WHO ELECTS THE BOARD OF DIRECTORS OF A JOINT STOCK COMPANY?

The article discusses the appointment of the Board of directors by various stakeholders, its composition and the manner of election, which is performed to implement proper corporate governance mechanism.
Estimated Reading Time: 10 minutes

Introduction

During the 17th and 18th centuries, the world witnessed companies’ growth; selective trustees and wealthy shareholders owned them. Numerous unincorporated partnerships came into existence; all these resulted in the accumulation of wealth, and the lower class people suffered a lot. The joint-stock companies were considered a forerunner of modern corporations; they made the general public investment funds and profit from the business; this concept facilitated sustainable development, causing the enhancement of corporations and the people’s economic standards. Due to reduced risk factors, easy transferable of shares, high profits, the concept of joint stock companies developed tremendously. As it used public money and rapid expansion of such capital-intensive enterprises, incorporating the companies was mandatory.

Consequently, registration and incorporation of companies, without specific legislation, was introduced by the Joint Stock Companies Act, 1844. It was the first legislative measure that facilitated registration, right to trade with limited liability and purchase and selling of stock. The history of Indian company law began with the emergence of the Joint Stock Companies Act, 1844, which later emerged to be the most comprehensive law in action, consolidating all pieces of rules and regulation.

The membership of the concerns becoming very large resulted in the separation of management and ownership; the shareholders being the joint-stock companies’ owners, the Board of directors who are the shareholders’ elected representatives, possessed the management and control. The management is delegated to the directors who act as a board; to have profound powers and duties and act as the face of the Corporation. They are appointed and regulated by the rules and regulations mentioned in the articles of the company. The Board of directors are described as agents, trustees, managing partners or an organ of a corporate body; all these roles are exhaustive and have specified powers and responsibilities.

Joint Stock Company

“A Joint Stock Company is a company or association consisting of individuals organized to conduct a business for gain and having a joint stock of capital represented by shares owned individually by the members and transferable without the consent of the group” –Merriam Webster Dictionary.

Joint-stock companies were created to finance endeavours that were considered expensive for an individual or even a government to fund; this led to the breaking down of investments into small shares purchased by multiple investors who receive profits from their respective shares. According to Prof. Haney, “Joint-stock company is a voluntary association of individuals for profit, having a capital divided into transferable shares, the ownership of which is the condition of membership”. These operations were primarily formed to diversify and expand businesses that required colossal investment of funds and professional corporate governance. A small partnership firm or a sole proprietorship could not meet the demands of big business and trading. 

Characteristics of Joint Stock Companies

  1. A joint-stock company is a separate artificial legal person
  2. It has perpetual succession and can be inherited from one person to another
  3. The company is created by registration under the Companies Act, 2013
  4. Once the company is incorporated, all the investors have limited liability
  5. It is an entity distinct from its members and owns the property, and can enter into contracts for trade and business
  6. It can sue and can be sued in its name
  7. The shares of the joint-stock company are easily transferable from one person to another
  8. The company is owned by the shareholders, who are also the investors of the company
  9. The company is managed and controlled by the Board of directors, who are the elected representatives of the shareholders
  10. The company, on its own, have the capacity can make the capital acquisition for running the business
  11. They perform the business within the scope and object of the memorandum of association and articles of association

Board of Directors

The Board of Directors is recognized as the company’s primary organ, responsible for the Corporation’s management; shareholders are the owners of the incorporation. They are numerous, which makes the management of the company affairs a tedious process. Thus the ownership and management were separated. The Board of Directors is the elected representatives of the shareholders who act as the Corporation’s face and have effective control over management. As stated in Aberdeen Rail Co. v. Blaike Bros.,[1]The directors are a body to whom is delegated the duty of managing the general affairs of the company. 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.”

A company may, in many ways, be likened to a human body. It has a brain and a nerve centre that controls the business; it also has hands that hold the tools and act following the centre’s directions. Some of the company’s people are mere servants and agents who are nothing more than hands to do the work and cannot represent the mind or will. Others are directors and managers who represent the company’s directing mind or will and control what it does. The state of mind of these managers s the company’s state of mind and is treated by the law as such.[2] They are the brain, and the only brain of the company, which is the body and the company can and does not act only through them.[3] When the brain functions, the Corporation is said to function.

Board of Directors in Joint Stock Company

Boards of directors are the administrative and representative bodies of joint-stock companies. The general assembly of shareholders of a joint-stock company appoints the directors that receive the most votes in a shareholders’ meeting. The Board of Directors (“the BoD”) of Joint Stock Companies is the body that manages and represents the company in the structure of a joint-stock company. In this regard, the BoD is liable to determine the company organization, appoint the authorized individuals who manage and represent the company, and supervise them.

 The powers and duties of the Board of directors are as follows:

  1. Represent the company in the financial market
  2. Perform binding joint-stock companies
  3. Assist in preparing annual report
  4. Conduct all activities within the scope of the company’s articles of association
  5. Call and conduct the ordinary and extraordinary general meeting for shareholders
  6. Prepare the agenda and minutes of the meeting for the general meeting
  7. Maintain profit loss accounts and proposals for the distribution of dividends
  8. Implement the resolutions passed in the general meeting
  9. Perform contractual obligation and hold liabilities
  10.  Maintaining the company’s corporate ledgers
  11. Too overlook the managerial affairs and provide required instructions to the executives on business and trade
  12. Determining the company’s management structure;
  13. Establishing audit committee, corporate social responsibility committee, management and shareholder relationship committee.
  14. Appointing and removing managers and authorized signatories;
  15. Supervising the  management to ensure that it acts in accordance with the law, articles of association, internal regulations and written instructions of the Board of directors;
  16. Maintaining share books, board resolution books, general assembly-related documents and the discussion register;
  17. To implement proper corporate governance rules and regulation
  18. Appointing other independent, executive and non-executive directors
  19. Preparing audit reports and submitting them to the governmental agencies
  20. Appearing for court cases and perform the adjudications
  21. Notifying the courts on assets and liabilities if necessary

