CORPORATE

GOVERNANCE
UNIT – III;
CORPORATE BOARDS
 BOARD OF DIRECTORS
 The board of directors is a group of individuals who are responsible for overseeing
the management and direction of a company or organization. In a broad sense, a
corporate board of directors acts as a fiduciary for shareholders.
 A board of directors is a group of people who represent the interests of a
company’s shareholders. It also provides guidance and advice to an organization’s
CEO and executive team.
 Section 2 (10) of the Companies Act, 2013 defined that “Board of Directors” or
“Board”, in relation to a company, means the collective body of the directors of the
company.
 Section 2(13) of the Companies Act defines a director as follows: "A director
includes any person occupying the position of director, by whatever name called.
The important factor to determine, whether a person is or is not a director, is to
refer to the nature of the office and its duties. It does not matter by what name he
is called. If he performs the functions of a director, he would be termed as a
director in the eyes of the law, even though he may be named differently. A
director may, therefore, be defined as a person having a control over the direction,
conduct, management or superintendence of the affairs of a company. Again, any
person, in accordance with whose directions or instructions, the board of directors
of a company is accustomed to act is deemed to be a director of the company."
The board has several key roles and responsibilities, including:
• Hiring and overseeing senior management: The board hires the CEO and other senior
executives and is responsible for overseeing their performance and ensuring that
they are acting in the best interests of the company.
• Monitoringfinancial performance: The board reviews the company’s financial
statements and ensures that the company is managing its finances responsibly.
• Ensuring compliance with legal and ethical standards: The board is responsible for
ensuring that the company is complying with all applicable laws and regulations, as
well as maintaining high ethical standards.
• Providing guidance and support to management: The board provides guidance and
support to senior management as needed, and may offer advice on key business
decisions or challenges.
• Representing the interests of shareholders: The board represents the interests of the
company’s shareholders, and works to ensure that the company is maximizing
shareholder value.
• Setting the overall direction and strategy of the company: The board is responsible
for setting the company’s strategic goals and direction, and ensuring that
management is taking the necessary steps to achieve those goals.
 Adopting policies to address conflicts of interest: The board establishes policies
and procedures to address conflicts of interest among board members, executive
leadership, and other stakeholders. These policies help maintain the integrity and
independence of decision-making processes, prioritizing the organization’s best
interests.
 Shaping the organization’s culture and vision: The board shapes and fosters the
organization’s culture, values, and vision. They establish and promote a culture of
ethical conduct, transparency, and accountability throughout the organization.
They ensure the organization’s values and strategic direction align with the
interests of shareholders and stakeholders, guiding the organization toward its
long-term goals.
 Improving the organization’s strategic focus and effectiveness: Board members,
including the audit committee, assess the organization’s performance, review
strategic plans, and make necessary adjustments to enhance the organization’s
strategic focus and effectiveness. They monitor key performance indicators and
ensure the organization is on track to achieve its objectives.
Overall, the board of directors plays a critical role in ensuring that the company is
operating in a responsible and effective manner, and that it is delivering value to its
shareholders and other stakeholders.
Types of Corporate Boards;
1. Governing Board - A Board where the Promoter of the company is not a part, is
said to be a Governing board. The board members consist of persons other than
the promoters and the intention of the Board is to provide direction to the owners
with the best way of running the organisation. The BOD is concerned mainly with
the bigger picture and delegate managerial task to people employed in the
organisation.
2. Working Board - As opposed to a governing board, a Working board not only
deals with the big picture but also simultaneously implements the policies and
strategies. This type of board is generally found in smaller or new organisations.
3. Managing or Executive Board - This type of board has its members as Executive
Directors and together they runs everything in the organisation on a day-to-day
monitoring basis. Such Board will have necessary subcommittees for quick
addressing of specific situations within the organisation.
4. Advisory Board - Advisory boards are similar to governing boards and they
provide advice and direction to those who are actually running the organisation;
the difference is that in case of governing boards the directions are given to
employees, in case of Advisory Board, the advice is given to the Board of Director
which is essentially in the form of an Executive or Working board. The role of
Advisory Board is important in critical matters and delicate situations.
5. Policy Board - This board is similar to the Advisory board, except that in the
Policy board instead of advising, the stress is on formulation of organisational
policies, practices and directions to guide employees. The CEO or promoter of
the company, or other employees implement the work of the policy board.
6. Cooperation Board - As the name suggests, the Cooperation board is one
where all members work and vote equally on all points of business. All
members are people elected to represent the members of a co-operative or
other non-profit organisation. All board members have a singular goal and
work to achieve the same.
7. Cortex Board - The Cortex model emphasizes on the value that an
organisation creates in the community. The performance of the organisation
is measured on the basis of parameters like community standards, giving
back, societal expectations etc.
8. Competency board: This type of board has members with specific expertise
that brings distinct advantages to the company. For instance, a board may
consist of a member with experience in product design, another in
advertising, another in finance and another in law.
 LEGAL POWERS OF THE BOARD
 The BODs, in broad terms is expected to perform the role of overseeing the running of the
enterprise by its CEO.
• Sec. 291 stipulates the BODs shall be entitled to exercise all such powers, and to do all such acts
and things, as the company is authorized to exercise and do, except those things which can be done
in a general meeting of the company.
The powers exclusive to the BODs are (Sec. 292):
 To make calls on shareholders in respect of money unpaid on their shares

