with a minimum of 3 directors. 

Types of Directors

The various types of directors that could be appointed in companies are as follows: 

  1. Executive director

An executive director is a full-time working director of the firm. They have a higher degree of responsibility towards the company. An executive director is expected to be efficient and careful in all the dealings of the company.

  1. Non-executive director

Non-executive directors are non- working directors. They are not a part of the routine working of the company. They might be a part of the planning or other policy-making processes. They help the executive directors to improve their decisions. They also challenge the executive directors to come up with the solutions that are in the best interest of the organization.

  1. Managing director

Managing directors have a substantial ability to decide, manage and supervise employees and other members of the organization. A Public Company or a subsidiary of a Public Company that has a share capital of more than Five Crore rupees must have a Managing Director.

  1. Independent director

Section 2(47) of the Act prescribes that an independent director must be defined while referring to section 149(5) of the act. Independent directors do not have any direct connection with the firm. Their skills are their asset. They aid the board whenever required. Public companies that have paid-up share capital, turnover, or outstanding loans of Rs. 100 Crores and Rs.50 Crores or more are required to have two independent directors.

  1. Residential director

A residential director is a person who has lived in India for at least 182 days. Each company should compulsorily have one residential director as provided in section 149(3) of the act. 

  1. Small shareholder director

According to section 151 of the Companies Act, 2013, Small shareholder directors can appoint a director in a listed corporation. This could be done by issuing a notice to at least 1000 shareholders or 1/10th of the shareholders, whichever is lesser.

  1. Women director

The firms which have their securities registered on the stock exchange or have a paid-up capital of Rs. One hundred crores or annual turnover of Rs. Three hundred crores or more must have a women director as per the requirements under section 149(1) of the act. 

  1. Additional director

Section 161(2) of the Companies Act of 2013 allows for the provision of an additional director. By taking the position of a director until the next Annual General Meeting, a person could become an additional director in the firm.

  1. Alternate director

As per the provision of section 161(2), when a director has been absent for more than three months, an alternate director can come on board on his behalf. An alternate director acts as a director only for a temporary period. H/she could only hold the office as a director only until it is permissible by the director whose office this director holds.

  1. Nominee director

Nominee directors are appointed by Shareholders, central government or third parties. They come on the board when there is severe mismanagement, or the board members misuse their powers. They are covered under the provisions of 161(3) of the Companies Act, 2013. 

ROLE OF DIRECTOR

A director is the part of a collective body called as the ‘Board’. He is also responsible for superintending, controlling, and directing the situation of the company for its best interest. A director is required to carry on the following roles in a firm:

  1. Director as an agent

A company is a separate legal entity which is considered as an artificial person in the eyes of the law. However, a company could not act itself. Therefore, a company acts through its directors. These are the representative of shareholders and are required to make decisions that are in the best interest of the shareholders and other stakeholders.

  1. Director as an employee

A director could also be appointed as a full-time employee in the firm. In such a situation the director would either be considered as a full-time employee or full-time director. 

  1. Director as an officer

Directors are the chosen officers of the company. They are required to carry out the duties assigned to them. In case of failures with compliance of the company rules, they could also be held liable for penalties. 

  1. Director as a trustee

Directors are the trustee of the property of the company. They are entrusted with the powers to deal with the monetary affairs of the company while acting as the trustee of the firm.

  1. Director as the “key managerial personnel” 

Director is also the part of key managerial personnel in a firm. It includes other important people of the firm such as the chief executive officer, the company secretary, the chief financial officer, etc. 

Meaning of Board Composition

Even though a company is a legal entity, it does not have any physical existence. Due to the lack of a physical body, a company could not get out its operation without any human agency. Therefore, a collective body of all the directors of a firm is known as the “Board of Directors”. Section 2(10) of the Companies Act, 2013 defines that the board is a collective body of the directors of the company. 

Powers of The Board

According to section 179 of the Companies Act, 2013, the board of the directors have following powers:

  1. The board is entitled to exercise all those powers that a company could exercise, subject to the articles and memorandum of the association as well as the regulations made by the company in the general meeting,
  2. The powers of the general meeting could not be exercised in the board meetings,
  3. The other powers exercisable by the board are as follows
  • To make calls on shareholders for the unpaid money of the shares
  • Authorize the buy-back of securities as per the provisions of section 68 of the act
  • To issue securities such as debentures in and outside India
  • To borrow money
  • To invest in the funds of the company
  • To approve loans or act as guarantor of the loans 
  • To approve the financial statement of the company and report of the board
  • To diversify the operations of the company
  • To approve merger, amalgamation, or reconstruction of the company
  •  To acquire, or take control over the stake in other companies including the subsidiaries 
  • To take note of disclosure of interests of directors and shareholders
  • To sell investments and free reserves of the firm
  • To accept public deposits
  • To make political contributions
  • To fill the vacancies in the board, etc.
  1. The board could also delegate some powers to any other principal officer, CEO, etc. as per the regulations

Board Committee Meaning

A board committee is a group consisting of the board members. These committees are constituted to perform some sort of expert work. These committees are formed as a substitute to the board to help in improving the effectiveness and efficiency of the board decisions. These committees enable better management and allow for in-depth scrutiny and better attention on the specific functions of the organization. There are various committees that could be formed in a company based on various functions. 

