Corporate Governance

Powers, Role and types of corporate boards INTRODUCTION The board of directors of a company which includes all directors elected by shareholders to represent their interests is vested with the power of management .The board has extensive powers to manage a company, delegate its power and authority to excutives and carry on all activities to promote the interests of the company and its shareholders, subject to certain restrictions imposed by public authorities. The board of directors of a company is authorized to exercise such powers and to perform all such acts and things as the company is entitled to. This means that the powers of the board of directors is co-extensive with those of the company subject to two conditions: 1 The board shall not do any act which is to be done by the company in general meeting of shareholders. 2 The board shall exercise its powers subject to the provisions contained in the articles or the memorandum or in the Fedral Acts concerned with companies or any regulation made by the company in any general meeting. A board of directors is a body of elected or appointed members who jointly oversee the activities of a company or organization. Other names include board of governors, board of managers, board of regent. Board of directors Governing body (called the board) of an incorporated firm. Its members (directors) are elected normally by the subscribers (stockholders) of the firm (generally at an annual general meeting or AGM) to govern the firm and look after the subscribers' interests. The board has the ultimate decision-making authority and, in general, is empowered to (1) set the company's policy, objectives, and overall direction, (2) adopt bylaws, (3) name members of the advisory, executive, finance, and other committees, (4) hire, monitor, evaluate, and fire the managing director and senior executives, (5) determine and pay the dividend, and (6) issue additional shares. Though all its members might not be engaged in the company's day-to-day operations, the entire board is held liable (under the doctrine of collective responsibility) for the consequences of the firm's policies, actions, and failures to act. Members of the board usually include senior-most executives (called 'inside directors' or 'executive directors') as well as experts or respected persons chosen from the wider community (called 'outside directors' or 'non-executive directors').

POWERS OF THE BOARD Under section 292 of the companies Act, it is stipulated that a companys board of directors shall exercise the following powers on behalf of the company by means of resolutions passed at the meeting of the board. Make calls on shareholders in respect of money unpaid on their shares. Issue debentures Borrow money otherwise (for e.g. through public deposits). 1

Invests the funds of the company. Make loans. Furthermore, there are certain other powers specified by the companies Act under various section Which shall be exercised by the board of directors only at the meetings of the board. These powers include: To fill vacancies in the board; To sanction or give assent for certain contracts in which particular directors, their relative and firms are interested. To receive notice of disclosure of directors interest in any contract or arrangement with the company. To receive notice of disclosure of shareholdings of directors. To appoint as managing director or manager a person who is already holding such a post in another company. To make investment in companies in the same group.

Role of corporate boards The board of directors, including the general manager or CEO (chief executive officer), has very defined roles and responsibilities within the business organization. Essentially it is the role of the board of directors to hire the CEO or general manager of the business and assess the overall direction and strategy of the business. The CEO or general manager is responsible for hiring all of the other employees and overseeing the day-to-day operation of the business. Recruiting, supervising, retaining, evaluating and compensating the CEO or general manager are probably the most important functions of the board of dir2) Provide direction for the organization. The board has a strategic function in providing the vision, mission and goals of the organization. These are often determined in combination with the CEO or general manager of the business. The board has the responsibility of developing a governance system for the business. The articles of governance provide a framework but the board develops a series of policies. This refers to the board as a group and focuses on defining the rules of the group and how it will function.

Govern the organization and the relationship with the CEO. Another responsibility of the board is to develop a governance system. The governance system involves how the board interacts with the general manager or CEO. Periodically the board interacts with the CEO during meetings of the board of directors. Typically Fiduciary duty to protect the organizations assets and members investment. The board has a fiduciary responsibility to represent and protect the members/investors interest in the company. So the board has to make sure the assets of the company 2

are kept in good order. This includes the companys plant, equipment and facilities, including the human capital (people who work for the company.) Monitor and control function. The board of directors has a monitoring and control function. The board is in charge of the auditing process and hires the auditor. It is in charge of making sure the audit is done in a timely manner each year.