 To issue debentures

 To borrow money otherwise than through debentures

 To investment the funds of the company

 To make loans

 To forfeit the shares

 To approve M&A

 To approve buyback of shares

• Sec. 293 restricts the powers of the BODs, by making them subject to the consent of a general
meeting of the company, in respect of selling, leasing or disposing of the property of the company;
remitting debt due by a director; borrowing money to an extent which exceeds the net worth of the
company, etc.
Functions of the Board (OECD Principles of Corporate
Governance)
• The board should fulfill certain key functions, including:
1. Reviewing and guiding corporate strategy, major plans of action, risk policy, annual
budgets and business plans; setting performance objectives; monitoring
implementation and corporate performance; and overseeing major capital
expenditures, acquisitions and divestitures.
2. Selecting, compensating, monitoring and, when necessary, replacing key
executives and overseeing succession planning.
3. Reviewing key executive and board remuneration, and ensuring a formal and
transparent board nomination process.
4. Monitoring and managing potential conflicts of interest of management, board
members and shareholders, including misuse of corporate assets and abuse in related
party transactions.
5. Ensuring the integrity of the corporation's accounting independent audit, and that
appropriate systems of control are in place, in particular, systems for monitoring risk,
financial control, and compliance with the law.
6. Monitoring the effectiveness of the governance practices under which it operates
and making changes as needed
THEORETICAL
PERSPECTIVES
Theories relating to strategic role of boards and functions ,
There are several strategic management theories in the context
of the board's strategy role.
These theories are:
1. Managerial Hegemony theory
2. Agency Theory
3. Stewardship Theory
4. Resource Dependence Theory
M A N A G E R IA L H E G E M O N Y T H E O R Y

(Mace, 1971; Vance, 1983; Lorsch and Maciver, 1989) argues that boards are a
legal fiction dominated by management. As such, they play a passive role in
strategy and in the broader sense of directing the corporation. This
managerialist perspective relies on five mechanisms for management control:
 - Separation of ownership and control
 - Information asymmetry between non-executive directors and top
management.
 - Managers in profitable organizations can reduce their dependence on
shareholders for capital and hence enhance their control by using retained
earnings to finance investment decisions.
 - In many cases, 'board members are handpicked by management' and
hence, management controls the board by virtue of this appointment
process.
 - Since inside directors’ report to the chief executive officer and are largely
dependent on this person for compensation and career advancement, the
extent to which such directors occupy board seats is likely to confer a power
imbalance to the chief executive.
 AGENCY THEORY
Agency theory focuses on the notion of an agency relationship in which the
principal delegates work to the agent, there is risk sharing between the entities and
there is potential conflict of interest (Eisenhardt, 1989).
 • It assumes that agents are opportunists who operate with bounded rationality -
they will self-satisfice rather than profit maximise on behalf of the principal.
 • Agency theory argues that the major role of the board is to reduce the potential
divergence of interest between shareholders and management, minimizing
agency costs and protecting shareholder’ investments.
 • Agency theory has very clear implications for the monitoring and control role of
the board, but its position regarding the strategy role is not as definite.
 • However, Zahra and Pearce (1989) argue that agency theory emphasizes the
crucial importance of the board's role in strategy, stating that it:
 • "places a premium on a board's strategic contribution, specifically the board's
involvement in and contribution to the articulation of the firm's mission, the
development of the firm's strategy and the setting of guidelines for
implementation and effective control of the chosen strategy.
 • Similarly, McNulty and Pettigrew argue that little has been said by agency
theorists about strategy as a means of control over managers
 STEWARDSHIP THEORY
 • Stewardship Theory (Davis, et al., 1997) argues against the opportunistic self-interest
assumption of agency theory, claiming that managers are motivated by ‘a need to achieve,
to gain intrinsic satisfaction through successfully performing inherently challenging work, to
exercise responsibility and authority, and thereby gain recognition from peers and bosses’.
 • This perspective recognizes a range of non- financial motives for managerial behaviour and
it supports the active school, arguing that the strategic role of the board contributes to its
overall stewardship of the company

