BCL Project

8/6/2019 BCL Project

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BUSINESS AND CORPORATE LAWS

Project on Board of Directors are eyes,

ears, nose and forehead of any company.

Describe in detail your views about the

same with a further listing as to how do

they perform and discharge their duties

under the Companies Act 1956.

Submitted by:

Aanchal goel (10609001)

Abhinav dhingra (10609002)

Abhishek kumar (10609003)

Abhishek sood (10609004)

Aditi uniyal (10609005)

Akanksha rai sinha (10609006)

Akshay misra (10609007)

Anchal verma (10609008)

Anjai verma (10609009)

Ankit kumar verma (10609010)

Ankit tiwari (10609011)

Submitted to:

Prof. G. K. Agarwal

Course code: M6CGM06


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Directors duties, responsibilities and rights

Duties of directors

Directors duties arise from the following sources:

y the common lawy statutesy the memorandum and articles of association of the companyy service agreements specifically entered between the director

and the company

y resolutions passed at members or directors meetingsy the rules of a regulatory body, if any

Common law duties:

A director's fiduciary duty

'Every director is bound at common law by a separate and

distinct fiduciary duty to the company (the term fiduciary

being derived from the Latin fiduciarius meaning of trust).

Directors owe their fiduciary duty to the company as a corporate

being in its own right and not to the members individually, not

even to a member who is a majority shareholder. Even if a

director occupies his position on the board by virtue of another

position he holds (for instance, where he is appointed by a major

shareholder or is entitled to a seat on the board by virtue of an

executive position in the company), a directors fiduciary duties

rest upon him as an individual. The fiduciary duty is likewise

not owed directly to creditors, employees or other stakeholders of

the company, although there is a range of circumstances in which

a director may, by virtue of the neglect of his fiduciary duty to

the company, be held personally liable to the companys


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stakeholders.' In this fiduciary capacity, a director assumes two

roles, as an "agent" acting on behalf of the company, and as a

trustee who controls company assets.

These roles give rise to the following directors duties:

y to act in good faith towards the companyy to act only within their powers and use their powers only for

purposes which benefit the organisation. Directors who act

outside their powers bind the company to the transaction

but may be held personally liable if a loss results

y not to use for personal gain any information acquired in theircapacity as a director

y to act in the best interests of the company and to avoid aconflict between personal and company interests

y to exercise independent judgment in decision-making. Adirector who is appointed to represent an interest group, for

example employees, is nevertheless obliged to act in the

best interests of the company as a whole

Conflict of interests

A conflict may sometimes arise between a directors personal

circumstances and that of the company. The law is unequivocal

as to the course of action a director who has a conflict of interests

must follow and a director may never prefer his interests over

that of the company he is entrusted to direct. A director who

does so may be liable to account to the company in respect ofany profits he makes as a result of such a transaction.

Directors may often sit on the boards of several companies

and conflicts may also arise between the divergent interests of

these companies, thus presenting a problem to the individual who


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sits on the boards of both companies. It is important to note that

where a director is simultaneously a director of a holding

company and its subsidiary, he owes a separate and distinct

fiduciary duty to both entities as legal individuals in their own

right. A director must guard against a conflict of interests

developing in a situation where he is a director of both the

holding company and a subsidiary. Should a conflict arise which

prevents him from discharging his duty to both companies

properly, he should consider resigning from either or both boards.

Duty of care and skill

The degree of care and skill required is determined objectively byconsidering how a reasonable person with similar knowledge and

experience would have acted, and then comparing this to the

directors actions. Each case is considered individually taking into

account the nature of the business and the directors specific

obligations. As indicated earlier, no distinction is made between

executive and non-executive directors.

Statutory Duties:

A director's duties in terms of the Companies Act

Directors have to comply with a number of obligations in terms of

the Companies Act. These are dealt with in Annexure A.