Audit Committee

Section 177 of the Companies Act, 2013 read with Rule 6 of the Companies (Meetings of the Board and is Powers) Rules, 2014, the board of every listed company and the following classes of companies is required to constitute an Audit Committee of the Board:

  1. Public companies with paid-up capital of 10 crore rupees or more
  2. Public companies having annual turnover of 100 crore rupees or more
  3. Public companies having aggregate loans or borrowings exceeding 50 crore rupees or more.

The audit committee is responsible for keeping track of the financial reporting and disclosure of the firm. It aims to enhance the confidence in the integrity of the company’ financial reporting, the internal control processes of the company and the risk management systems. The major functions of the audit committee are to recommend the appointment of auditors of the company, monitor his performance and reports and keep track of all the financial activities such as fund raising and related matters. The roles and functions of the audit committee are included in the section 177(4) and clause 49 of the act. 

Nomination and Remuneration Committee

Section 178 of the Companies Act, 2103 read with the rule 6 of the Companies (Meetings of the Board and is Powers) Rules, 2014, the board of every listed company and the following classes of companies is required to constitute a nomination and remuneration Committee of the Board:

  1. Public companies with paid up capital of 10 crore rupees or more
  2. Public companies having annual turnover of 100 crore rupees or more
  3. Public companies having aggregate loans or borrowings exceeding 50 crore rupees or more.

The nomination and remuneration committee has many functions to carry for the firm. This committee is responsible for ensuring remuneration arrangements that support the strategic objectives of the business. Apart from that, this committee is also responsible for evaluating the performance of all the directors of the firm. Sub-Section (2), (3) and (4) of section 178 specifically mentions the functions of this committee. The committee is also responsible for identifying the people who could be appointed as the directors of the firm and deciding their renumerations.

Role of Nomination and Remuneration Committee under Sebi (Listing Obligations and Disclosure Requirements) Regulations 2015

The Nomination and Remuneration Committee of every listed company is required to make recommendations to its board of directors, design a policy regarding the remuneration of the directors, people working as key managerial personnel and other employees.

Every company must constitute a Nomination and Remuneration Committee which shall comprise of at least three directors, all of whom should be acting as the non-executive directors and at least half of them shall be independent. An independent director must be appointed as the chairman of this committee. 

Role of Nomination and Remuneration Committee:

  1. devising the criteria for determining experiences, positive characteristics, and independence of a director 
  2. recommend to the board a policy relating to, the compensation of the directors, key managerial personnel as well as the other employees.
  3. preparation of criteria for evaluating the performance of independent directors and the board.
  4. formulating a policy on diversity of the board of directors.
  5. identifying people who are skilled and qualified enough to take up the posts of directors and who can be appointed for senior management of the firm in as per the criteria, and recommend the about board their appointment and dismissal.
  6. Whether to extend or continue the term of appointment of the independent director, based on their performance evaluation.

Stakeholder’s Relationship Committee

According to section 178(5), each listed company that consists of more than one thousand shareholders, debenture-holders, deposit-holders, and any other security holders at any time during a financial year shall constitute a Stakeholders Relationship Committee.

As per clause 49 of the listing agreement ‘Shareholders/Investors Grievance Committee’ should be constituted by the board of the company under the chairmanship of a non-executive director. The committee is to specifically investigate the redressal of shareholder and investors complaints regarding various issues such as the transfer of shares, non-receipt of declared dividends non-receipt of the balance sheet, etc. The main function of this committee is to accelerate the process of share transfers and ensure that the interests of all the stakeholders such as investors, customers etc., are taken well care of.

Risk Management Committee

In addition to the constitution of the audit committee as per the requirement of the Companies Act 2013 as well as the revised clause 49 that will evaluate of internal financial controls and risk management systems, the revised Clause 49 of the Listing Agreement also requires that the company through its Board of Directors shall constitute a Risk Management Committee. The Risk Management Committee shall consist of members from the Board of Directors in the majority. Senior executives of the company may also be members of the risk management committee, but the chairman of this committee shall strictly be a member of the board. The board of directors shall be accountable for framing, executing, and monitoring the management of risk for the company. In addition, the board shall also outline the roles and responsibilities of the Risk Management Committee. It may also delegate monitoring and studying of the risk management plan to the committee and such other functions as it may consider being in the best interests of the company.
Conclusion

A firm is a voluntary association of people who come together for various purposes. The proper management of its operations is ensured when the authority, as well as the power, is delegated among various people working at various levels. Therefore, committees and boards are constituted to ensure the efficient and effective functioning of the listed companies. These entities within the companies are required to comply with the various legal regulations and protect each other’s interests. 

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