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As stated by Marshal J in Dartmouth College v Woodward, “A corporation is an artificial being, invisible, intangible and existing only in contemplation of law”, it has neither a mind nor a body of its own. They don’t possess any knowledge or intention to act independently; for these following reasons, it was made necessary that a company be entrusted to some human agents to carry out it’s business and management. To fulfill the need of human agents, the person called director was constituted. They are the elected representative of the shareholders to whom they are accountable and act in good faith. Furthermore, for the following reasons, the company constitutes a board of directors;
- Improve the possibilities of maintaining a cordial relationship between the shareholders and the company management.
- Uphold the interests of the shareholders and work for company development.
- Manage the company affairs both internally and with external organisations.
- Understand and execute all complicated financial transactions and agreements.
In other forms of organisation, the same person holds ownership and management responsibilities, whereas this is not the companies’ scenario. In a company, the shareholders are the owners, but it is not feasible to engage all the shareholders to manage the company affairs directly. Even though the shareholders hold absolute power and control over the company management’s, their role is nominal concerning its core functioning to avoid repercussions. Thus to fulfil the role of shareholders in management, the company is operated through a human agency called directors, collectively known as the Board of Director. They form the shareholders’ elected representatives to have effective control and power over the company’s management.
Apart from the above said, there are various other reasons for the separation of ownership and management;
- The number of shareholders of most of the companies, especially public limited companies, is enormous. It would be challenging for every shareholder to participate in the management of the company actively.
- Shareholders and members of the company are usually scattered widely, both within and outside the region, which would probably be very difficult for them to carry over the management’s day-to-day operations in a coordinated manner.
- Members are conferred with the right to transfer their shares to someone, resulting in amending the membership.
- The shareholders may invest in shares as a part of their investment portfolio. In that case, the shareholder will intend to get good returns for their investments and not participate in the company management affairs.
- All the shareholders cannot be expected to be experts in business management, whereas a large company’s management is very elaborate and highly complicated. Thus, it demands the services of a competent authority.
- In this highly competitive market, it is not desirable to allow shareholders to have complete access to the company’s business secrets.
Thus, it must delegate the company’s management and powers to a small body of elected representatives for all the above practical reasons. These elected representatives of shareholders individually as directors and collectively as “Board of Directors” act as the policy-making and decision making authority.
Who is a Director and the Board Of Directors
“The directors are a body to whom is delegated the duty of managing the company’s general affairs. A body corporate can only act by agents, and it is, of course, the duty of those agents so to act as best to promote the interests of the corporation whose affairs they are conducting.”
According to section 2(34) of the companies act, a director means a director appointed to its board. Based on his functions, a director may be defined as a person who directs, conducts, managers, and supervisors its affairs. Section 179 expressly best the management of the business of a company in its Board of directors. Only the board policy’s most important matters may be referred to the shareholders for decision at the periodical general meeting. They form the supreme policy framing body and decision making organ of a company. The directors or the brain behind the company occupy a pivotal position in the company’s structure.
Board of Directors as per Section 149 of Companies Act, 2013
As per section 149(1) of the Act; Every company shall have a Board of Directors consisting of individuals like directors
1. Minimum number of three directors in the case of a public company,
2. Two directors in the case of a private company,
3. One director in the case of a One Person Company; and a maximum of fifteen directors:
4. Up to fifteen directors shall be appointed by passing a special resolution
5. Compulsory on women director
6. There should be at least one director who has stayed in India for a total period of not less than one hundred and eighty-two days in the previous calendar year.
7. Should possess at least one independent director, a nominee director, and an executive and non-executive director
Types of Directors
Independent director: An independent director concerning a company means a director other than a managing director or a whole-time director or a nominee director.
- They are a person of integrity and possesses relevant expertise and experience
- They do not hold any financial relationship with the company or acts as a promoter
- They or their relatives do not hold the key managerial personnel or is or has been an employee of the company or its holding, subsidiary or associate company
- They are the Chief Executive or director and possesses such other qualifications as may be prescribed.
- Every independent director shall at the first meeting of the Board in which he participates as a director. After that, at the first meeting of the Board in every financial year or any change in each circumstance, each may affect his status as an independent director.
- An independent director shall hold office for up to five consecutive years on the Board of a company but shall be eligible for reappointment.
- They shall hold office for more than two consecutive terms.
Managing director: A managing director means a director who, under the articles of a company or an agreement with the company or a resolution passed in its general meeting, or by its Board of Directors, is entrusted with substantial powers of management of the affairs of the company and includes a director occupying the position of managing director,
Nominee director: It means a director nominated by any financial institution in pursuance of the provisions of any law for the time being in force, or of any agreement, or appointed by any Government or any other person to represent its interests.
Additional director: The articles of a company may confer on its Board of Directors the power to appoint any person, other than a person who fails to get appointed as a director in a general meeting, as an additional director at any time who shall hold office up to the date of the next annual general meeting or the last date on which the annual general meeting should have been held, whichever is earlier.
Shadow Director:- A person, who is not appointed to the Board, but on whose directions the Board is accustomed to act is liable as a Director of the company unless he or she is advising in his or her professional capacity.
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 elected from a small shareholder.