Duties in terms of the memorandum and articles of

association

The memorandum of association determines the scope of the

companys objects and powers, while the articles of association is

a contract between members themselves and between members

and the company. The articles therefore contain the internal rules

by which a company is governed. The Companies Act provides a


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standard set of articles that many companies use as a basis but

may amend to meet their specific needs. The memorandum and

articles are integral to the company and directors should

familiarise themselves with their contents since they invariably

impose duties on directors.

Directors and shareholders Decision making authority

Whilst shareholders retain ultimate responsibility for the

company and have the power to remove or not to re-appoint

directors, they in effect delegate the day-to-day running of thecompany to the directors who in turn appoint and supervise

management. The board of directors must manage the company

within the limits of legislation and the memorandum and articles.

The board may delegate certain powers to managers and at the

same time impose appropriate restrictions and conditions which

can be varied or revoked at any time. The directors have a duty

to monitor management's performance and ensure that

management work within their delegated power. In the absence

of specific cause for suspicion, directors are generally entitled to

trust management to perform their duties honestly and to accept

and rely on the judgment, information and advice of management

when reaching their own decisions. Directors should not lose sight

of the fact, however, that they remain ultimately liable, both

jointly as a board and individually, for the well being of the

company.


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Directors power to bind the company

'Normally the powers and duties of directors are left undefined

and it is implied that directors possess all powers necessary to

enable them to direct the affairs of the company. The articlesmay sometimes seek to limit these powers or to specify particular

duties, in which event these limitations must be strictly complied

with. A director may not enter into transactions on behalf of the

company which are beyond the powers conferred upon him by

the articles, the Act and common law.

In some circumstances where directors have acted beyond their

powers as directors, the shareholders may subsequently ratifytheir action by special resolution. Ratification is not possible,

however, where the action falls outside the object of the company

as defined in the companys memorandum of association.

Directors will be liable to the company for any financial losses

incurred by it as a result of them having acted outside the scope

of their authority. Any member of the company may institute

action against any incumbent or previous director where the

company has suffered damages due to a breach of trust or awrongful act by that director. [266]


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Loans to directors

Loans made either directly or indirectly to directors are prohibited

unless:

y all members give their consenty a special resolution approves a specific loany the loan is to enable a director to perform his or her dutiesy the business of the company is to make loansy the loan is to provide assistance to enable the director to

participate in a companys share incentive scheme

y the loan is for directors' housingy the loan is made to a director of a subsidiary who is not also

a director of the lending company [226]

Indemnifying directors

A company may take out insurance to indemnify its directors

or officers for negligence, default, breach of duty or breach of

trust. [247] This provision was introduced by a 1999

amendment to the Companies Act and it is suggested in King II

that directors persuade their companies to take out this insurance.

' In terms of 248, if, in any proceedings for negligence, default,

breach of duty or of trust against a director, officer or auditor, it

appears to the court that the person has acted honestly and

reasonably, the court may relieve him, wholly or partially, of his

liability. The burden of proof to show that he acted honestly and

reasonably in the context of surrounding circumstances is on the

director seeking relief.'


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Dissenting Directors

Where a director strongly disagrees with a board decision, he has

several ways to indicate this dissatisfaction. A dissenting

director may:

y prepare a memorandum setting out his objectionsy raise these concerns at a formal board meeting, requesting

that a meeting be convened if the matter needs urgent

attention and the next board meeting is too late to give

proper attention to the issue

y insist on a full hearing at the meeting and request thatdetailed objections be recorded in the minutes of themeeting

y seek professional advice if this is appropriate. (King IIrecommends that the company should have a procedure for

the director to be able to do so at the expense of the

company).

If the matter is not resolved at a board meeting, the dissentingdirector could call a general meeting (if authorised by the articles)

or rally shareholders to call a general meeting as the

shareholders hold the ultimate power in the company. If this is

not possible and the director is not prepared to abide by the

majority board decision, he may have no alternative but to resign.