Resource Dependence Theory

 • Resource dependence theory stems from research in economics and sociology and focuses
on the role of interlocking directorates in linking firms to both competitors and other
stakeholders (Zahra and Pearce, 1989).
 • According to this theory, boards are a ‘co- optative’ mechanism for a firm to form links with
its external environment, to access important resources and to bugger the firm against
adverse environmental change.
 • However, as with agency theory, the implications of resource dependence theory for the
strategy role of boards are mixed.
 • While Stiles (2001) argues that the board's boundary spanning activity contributes to the
strategy role by bringing in new strategic information,
 others argue that resource dependence theory focuses on the role of the boards in attaining
resources rather than using such resources.
Effectiveness of Corporate Board
• Effectiveness of corporate board we mean the ability of the
board to exercise its powers. A board which asserts itself
against the powerful CEO and his team are said to be effective.
A board which is involved in its task of corporate governance in
an appropriate manner is to be effective.

A-good Board can't make a company, but a bad one will

inevitably kill it.
Factors Determining Board Effectiveness
 • Size of the Board
 • Composition of the Board
 • Individual Directors
 • Chairman of the Board
 • Board Meetings
 • Board Information
 • Board Diversity
 • Board Remuneration
 • Board Dynamics
 • Board Evaluation
 • Board Empowerment
 SIZE OF THE CORPORATE BOARD
Size of the board we mean number of directors in a board.
 • A board should have appropriate number of members - neither too small nor too
big.
 • The relationships between the size of a board and its effectiveness can be
delineated by an inverted U curve.
 • As the number of members in a board increases initially, more ideas and
knowledge can be added to the board and its effectiveness is improved.
 • However, as more members are added to the board after a certain threshold, the
problem of coordination and conflicts are turning more and more serious, and
offset the benefit of additional ideas and knowledge contributed by the additional
members. As a result, the board effectiveness will be jeopardized.
 • Research on team success suggests that bigger is not better when boards
exceed 15 or 20 members. When the number of directors climbs far above middle
range, the engagement of each diminishes and so too does their capacity to work
in unison.
 • corporate decision makers seem to consider both agency costs and resource
dependency when setting a firm's board size.
LEGAL POSITION

 Every public company (other than a deemed public company) shall have at
least 3 directors and every other company (e.g., a private company,
deemed public company) at least 2 directors (Sec. 252).
 • Subject to the statutory limit, the Articles of a company may prescribe
the maximum and minimum number of directors for its BODs (Sec. 258)
 • The number so fixed may be increased or decreased within the limits
prescribed by the Articles by an Ordinary Resolution in the General
Meeting.
 • Any increase in number of directors beyond the maximum permitted by
the Articles shall be approved by the Central Government (Sec. 259).
 • But where the increase in number does not make the total number of
directors more than 12, no approval of the Central Government is needed.
COMPOSITION OF THE BOARD
• Composition of corporate boards is as important as size of the board.
 • Every board should be well composed; in other words, it must have right
blend of people.
 • The composition of the board has to suit the company's business. There
has to be a match between the requirements of the firm from the board and
the knowledge base of the board.
 • The non-executive members of the board should be selected on the basis
of merit, professional qualifications, experience, personal qualities,
independence, and diversity.
Why Board Composition Matters?
 1. A board is expected to monitor, supervise and control the actions of CEO
and his team. More importantly, it has to help in developing and
implementing strategy
 2. A firm expects board to be resourceful; always aiding and assisting the
management team in periods of normal business conditions and during
crises.
 3.Theboardshouldhaveenoughabilitytoprovide assistance to the
management team as and when it is required.
Broadly speaking, board composition involves the following two aspects:
1. Board Independence
2. Board Diversity
Board Independence
 As far as possible, the corporate board should be independent; independent of
management and CEO.
 Independence of board is achieved by inducting 'independent directors' Greater the
number of independent directors, greater would be the independence of the board.
 The crux of board independence is deciding about the proportion of insider directors and
outside directors.
 There are merits and demerits of insider directors and outside directors