Alternate director: The Board of Directors of a company may, if so authorised by its articles or by a resolution passed by the company in general meeting, appoint a person, not being a person holding any alternate directorship for any other director in the company, to act as an alternate director for a director during his absence for not less than three months from India
Structure and Legal Position of Board Directors
According to its by-laws, the board structure is usually created; its actions are governed through the internal rules and monitored through external statutes. The laws and regulations made usually provide the composition of the Board and their appointment procedure; also, the processes of meetings and elections. Apart from the by-law’s provisions, the board’s general structure and composition usually consist of the first director, independent director, nominee director, shadow director, executive directors, non-executive directors, additional director, small shareholder director, women director, managing director, etc. It isn’t easy to define a company’s directors; they are sometimes described as agents, trustees, and managing partners. But each of these expressions is not used as exhaustive of the powers and responsibilities. Still, indicating the valuable point of view they met for movement and particular purpose be considered. The position of directors as agents, trustees and managing partners discussed here:
Directors as Agents
As observed by Cairns, L. J., a director or merely an agent of the company, the company itself cannot act in its person for it as no person it can only act through directors. The case is about those directors merely ordinary case of principal and agent. Wherever an agent is liable, those directors would be liable where that liability would attract and attached to the principle alone. Directors are therefore termed as agents of the company. As an agent, a director must act within the scope of its authority and conduct the business with reasonable care and due diligence.
Their strict adherence to the norms laid down in the memorandum of association and articles of association are of primary importance. They are the persons who enter into contracts on behalf of the company and cannot act more independent apart from the powers vested by the rules and regulations. As an agent, a director must act honestly and conduct the company’s affairs with reasonable care and diligence.
Directors as Managing Partners
The directors are elected representatives of shareholders vested with the responsibility of overall management of the company’s affairs on behalf of the shareholders that they enjoyed managing partners on the one hand. They are the shareholders, on the other. They are indeed in managing partners appointed to fill that post by a mutual arrangement between all the shareholders.
Directors as Officers
As per section 2(59) of the Companies Act 2013, directors are the company’s officers. Officers include any director manager or key managerial personnel or any person following whose direction or instructions the Board of directors or any other directors are accustomed to act.
Directors as Trustees
It was observed in Ramaswamy Iyer vs Brahmayya, that “the directors of a company or trustees for it concerning their powers and funds of the company and for misuse of the power they could be rendered liable as trustees and on their death the cause of action survives against their legal representatives.”
It is because directors are in their duties, which stand in a fiduciary position concerning the company. However, directors are not described as trustees in a legal sense because they act in a company’s fiduciary relationship. They do not form a trustee, as explained in a will. The court expects the directors to have a degree of integrity and standard of conduct, and accountability to the liabilities. As a trustee and director have to maintain the companies money and property and work following the powers interested within them, They deal with capital under the companies management and act in good faith in exercising their influence within the company’s ambit of interest. They are not interested in making any secret profit out of it.
In Gopal Khaitan v State, the apex court observed a theory of corporate life which reveals that when a specific organ has been treated as an organ of the company, for whose action the company is to be liable just as a natural person is for the actions of his limbs, thus the modern-day directors are sometimes more than mere agents or trustees.
Functions of Board Directors
- Board of directors is the primary authority to frame the dividend policy of the company shares.
- Issue shares and debentures and invest funds into different companies to enhance profits.
- Perform to the appointment of subsequent directors and other committee members for the management’s effective functioning.
- Fill up the vacancies by appointing additional directors or alternate directors.
- The Board is the company’s face to make representations in external affairs such as contracts, legal liabilities, and other trade and businesses.
- They provide sanction or give consent for the contracts and agreements in which the company business is interested.
- They have the power to contribute funds for defence and political interest.
- The Board’s primary role is to act on behalf of the shareholders; thus, they maintain the shareholders’ fiduciary obligation. According to Millet LJ, a fiduciary is ‘someone who has undertaken to act for or on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence.”
- The prime reason for the separation of ownership and management is to regulate the company’s trading and business effectively; the Board carries this out.
- The Board of directors are the first persons to be held accountable for any activities against the law; they possess the duty to scrutinise all the company’s actions.
- They probe into the misuse of executive powers and corporate information and take necessary steps
- their primary function is to promote the company’s objectives as stated in the memorandum of association and work towards fulfilling it.
- They prepare and implement the standards of corporate governance.
- One of their general function is to conduct board meetings at regular intervals which are of intermittent nature of the duty to be performed by the Board of directors.
- They form audit committees and appoint relevant skilled members to inspect and maintain the government’s financial accounts and audits.
There was a time when corporations played a minor part in our business affairs. Still, now they play the chief part, and most men are the servants of corporations. This has given the company and its executives enormous power to affect labourers and consumers and shareholders’ lives. As observed in Bath vs Standard Land company, the Board of directors is the company’s brain, the body, and the company can act only through them. This implies that every position of power possesses responsibilities.
Only when the brain functions that the company is said to function these two observations revealed the importance of company management directors. The Board of directors is bound to implement the policies laid down by the shareholders and look after the management of today’s affairs. The power entrusted with the Board of directors is strictly according to the provisions of the company’s rules and regulations and subject to the company’s memorandum of association and articles of association. They form the first tire of company management, which undertakes to supervise control and direct the company’s trade and businesses.