TYPES OF BOARD OF DIRECTORS A board of directors is a committes elected by the shareholders of a limited company to be responsible for the policy of the company. some times full-time functional directors are appointed each being responsible for the some particular branch of the firms work. And the types of corporate boards are as follows

The board of directors of a company shall have an optimum combination of executive and non-executive directors with not less than 50% of the board of directors to be non-executive directors. The number of independent directors would depend whether the chairman is executive or non-executive .In case of a non executive chairman, at least 1/3rd of the boar d should comprise independent directors and in case Executive chairman at least half of the board should be independent directors.

MEANING OF EXECUTIVE AND NON-EXECUTIVE DIRECTOR An executive director is one who is an executive of the Company and also a member of the board of directors. NON-EXECUTIVE DIRECTOR An non- executive director has no separate employment relationship with the company. INDEPENDENT NON-EXECUTIVE DIRECTOR An independent non-executive director are those directors on the board who are free from any business or other relationship which could materiality 3

interface with the exercise of their independent judgement in the process of decision making as a member of the board. AN AFFILATED/NOMINEE DIRECTOR . An affiliated director or nominee director is a non-executive director who has some kind of independence, impairing relationship with the company.

strategic role of boards and functions This understanding and appreciation of the role of the boards as being valuable has resulted in several recommendations to boost their contribution to success of companies by innumerable committees that have been appointed by governments and public spirited organizations all over the world. company laws enacted by various countries make it a point to stress that the duty of a statuary board is to protect and represent the interests of shareholders. The board cannot and does not run the company. There are executive who run the day -to day affairs of the company as dictated by the board. The role of the board is to work out business Strategy and address big issues. A boards role is evolved from law, custom, tradition & current practice, while it gets its authority from the Shareholders as their representatives to run the companys mission. How a strategic board can ensure good governance? If the board is smaller and compact, the greater will be the director's involvement. Strategic board should be divease, i.e, the directors should have different professional backgrounds, so as to provide their collective wisdom to devise a strategy for their company. The board cannot be effective unless it is being provided with appropriate & comprehensive information. As they say, the out put is only as good as the input. While the CEO.s responsibility is to focus on the day-to-day operations, the boards is to concentrate on long-term shareholder value

Role of the Board in Corporate Governance By Erika Johansen, eHow Contributor A corporate board safeguards the interests of the corporation's stakeholders. In the modern company, the board is generally supposed to manage the corporation on behalf of the shareholders, effectively acting as trustees for shareholder interests. Directors are elected by shareholders, and may even be shareholders or company employees themselves. Corporate governance directs organizations' decisions. One of the most important roles of corporate governance is to ensure that strategic decisions are made in the interest of those with a stake in successful outcomes. Boards have increasingly become more focused on corporate shareholders, but a shift may be beginning to occur. The interests of stakeholders, such as customers, potential customers and non-customers impacted by the decisions of a company, 4

may begin to get attention as corporate governance plays an increasingly strategic role.

Functions of Boards A board's primary functions are to: nominate directors, elect a chairman and appoint a chief executive; set objectives, define policy and develop strategy; interpret corporate culture, ethical standards and people rationale into everyday acts; specify authorities of chairman, chief executive and board; make certain the chief executive provides satisfactory leadership, planning, organization, control and succession; approve short and medium term tactical, technical, operational and financial plans; monitor performance against agreed goals; check that the employees, customers, suppliers and society get a fair deal from the organization and that a proper balance exists between their interests and those of members; account to members for the results; ensure present plans and actions provide for the organization's continuity; when necessary remove the chairman or the chief executive or other directors.

Determinants of Board Effectiveness Introduction: The board of directors is the central corporate governance mechanism that the shareholders entrust to monitor and to provide strategic guidance to the management of a corporation. The objective of corporate governance is to constitute an efficient and functioning structure that overcomes diverging interests generated by the separation of ownership and control in widely-held corporations 5 important areas which an effective boards can make up for: 1. Effective Board Leadership. 2. Strategy. 3. Risk vs. initiative. 4. Succession planning. 5. Sustainability. 5

particulars

Minimum

Maximum

Private

Public

Private

Public

Sec. 252 of the Cos Act 1956

The Companies Bill 2003

Temptation to micro-management Ineffective Nominating Committee No Plan for Rotation Failure to remove unproductive members Too small Lack of functioning committee structure No strategic plan No plan for orientation of new and old members Determinants I. Board Size:

The size should be large enough to secure sufficient expertise on the board, but not so large that productive discussion is impossible and free-riding among directors is prevalent. As per CGSI Committee

2. Composition A board should have a mix of inside/executive andoutside/independent directors with a variety of experience and core competence if it is to be effective in judging the managements performance objectively.30 For the purpose of board independence, a substantial share of a board should consist of independent directors. The board has an Executive Chairman. The composition of the Board shall include such minimum number of independent directors as mentioned in law. Current requirement: 6

The Companies Act, 1956 is silent on the ratio of non-independent Directors. Clause 49.1(A) of the Listing agreement provides that the number of independent directors would depend on whether the chairmen is Executive or Non- executive. 3. Information: Regarding: Companys performance External environmental forces Internal environmental forces Departmental information Internal control system 4.Compensation to directors: The board has constituted a Remuneration Committee comprising Independent director to recommend / review remuneration of the board. Key issues: Pay to performances Process for determination Severance payment Pensions for NEDs

MEETING AND EVALUATION OF BOARD PERFORMANCE ROLE AND FUNCTIONS OF BOARD CHAIRMAN 1. To act as a liaison between management and the Board; 2. To provide independent advice and counsel to the CEO; 3. To keep abreast generally of the activities of the Company and its management; 4. to ensure that the Directors are properly informed and that sufficient information is provided to enable the Directors to form appropriate judgments; 5. in concert with the CEO, to develop and set the agendas for meetings of the Board; 6. To act r at meetings of the Board; 7. To recommend an annual schedule of the date, time and location of Board and Committee meetings; 8. To review and sign minutes of Board meetings; 9. To sit on other Committees of the Board where appropriate as determined by the Board; 7

10. To call special meetings of the Board where appropriate; 11. in concert with the CEO, to determine the date, time and location of the annual meeting of shareholders and to develop the agenda for the meeting; 12. to act as Chair at meetings of shareholders; 13. to recommend to the Board, after consultation with the Directors, management and the Governance and Nominating Committee, the appointment of members of the Committees of the Board; 14. to assess and make recommendations to the Board annually regarding the effectiveness of the Board as a whole, the Committees of the Board and individual Directors; and 15. to ensure that regularly, upon completion of the ordinary business of a meeting of the Board, the Directors hold discussions without management present.

SUCCESION

PLANNING

Succession planning is integrated with organizational strategy and culture , future leaders grooming and development and change management to achieve organizational business continuity. succession planning is used to spot , select and develop future leaders and should be planned , applied and measured to insure a beneficial outcome . It should convey a positive message about an organizations future course of action and goles. Succession planning is a process where by an organization ensure that employees are recruited and developed to fill each key role within the co. succession planning is the course of action ensuring that appropriate intimates are ready at the right time , to effectively run the organization and meet its future challenges. succession planning is the ongoing process of identifying,assessing & developing skills and talent through monitoring, grooming and job rotation.

IMPORTANCE OF SUCCESSION PLANNING Employees , supervisors develop their knowledge, skills & abilities. Enable organization to identify talented employees and provide education to develop them for future high level & broader responsibilities. Actively persuing succession planning ensures that employees are constantly developed to fill each needed role . Successful succession planning build strength.

Eg-: a succession plan always helps top companies to hold people accountable for leadership development MC-Donald had to name a successor within just an hour of the sudden death of its 60 years old chairman Jim cantalcupo.

the decision was only possible only due to years of succession planning.

ROLE & RESPONSIBILITIES OF CEOs The CEO & the senior manager run the corporation day to day business operations . The CEO should be aware of the major risks & issues that the corporation faces & its responsible for supervising the corporations financial reporting process. It is a responsibility of CEO &of senior management under the CEOs direction, to operate the corporation in an effective & ethical manner. Strategic planning: the CEO generally take the lead in strategic planning . They identify & develop strategic plans for the corporation & implement the plans . A CEO of intigrity- the CEO should be a person of intrigity who takes responsibility for the corporation adhering to the highest ethical standards. The CEO & senior management are responsible for operating the corporation in ethical manner they should never put individual ,personal interest before those of the corporation or its shareholders.