Board Diversity
 Another issue with which board composition is concerned is 'Board Diversity'.
 Diversity is the hallmark of effectiveness and is being emphasized in recent years by
several committees and experts.
 Board diversity can be defined as variety in the composition of the BOD.
 Board diversity refers to combinations of individual director attributes, characteristics
and experiences.
Sources of Diversity
 • Age

 • Gender

 • Tenure

 • Ethnicity

 • Culture

 • Religion

 • Constituency representation

 • Professional background

 • Knowledge

 • Technical skills

 • Expertise

 • Relevant industry career

 • Life experience
Directors
The company cannot act in its own person, for it has not person; it can only act
through directors.
• The BODs is the brain and the only brain of the company which is the body,
and the company can and does act only through them. It is only when the
brain functions that the corporation is said to
function.
• Sec 2 (13) defines a director as including 'any person occupying the position
of director by whatever name called:

Types of Directors
• Inside directors • Outside directors • Interested directors • Professional directors
• Special director • Nominee director • Independent director • Government director
• Whole-time director • Managing director • Small shareholder director
 • Inside directors are those who are in the whole- time employment of a company

 • Outside directors are those directors who are not in the whole-time employment of a
company and as such are not associated with its day-to-day working.
 • Professional directors are specialists in different fields of management with extensive
experience and capability of assisting in improving a given organization.
 • Nominee directors are appointed by financial institutions or banks, which extend term loans
and/or working capital assistance or any other type of financial assistance to companies.
 • Nominees of Government of India are government directors.

 • Director by Small Shareholders

Companies (Amendment) Act, 2000 has inserted in Sec. 252 (1) a new clause: A public company
having:
1. A paid-up capital of Rs. 5crore or more

2. 1,000 or more small shareholders

may have a director elected by such small shareholders. Small shareholders mean a shareholder
holding shares of nominal value of Rs. 25,000 or less in a public company.
 • A WTD includes a director in the whole-time employment of the
company. Thus, a WTD means a director who devotes all his time and
attention to the management of the company (Sec. 269 (1)).
 • Managing Director - Sec. 2 (26) of the Act, means a director, who, by
virtue of an agreement with the company or of a resolution passed by the
company in a general meeting or by its BODs or by virtue of its MOA or
AOA is entrusted with substantial powers of management which would not
otherwise be exercisable by him and includes a director occupying the
position of a MD, by whatever name called.
Legal Position of Directors
 • The Act does not lay down any qualifications for a person to become a director. However, it
lays down disqualifications.
 • Sec. 253 provides that only an individual and not a body corporate, association or firm shall
be appointed as director.
 • The true position of a company director is that of an agent.

 • BODs as a collective body is the agent of the company. A single director will have no authority
to bind the company unless such powers are specifically delegated to him by the BODs.
 To some extent, directors are also trustees for the properties of the company and of the rights
which are conferred on them law and conventions.
 • Barring directors in the whole-time employment of the company like the MD or ED, WTD, etc.,
directors are not in the employment of the company and they are not entitled to any
remuneration beyond what is allowed to them by the Act, i.e., fee for attending meetings of the
board & its committees.
 • There is no statutory requirement that a director must hold qualification shares in the
company in which he is a director.
 • Every public company shall have at least 3 directors and every private company shall have at
least 2 directors.
 • Sec. 275 prohibits the appointment of a person holding office of director in more than 15
companies. (Amendment Act, 2000 has reduced the number from 20 to 15).
Duties of Directors
• Statutory Duties
• Fiduciary and General Duties