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Rights of Directors:

Directors have the right to:

y inspect the companys accounting records, assisted by anaccountant [284(3)]

y claim reimbursement for expenses incurredy discharge their duties without interference from co-directorsy participate in the strategic management of the company and

attend and vote at board meetings

yreceive reasonable notice of meetings

y take independent professional advice at the expense of thecompany


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THE BOARD OF DIRECTORS

Size and composition of the board

The minimum number of directors is respectively one for a

private, and two for a public company. The maximum number of

directors is determined by the companys articles of

association. In order not to become unwieldy and ineffective,

most boards of public companies are between eight and twelvedirectors with sixteen being the optimum number recommended

for the boards of banks.

King II recommends that the positions of chairperson and

chief executive officer of the company should be separated,

alternatively that the board appoint a lead independent director

who will bring a level of autonomy to board discussions. It also

recommends that a board have a majority of non-executivedirectors. These directors should be totally independent from

any significant business relationship with the company since their

role is to bring to the board independent judgment and broad

business experience.


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Role and function of the board

In terms of King II, the boards role and function is to:

y provide strategic direction to the companyy retain full and effective control of the companyy ensure compliance by the company with all laws and

regulations

y communicate with stakeholders in a transparent mannery delegate appropriate powers to management and monitor

the exercise of that delegated power on an ongoing basis

y reserve certain powers to itself as a board where this relatesto issues which are material to the company, for instance achange in the strategic focus of the companys business

y have unrestricted access to company information andrecords

y agree on a procedure to allow directors to obtainindependent professional advice where necessary

y review the size and composition of the board in terms of themix of skills and diversity and decide on the optimal

composition required to ensure the board's effectivenessy identify and monitor key risks and ensure that the

company has effective systems of internal control to manage

risk within acceptable parameters

y identify key performance areas for the board andmanagement

y identify and monitor non-financial aspects relevant to thecompany and its stakeholders and ensure that the company

conducts itself as a responsible corporate citizen

y record the facts and assumptions which lead it toconclude that the business will be a going concern in the

next financial year (and if not, what steps the board is

taking to ensure that this status will be achieved)


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y explain the effect of all resolutions required to be passed atshareholders meetings

y ensure the chairpersons of the audit and remunerationcommittees and as many directors as possible attend

shareholders meetings to answer questions about the state

of the company

y provide biographies of all directorswho are to be appointedat an AGM

y seek the optimum balance for the company betweenconformance with the dictates of good governance and

performance

Characteristics of an effective board

Although directors act in concert as a board, each director is

individually responsible for being as effective as he can be.

Directors must ensure that they:

y devote adequate time and attention to their dutiesy have a good working knowledge of the company, including

its organisational structure, management, internal financial

controls and its products or services

y prepare adequately for board meetings by working throughboard and agenda papers

y ensure that management reporting is presented in a clearand easily understood format containing all necessaryinformation about the company that directors need to know

y actively participate in corporate planning including budgeting,strategic planning and cash flow projections

y have access to the entire management team and obtaininformation from them firsthand where necessary


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y assign specific areas of responsibility to management toensure individual accountability of each manager

y oversee the appointment of senior management and appointonly individuals of suitable calibre

y ensure compliance with relevant legislation and regulationsand implement an effective reporting system to monitor

such compliance

y conduct visits to company premises on a regular basisy have a good working knowledge of the contents of important

company documents such as the memorandum and articles

of association, policy manuals, strategic plans, key contracts,

the board charter and the terms of reference of board

committees

Board charter

King II recommends that companies consider introducing a

charter to govern the performance and operations of the board. Aboard charter might incorporate details of:

y board composition, proportion of independent directors toother directors, directorship terms and retirement age, and

limits on the number of directorships held by each director

y the boards major responsibilities, distinguishing thesefrom management responsibilities

y director selection criteria including skill sets, diversityand experience, recruitment process, and the orientation

and induction process to be followed with new directors

y board leadership issues including the selection of thechairman, the separation of roles of the CEO and

chairman or the appointment of a lead independent director


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y director compensationy board meeting proceduresy board performance monitoring and board audits including

the assessment of the board and committees' effectiveness

and assessment of individual director performance

y guidance on conflicts of interesty the constitution of Board Committees

A Charter and Terms of Reference for a company's board and

board committees are considered essential for the proper

governance of the company. Whilst the King II Report provides

generic examples of such documents, companies are cautioned

against simply adopting such generic standards without, in the

first instance, interrogating the particular company's corporate

governance needs and ensuring that the board and committee

structures in place are appropriate in the specific context.