CHAP 4 Board committee

INTRODUCTION The Board (or Committee of Management, or Board of Directors, or Council - there are many different names) is the highest authority in an organization, responsible for taking major decisions and responsible for overseeing the operation of the organization. Their job is to provide direction for the group, ensure the organization remains true to its mission, operates legally and ethically and also to report back to all the stakeholders that they serve.

Since a board cannot be continuously functioning and meets only once in a quarter, board functions are performed by specially constituted board committees which are represented mainly or wholly by the independent directors. Ordinary members of the organization have the responsibility of selecting the Board. They can stand for election to the Board, and may put themselves forward to sit on subcommittees. This helps to ensure that Boards and subcommittees are connected to the organization's members and that they are representative of the members. Members can also make their views known to the Board both directly and at General Meetings. Meaning of committee One or more persons elected or appointed, to whom any matter or business is referred, either by a legislative body or by a court or by any collective body of men Committees. Definition of Committees: 1. A group of people appointed for a specific function, typically consisting of members of a larger group. 2. Such a body appointed by a legislature to consider the details of proposed legislation. 3. A group of people officially delegated to perform a function, such as investigating, considering, reporting, or acting on a matter Definition of Committees.

SIZE OF BOARD COMMITTEE The board of directors are elected by a companies shareholders and accountable to them. It is the primary organ of the company. The size of the board under the companies act is a minimum three directors in the case of a public limited company and to in the case of private company. Any increase beyond 12 require central governments approval (sec 259). A public company having a paid of capital of Rs 5 crores and 1000 or more small shareholder (having shares of nominal value of Rs 20000) should have a director elected by small share holder. Americas corporate board have 10 to 11members.

Characteristics of Board committee Board Leadership The effectiveness of board meetings depends largely on the leadership ability of the chairperson to set an agenda and direct discussions. The board agenda is usually prepared by chairperson in collaboration with the CEO. CEO Duality implies that the companys CEO holds both the position of chief executive and the chair of the board of directors. The are pros and cons of that model, but investors usually prefer to separate the positions. If they dont, then it is preferable that the companys board consists of a substantial majority of independent directors. 10

 Lead Director demand for Lead Director increased because of the presence of CEO duality, resulting from growing concern that duality places too much power in the hands of CEO, which may impede board independence. Board Composition in terms of ratio of inside and outside directors, and the number of directors influence the effectiveness of the board. A board size of nine to fifteen is considered to be adequately tailored to the number of board standing committees Board Authority is granted trough shareholder elections. SOX substantially expanded the authority of directors, particularly audit committee members, as being directly responsible for hiring, firing, compensating, and overseeing the work of the companies independent auditors. Responsibilities the primary responsibility of the board of directors that the companies assets are safeguarded and that managerial decisions and actions are made in a manner of maximizing shareholders wealth while protecting the interests of other shareholders. Resources board of directors should have adequate resources to effectively fulfill its oversight functions. Resources available to the board consist of legal, financial, and information resources. TYPES OF BOARD COMMITTEE Audit committee Compensation committee Legal and public affairs committee Governance committee Nominating committee Financial / Investment risk committee shareholders committee Risk and Audit committee Remuneration committee

Executive committee Human Resource and remuneration committee

1. AUDIT COMMITTEE :The committee shall meet at least 6 times every financial year. The committee shall consist not less than 3 members. Each committee members shall be an independent directors as defined under the listening agreement and the committee will have at least one member who shall financial and accounting expertise. TYPES OF AUDIT 11

Financial statement audit compliance audit operational audit

2. COMPENSATION AND MANAGEMENT DEVELOPMENT COMMITTEE :The committee shall be appointed annually by the board and be comprised of two or more directors as determined by the board, each of whom must be determined by the board to be Independent the compensation and management development committee has oversight responsibility with respect to executive compensation and works with management to develop clear relationship between pay levels, business line financial performance and returns to shareholders , in order to align the companies compensation structure with its organization objectives.