Statutory Duties:
 Duty to attend board meetings
 Duty not to contract without board's consent
 Duty to disclose interest
 Duty of director to make disclosure of shareholding
 Duty in connection with the general meeting
 To disclose the receipts from transfer of property
 To disclose receipt of compensation from transferee of shares
 Duty to file declaration of insolvency - Sec. 77A (buyback of shares)
 To make a declaration of solvency in the case of a member's voluntary winding
up
Fiduciary and general duties
 •Duty not to be negligent and not to commit or let others to commit
tortuous act
 • Duty not to exceed powers
 • Duty to have regard to act in the best interests of the company and its
stakeholders
 • Duty to creditors if business is conducted with intent to defraud them
 • Duty of confidentiality
 • Duty not to exercise powers for a collateral purpose
 • Duty not to misapply company assets
 • Duty not to compete with the company
 • Duty not to make secret profits and make good losses if incurred due to
breach of duty, negligence, etc.
Socrates Method and Director
The thoughts of the Greek philosopher Socrates.
• Socrates's goal was exposing faulty thinking on issues of morality, justice and
democracy.
• Socrates's method was a series of linked questions designed to reveal
defective reasoning, confusion, inconsistency, poor preparation, unsound
conclusion and inappropriate behaviour.
• For Socrates, it was eureka when the authorities he was questioning
contradicted themselves for all including themselves to see.
• 'Ask enough of the right questions, in the right way and at the right time, and
the probabilities are high that everything worth knowing will be known and
everything worth exposing will be exposed.'
• Executive being questioned in a formal boardroom setting does not have the
option of refusing to answer; deferral for information is fine, but flat-out refusal is
something no executive can survive for long.
• The board's job is to make sure things are done properly and ethically, not to
do them.
Characteristics of Socratic Method
 Socratic Method is not some random, spur-of-the- moment bunch of questions. It has a number
of characteristics geared to getting to the essence of the corporation's capacity to compete,
prosper and grow.
 1. Socratic questions pertain to things that materially affect corporate prospects.

 2. Socratic director knows exactly what he/she wants to know and why knowing it is important.

 3. Socratic questions are a consequence of intense fact- finding and thought.

 4. Socratic director has carefully considered the possible answers that might be given to a
particular question so as to be ready with the next question.
 5. The Socratic method has nothing to do with making the questioner seem wise or important.

 6. The Socratic director does not be labour. He/she known when the issue at hand has been
properly explored and stops.
 7. The Socratic method should not scare, offend or embarrass competent, honest executive.

 8.The Socratic direct knows the corporation well enough to be genuine help to management.

 9.It is not important which director asks the questions; it is only important that they are asked
and that all directors pay close attention to the responses. The Socratic director is a superb
listener. It is when we are listening that we learn the most. Listening sharpens judgement.
 10. The Socratic method probes but does not provoke; it oversees but does not intrude; it is
candid but always respectful; it is constructive; it expands inquiry, it does not shut it off.
Chairman of the Board
 • Chairman of the Board is an important person in corporate governance of a
company. In fact, he is viewed as the 'Governance Head' of the firm.
 • He is a link between shareholders and management and represents the interests
of shareholders.
 • Making tomorrow's company out of today's sums up the basic role of every
chairman of the board
 • There is no legal definition of the term Chairman. In fact, a firm need not have a
permanent chairman, as per provisions of Company Law. Chairman is required only
to chair board meetings and other meetings of the company.
 • However, the role of Chairman goes beyond chairing meetings. He is required to
ensure high governance standards for the firm. He is regarded as public face or
image of the firm.
 • The chairman of the board is seen as a key figure in corporations, often being
responsible for driving the long-range vision of the company.
 • Many times, the board chairman is also one of the most visible spokespersons for
the company, conducting interviews and providing expert analysis not only relating
to his company, but also the general industry his company operates within.
 • Many times, the board chairman is referred to as the chairperson, a more
politically correct term, as it includes both men and women.
Section 175 provides that unless the articles of company provide, the
members personally present at the meeting shall elect one of themselves to
be the chairman thereof on a show of hands.
• Most of the companies, name in their articles the chairman of the meetings
of the board.

