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8/3/2019 Role of Board
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Board of Directors
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Role of Board of Directors
Supreme decision making body
Take decisions on strategies, policies,
investments , staffing , internal controlsetc. for implementation by management
Control management of affairs of company
Directors are powerful instrument of CG
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How Directors elected
Directors are elected by shareholders at
AGM ( names proposed by Directors)
No educational requirement No upper age limit
Board has also power to appoint some
Directors Rotation of 2/3rd Directors after three years
Min no. 3 , Max no as per AOA
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Directors
Disqualifications - minor , unsound mind ,
convicted for moral turpitude ,no default in
debentures , loans
Max directorship- 15 public companies
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Types of Directors
Executive Directors full time executives
of company
Also members of Board Non Executive Directors part time
Directors
H
ave no employment relationship with cocompany
Only attend Board and Committee Mtgs.
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Directors
Independent Directors
- NEDs who have no business or
pecuniary relationship with company orpromoters which could materially interfere
with their independent judgment
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No of Independent Directors
50 % Ind Dirs if Chairman is ExecutiveDirector,
1/3rd if Chairman is a Non ExecutiveDirector
UK Combined Code- 1/3 rd of Board to be
NEDs and independent
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Why Independent Directors
They can bring objectivity andindependent judgment in decision making
They can take lead when conflict ofinterest arises with Executive Directors
They can play role in ensuring CG
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Nominee Directors
Nominated by lenders (Banks, FIs) in
terms of provisions of Loan Agreements
Nominated by Govt., BIFR Not required to hold qualification shares
Not subject to rotation
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Chairman of Board
Directors elect one of Directors as
Chairman
He presides over meetings of Board and isresponsible for running the Board
Chairman evaluates performance of CEO
Chairman should be independent personto counterbalance power of CEO
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Chief Executive Officer- CEO
Board also appoints a CEO who leads
senior management team
Chief Executive Officer (CEO)- is ED who
manages day to day operations
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Chairman v/s CEO
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Separation of role of
CEO and Chairman Combining two roles leads to conflict of
interest in decision making
Also too much concentration of power inone person
Combining will remove any check on CEO
Combining will make it difficult for both todeliver (in large corporations)
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Role of Board in CG
Board to ensure that management works in best
interests of company and shareholders
The quality of Board, their competence,
commitment ,composition and willingness tocompany and shareholders only drives values of
the Board
Board is critical success factor for CG in
company
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Board functions for better CG
Show total commitment to company
Steer discussion properly
Make clear stand on issues
Appoint efficient and effective CEO
Decisions on acquisitions at right stage
Anticipate business events
Long tem interests and shareholders value
Promote overall interests of co and stakeholders
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Board Committees
Board can not devote full time to all
matters
Committees of Directors are constitutedfor detailed examination of various aspects
Committees enhance effectiveness of
Board
Members of all Committees are to be
disclosed in annual report
Committees report to Board
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Board Committees
Audit Committee
Remuneration Committee
Nomination Committee Share Transfer Committee
Investor Grievances Committee
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Audit Committee
Consists of majority of independent NEDs
Ensures protection of interests ofshareholders
Appointment of auditors, fees
Review scope of audit, outcome
Internal control systems
General independence of audit
Risk management systems
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Nomination Committee
Ensures formal , transparent process for
appointment of Directors
Consists of majority of independent NEDs Evaluates composition of existing Board
Wide net to search suitable candidates
Also involved in succession planning
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Remuneration Committee
Remuneration Committee of Directors to
decide on all remuneration issues- policy,
package ,incentives, pensions, severance
R.C. considers all relevant factors-size ,
nature of business, complexities, location,
pay in similar companies
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Remuneration Committee
Makes recommendations to Board on
executive compensation and its cost
Decides compensation packages for EDs Remuneration of NEDs decided by Ch./
Board
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Remuneration of Directors-
issues Remuneration should be sufficient toattract, retain and motivate professionals
There should be balance between fixedand variable pay, fair and appropriate pay
Pay package should not obstruct
independent judgment
Transparency in pay package required
disclosure to shareholders
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Disclosure of remuneration
Details of remuneration and Performancetargets should be disclosed in RC Report
Chairman to answer questions onremuneration at AGM
Remuneration Committee may be allowedto consult outside consultants
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Evaluation of Directors
There should be formal procedure ,
performance criteria for evaluation
Combined Code suggested formalevaluation of Board and its members and
Committees
Such system will ensure proper
performance related pay
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Post reforms Boards- changing
profile Proactive and Professionalised Boards
Chairman and CEO different
Independent Directors have their say
Board committees with expert members Family owned companies going for professional
directors
Transparency of financial statements
Adequate compensation for members Boards imbibing CSR, CG values, stakeholdersinterests