3. LEGAL AND PUBLIC AFFAIRS COMMITTEE:The legal and public affairs committee reviews and considers major claims and litigation, and legal, regulatory, intellectual property and related governmental policy matters affecting the company and its subsidiaries. Legal and public affairs committee reviews and approves management policies and programs relating to compliance with legal and regulatory requirements, business ethics and environmental manners. 4. NOMINATING AND CORPORATE GOVERNANCE COMMITTEE:The committee shall consist of no fewer than 3 members. The nominating and corporate governance committee makes recommendation as to the organization, size and compensation of the board and the committees thereof, and considers the qualification, compensation and retirement of directors. 5. FINANCE RISK COMMITTEE :The finance, investment and risk management committee oversee the investment activities, financial management, and risk management of the company and its subsidiary. 6. SHAREHOLDERS/ INVESTORS GRIEVANCES COMMITTEE :The committee comprises of four members(CEO, COMPANY SECRETARY, CHAIRMAN, AND DIRECTORS). The committee review the redressal of investors complaints related to transfers and transmission, annual report, dividends and other share related matters. 7. RISK AND AUDIT COMMITTEE:The risk and audit committee comprises of five directors, all being Nonexecutive directors, four of whom are independent . Risk and audit committee has well established Terms of reference, which articulates the role of the risk and audit committee. At each board meeting, the chairman of the risk and audit committee briefs the board of directors on the discussions at the risk and

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audit committee meeting, and the minutes of these meetings are also circulated to all members of the board. 8. REMUNERATION COMMITTEE:Although not mandatory in terms of the listing agreements of India, remuneration committee comprising of three non-executive directors, of which two, including the chairman, are independent maybe created.

9. EXECUTIVE COMMITTEE :This committee comprises of majority of Non-executive directors, one being the chairman of the board, who also serves as the chairman of the executive committee, plus two executive directors. This committee met three times during the financial year. Details of attendants at meetings are provided here. 10. HUMAN RESOURSE AND REMUNERATION COMMITTEE :Main objectives of this committee is to fulfill the boards responsibility for the strategic human recourses issues of the group particularly the appointment, remuneration and succession of the most senior executives. The committee comprises a minimum of three independent Non-Executive directors. Its responsibilities are outlined in the remuneration report. Reasons of Board Committees: They are used to save time at general meetings. Matters can be discussed and reviewed in detail by a committee and recommendations brought to the general meeting. The work of the organization becomes more efficient. The specialized skills and interests of members are used to their full advantage. More members get involved in the detail work of the organization. Responsibilities are shared according to skills and interests of members Reasons of Committees Advantages of Committees: 1. Committees help to bring together a variety views, interests, and expertise together for completion of task. 2. Committees provide a mechanism for discussion and agreements based on consideration of a wider range of interests and alternatives.

3. Committee enable use of specialized manpower or expertise for a specific task, by permitting such experts to work part time on the committees. 4. Committees avoid the mistakes of hasty decisions taken without due considerations.

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5. Decision taken by committee are more easily accepted by the all departments because of representation of their interests and viewpoint in the decision making process by way of their representative working on the committee. REQUIREMENTS FOR EFFECTIVE BOARD COMMITTEES How can you ensure that your board functions efficiently? Based on my experience, here are six steps to building an effective, independent board: #1: Find the expertise you are missing Outside directors can bring in experience that your team lacks. For example, if your company is about to embark on an aggressive acquisitions strategy, you might want to select someone with significant merger-and- acquisition experience. If you are thinking about expanding internationally, you may want to consider a person with overseas experience

#2: Look for board experience. People who have served on boards can hit the ground running, because they already understand the critical issues of audit, compliance, finance, and strategy, as well as other dynamics that can affect board performance. For this reason, current or former CEOs make ideal board candidates. Since they have prior board experience, the learning curve is relatively short and easy. 3: Do not overlook non-CEO candidates. CFOs, COOs, directors of development, and directors of sales--especially if they work at significantly larger companies--can bring valuable experience to your board. Because these types of executives frequently want board experience, they may be willing to serve on much smaller company boards than a CEO would consider.

#4: Keep your board size manageable. Small, focused boards are generally preferable to larger ones, especially for midsize companies. I usually recommend that companies start with five board members, and then perhaps expand to seven over time #5: Choose people who can participate fully. The people on your board must be able to dedicate significant time to your company-not just for scheduled meetings, but also on an ad-hoc basis when time-sensitive challenges arise. For that reason, I like to find board members who are in close proximity to the company. #6: Divide your board into focused committees . Boards work on a broad range of issues, including compensation, audit, transactions, capital expenditures, financings, overall business strategy, key personnel decisions, lawsuits, and other problems that arise.

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