Regulation - 76 of Table A
 1. The Board may elect a chairman of its meetings and determine the
period for which he is to hold office.
 2. if no such chairman is elected, or if at any meeting the chairman is not
present within 5 minutes after the time appointed for holding the meeting,
the directors present may choose one of their number to be the chairman
of the meeting.
 3. As a matter of convention, the chairman of the meetings of the board is
a member on all the board committees and he presides over all the
committee meetings.
Key responsibilities of Chairman
• Chairing a board is a difficult and demanding task. Transforming a group of directors
into an effective board requires hard work.
• It is the chairman who has to ensure that the inside knowledge of the executive
directors and the outside experience of the non-executive directors is effectively
combined.
• Chairmen have to encourage board members to speak out as individuals and to work
together as a team.
• Establish and develop an effective Board;
• lead the Board as a team;
• plan and manage the Board's business;
• establish priorities for the company;
• maintain and develop a productive relationship with the company Chief Executive,
for whose recruitment he is responsible;
• with the Chief Executive, lead the communication of company policies with a wide
range of constituencies;
• represent the company on particular national and international financial institutions;
• establish and maintain high level contacts with the most important financial
institutions worldwide;
• act as an accountability focus for the company, chairing its annual public meeting, giving
evidence to select committees.
• represent company in the most senior meetings
• To convene and preside over board meetings and meetings of the independent directors
without management present;
• To provide leadership to the board and uphold high corporate governance and ethical
standards;
• To establish the processes the board uses in managing the responsibilities of the board and
committees;
• To organize and establish board agendas with assistance from the CEO, board committee
chairs, and the corporate secretary;
• To plan the agenda and provide sufficient time for discussion of agenda items;
• To supervise circulation of proper and relevant information to the directors in a timely
fashion;
• To ensure contribution from all directors at the meeting;
• To focus the board's attention on relevant matters, limit distraction and discord, and work
towards consensus;
• To communicate effectively with management on a regular basis;
• To act as a "sounding board" for the CEO; and
Should Chairman and CEO Role be Combined
 CEO duality (i.e., when the CEO also serves as chairman) violates the principle
of separation of decision-management and decision-control and hinders the
board's ability to perform its monitoring functions. Likewise, separating the two
positions is essential for board effectiveness, since a chairman/CEO cannot
perform control functions "apart from his or her personal interest."
Board Meetings
• Board meetings constitute another significant variable influencing the performance of
board. Board meetings provide an opportunity for the board to interact with CEO and his team
and get clarifications.
• A board which never meets or rarely meets is taken as a weak board
• Governance scandals have occurred the world over because boards of such companies have
not met or met very infrequently.
• Moreover, Directors enjoy powers. These powers are exercisable only in board meeting.
• A meeting may be generally defined as a gathering or assembly or getting together of a
number of persons for transacting any lawful business.
- There must be at least two persons to constitute a meeting
- Every gathering or assembly does not constitute a meeting
• However, mere fact that the board meetings are held is not a guarantee that governance
problems do not exist. Board meetings must be held effectively. The effectiveness depends
on:
- Number of meetings held
- Duration of board meetings
- Agenda of the meeting
Legal position
• Notice of every meeting of the BODs be given in writing to every director.
Notice must give data, time and place of the meeting. Sec. 286 does not
provide for a minimum day for giving a notice for convening a board
meeting.
• A general meeting has to be held at registered office during working hours
and on a day that is not public holiday. There are no such restrictions in the
Act regarding the meeting of the BODs.
• Sec. 172 (dealing with general meeting) every notice shall specify the
place, day, hour and statement of business.
• Every meeting of the BOD of a company shall be given in writing to every
director (Sec. 286).
•Sec. 285 A meeting of BOD shall be held at least once in every 3 months
and at least 4 such meetings shall be held in every year.
• Clause 49 of Listing Agreement of SEBI requires the listed companies to
which this clause is applicable to hold at least 4 board meetings in a year
with a maximum time gap of 4 months between any two meeting.
• Quorum is the minimum number of directors required to be present to
validly transact any business.
• Sec. 287 (2) 1/3rd of the total strength or two directors whichever is
higher. The quorum is required at every stage of the meeting.
• The law does not require an agenda for meeting of the directors.
• However, good practice demands agenda. Not only agenda or list of items
but notes on the items. Agenda must be circulated in advance.
• It is advisable to circulate along with the notes on agenda, the proposed
resolutions to be moved at the meeting and to be passed by the directors.
Board Dynamics
• Board effectiveness is also determined by the dynamics flowing among the board members.
• Board dynamics indicate the way the board members act and react. A mutual and
coordinating relationship among the members help board in resolving many governance
problems.
• On the other hand, fi board members are divided, or lack proper cooperation, the board
fails in its duties. A divided house is used to greater extent by the CEO and his team to
weaken the governance standards.
• Maintaining proper board dynamics is the sole responsibility of board chairman and to some