Should you require assistance with developing a Board Charter or

Committee Terms of Reference, please contact Ramani Naidoo at

Edward Nathan on (011) 269-7633.

Board audits

Modern companies are highly complex and evolving entities. A

directors attention is so often focused on the day-to-day

activities of the company that the performance of the board itself

may not be questioned until some major event occurs which

forces the board to evaluate its effectiveness. The board has a

responsibility to ensure that its own performance meets the

high standards that it sets for the rest of the company. An

analysis of the answers to questions such as those below should


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be turned into recommendations for incorporation into a strategic

plan.

Some suggested areas for board and individual director

evaluation follow:

Board performance

y are the key responsibilities noted in the Board charter beingcarried out?

y is adequate and timely information received?y are meeting agendas appropriate and is adequate meeting

time allotted?y how well do directors work together, is communication and

discussion appropriate and is a sufficient degree of

consensus achieved on key issues?

y are there any holy cows in the boardroom environmentwhich prevent open and frank discussion?

y is the board composition effective (i.e. is the mix of skillsand diversity appropriate; how well do the personalities of

directors interact in the boardroom?)y is the board's overall level of effectiveness adequate?y is the board the right size?y are individual roles and responsibilities clearly defined?y what criteria are used to select directors?y do non-executive directors annually review succession plans

for senior management?

y are the activities of the executive committee (if any)sufficiently contained to prevent the emergence of a "two-tier" board?


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Board processes

y how critically are decisions debated?y is sufficient time allowed in meetings for thoughtful

discussion in addition to management presentations?y can non-executive directors alter the meeting agenda?y do non-executive directors meet separately from executives

from time to time?

y is there an environment ofopenness and trust amongstdirectors?

y how effective is the chairman?

Internal information

y what internal information do directors receive?y how are directors kept up to date on company

performance?

y does the company help directors to prepare for meetings bysending relevant information and analyses ahead of time?

y do directors routinely speak to senior managers who are notrepresented on the board?

Non-executive directors

y is the board constituted such that important stakeholdersconsider it responsive, representative and legitimate?

y does the board include a significant percentage ofindependent, critical, outside directors who add value to the

deliberation process?

y is there an appropriate balance of non-executive andexecutive directors?


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y is there a nomination committee to search for and screensuitable candidates?

y are non-executive directors periodically rotated?

Strategic planning

y is the organisation bottom-line driven and/or short-termfocused?

y does the board focus on strategic issues, or does it tend todebate operational matters at meetings?

y is the board actively involved in formulating long-rangecorporate strategy from the start of the planning cycle?

y does the board have regular retreats for strategic planning,or is strategy at least a standing agenda item?

y are business risks and key assumptions about the companyand its operating environment clearly identified and

regularly challenged?

Compensation and performance appraisal

y how critically is corporate performance appraised?y is good board performance visibly rewarded?y is indifferent or poor board performance addressed?y does the remuneration committee base director

compensation on long-term results?

y is the performance of each director regularly reviewed?y do non-executive directors formally evaluate the chief

executive's performance, objectives and personal plansevery year?

y is at least a portion ofdirectors' pay linked to corporateperformance?

y are directors who are no longer making an adequatecontribution discouraged from standing for re-election?


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Individual director performance

y does the director attend board meetings regularly?y is the director adequately prepared for meetings?y does the director participate actively during meetings?y is the director able to communicate and express ideas

clearly?

y is the director willing to listen and acknowledge otherviewpoints?

y does the director understand the business of thecompany and industry in which it operates?

y is the director able to work effectively with other directorsand management in the best interests of the company?

y what does the director do well?y what should the director do differently? andy what is the overall level of contribution of the director?

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