Basic Requirements in Board of Directors as per Companies Act, 2013

  1. Section 149 of the Companies Act states that every company should constitute a board of directors to have strategic oversight over business operations by directly managing the company affairs and to ensure legal compliance, financial accounting and reporting with credible information through proper and timely disclosures.
  2. It must certainly have a minimum of three directors for a public company, two directors for a private company and one Director in a one-person company.
  3. The maximum number of directors is fifteen. However, the company can pass a special resolution in a general meeting and assign more than fifteen members to the Board of directors.
  4. The maximum number of companies that an individual can become a director of is 20 companies.
  5. It is mandatory that at least one Director appointed should have lived in India for a minimum of 182 calendar days of the previous year
  6. There should be at least one women director
  7. All listed companies must have at least one-third proportion of their Board of directors as independent directors

Election and Appointment of Board of Directors

Election of directors is the primary managerial duty or function of these shareholders in a business corporation. It demands to be undertaken with needful care and regulation in their interest. The shareholders or the company members make the appointment of directors through a proper election process in the Annual general meeting. Shareholders have the sole authority to elect the Board of Director through casting votes; the member who acquired the maximum number of votes will be appointed as the Director. The General assembly of Shareholders will elect members of the Board of Directors for Joint Stock Companies as per the statutory requirements and rules laid in the Articles of Association.

Appointment of the First director

The provision relating to the appointment of first directors is given under section 152 of the Act; the first director is appointed through any one of the following methods:
The articles may prescribe the first director’s name or the mood of appointment of the first directors. If no provision is made in the articles of association of a company for the appointment of first directors, the shareholders or the subscribers to the memorandum who are the individuals shall be deemed the company’s first directors. They shall hold the office until the directors are duly appointed in the annual general meeting.

Election by shareholders in Annual general meeting

  • Members of the Company Board of Directors shall be elected by cumulative vote. The number of votes belonging to each Shareholder is multiplied by the number of persons elected in the Company Board of Directors.
  • Statutory requirements are as follows:
  • A person to be appointed as a director of a company should have the director identification number allotted by the central government.
  • Every person or a member of the company who proposed to be appointed as a director shall furnish the director identification number and a declaration of qualification to become a director.
  • In case of appointment of independent directors in the general meeting and explanation statement explanatory statement for such an appointment has to be annexed in the meeting notice and sent to the shareholders. The statement shall specify the opinion of the Board for the said appointment.
  • A person appointed as a director shall give his consent to hold the office as Director, and consent should be filed with the registrar of the company within 30 days of his appointment

Election by Nomination

  1. Section 161(3) provides that subject to the articles of association of the company, the Board may appoint any person as a director nominated by any institution in pursuance with the provision of any law for the time being in force and holds office by virtue of the shareholdings in the government company.
  2. The Shareholder shall be entitled to give all voters in his/her possession for one nominee or distribute them among two or more nominees as he/she sees fit. The nominees who received the most significant number of votes shall be considered elected to the Board of Directors.

Appointment by Board

The general powers to appoint the directors is vested with the shareholders through an annual general meeting. However, there are also two more cases where the Board itself can appoint new directors. In the first case, the articles of association of the Corporation empowers the directors to appoint an additional director to subject to the course of the maximum number of directors mentioned. Those additional directors hold the office only up to the next annual general meeting on the last day on which the meeting should have been saved. In the second case, the Act under section 161 authorizes the directors to fill the casual vacancies, which occur when the Director’s office is vacated before the expiry of his term.

Appointment by Tribunal

The company law tribunal has the power to appoint directors for the prevention of oppression and mismanagement. Through the provision under section 241 of the Act, the company seeks relief in cases of oppression and mismanagement of a company’s affairs, Tribunal after scrutinization, makes such order as it deems fit for the appointment of the such number of persons as directors who may be required to report to the Tribunal on such matters as the Tribunal may direct.

Manner of Election

  1. Appointment must be made through voting on an individual basis; the candidates cannot be put the vote on en bloc; they have to be voted on an individual basis.
  2. The appointment must be made by proportional representation; it is considered the primary method for directors’ appointment.
  3. A simple majority of shareholders votes appoints them.
  4. Cumulative voting is made, where several directors are voted simultaneously. The casted votes of the whole number of the shares held are multiplied by the number of directors to be elected for the candidate, for distributing the votes among part of the vacancies to be filled.

Conclusion

The joint-stock companies are considered the modern-day corporations who trade shares to raise capital to run their business; in all these operations, the Board of directors play a pivotal role in conveniently managing the company’s business and supervising the other major managerial affairs. In joint-stock companies, the shareholders though being the owner, do not have direct control over the management as it is not practically feasible; it is only the Board of directors who are the elected representatives of the shareholders wield power from the ownership and have effective powers and control over the management to run the business.

The shareholders appoint them through the process prescribed through statutory provisions of the land and the rules mentioned in its articles of association. In this highly competitive market, it is not desirable to allow all the shareholders to have complete access to business management. Thus, the Board of directors is the practical solution.


[1] (1854) Macq 461

[2] Daimler Co Ltd v Continental Tyre & Rubber Co. Ltd, (1916)

[3] Bath v Standard Land Co. Ltd (1910)

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