extent that of corporate CEO. To improve or
increase dynamics level, the following measures may be used:
1. Proper selection procedure for board members
2. An evaluation of performance of individual directors and that of team as a whole.
3. An attractive remuneration package
4. Training board members
5. Provision of proper agenda with decision notes.
6. Dynamic chairman
7. Giving equal opportunity to all board members
8. Comprehending difficult situation and taking appropriate action
Board remuneration
• Board members hold position not for gratia (favor, not compelled by legal
right).
• There has to be adequate honorarium for members to involve themselves
functions.
• Board members are paid both sitting fees as well as remuneration.
• The Central Government has increased sitting fees from Rs.1,000 per meeting
to Rs. 5,000; again, to Rs. 25,000.
• The remuneration payable to the directors of a company, including any
managing or whole-time director, shall be determined, in accordance the
provisions given in law either by the articles of the company, or by a resolution (
special resolution fi the articles so require ), passed by the company in general
meeting and the remuneration payable to any such director determined as per
the said provisions shall be inclusive of the remuneration payable to such
director for services rendered by him in any other capacity.
• A director who is in whole time employment of the company or a managing
director may be paid remuneration either by way of a monthly payment or at a
specified percentage of net profits of the company or partly by one and partly by
the other.
 A director who is neither in the whole-time employment of the company
nor a managing director may be paid remuneration either by way of a
monthly, quarterly or annual payment with the approval ofthe central
government or by way of commission if the company by special resolution
authorizes such payment.
 If any director receives any remuneration in excess of the permissible limit,
he will have to refund such sums to the company and until such sum is
refunded, he shall hold it in trust for the company. Even the company
cannot wave the recovery of such sum unless permitted by central
government.
Information to Corporate Board
• Information is key to the working of corporate boards.
• An informed board is more powerful/effective than an uninformed board
because information is power.
• "Information is the lifeblood of effective governance." Olivia Kirtley.
• However, the relationship between information and board effectiveness is
not always linear. Effectiveness increases with the increase in information
but up to a point. Afterwards, further increase in information can lead to
'information overload'.
• Further, quality of information supplied also matters. Other things being
equal, higher the quality of information, higher would be the effectiveness of
the board. However, higher the quantity of information, lower would be the
quality of information. Quantity and quality are inversely related. Higher
quantity produces lower quality.
Type of board information
• Board's informational needs are complex, difficult to understand, varied and unlimited.
• A board requires every bit of company information.
• Such requirements are both quantitative and qualitative; both financial and strategic.
• Boards need to balance external and internal information, applying their wisdom and
experience to recognize problems, develop solutions, and take (or direct) action.
• A board gets the required information either from corporate sources and from non-
corporate sources. The major source of board information is CEO and insiders. The
insiders have to provide the required information.
• Board members should devote some time to develop their own sources of information.
Many governance problems have arisen from poor management decisions, hidden and
often compounded through inadequate information disclosure to the board. However, if
the board relies solely on management reports, the risk is that information may be
incomplete, filtered, or edited, even in good-faith ways.
• Directors should periodically review the company's information-reporting format and
content to ensure that they adequately inform the board and its committees on all
topics relevant to corporate growth and well-being.
Information to be placed before BODs
• Annual operating plans and budgets and any updates
• Capital budgets and any updates
• Quarterly results for the company and its operating divisions or business segments
• Minutes of meetings of audit committee and other committees of the board
• The information on recruitment and remuneration of senior officers just below the board level,
including appointment or removal of CFO and the company secretary
•cause, demand, prosecution notices and penalty notices which are materially important
• Fatal or serious accidents, dangerous occurrences, any material effluent or pollution problems.
• Details of any joint venture or collaboration agreement.
• Transactions that involve substantial payment towards goodwill, brand equity, or intellectual
property.
• Significant labour problems and their proposed solutions. Any significant development in
HR/industrial relations front like signing of wage agreement, implement of VRS, etc.
• Sale of material nature, of investments, subsidiaries, assets, which si not in normal course of
business.
• Quarterly details of foreign exchange exposures and the steps taken by management to limit the
risks of adverse exchange rate movement, fi material.
• Non-compliance of any regulatory, statutory nature or listing requirements and shareholders service
Board Evaluation
• Rare is the company that does not periodically review the performance of its key
contributories.
Meaning of Board Evaluation
• It is a structured means for obtaining input from individual directors on board and
committee progress toward compliance with applicable rules and accomplishment of
specified goals.
• in addition, if the process is structured to elicit suggestions for improvement, it can
provide a forum for brainstorming improved governance ideas

Reasons for Board Evaluation

• Institutional investors activism
• Can clarify Individual and collective roles
• May also Improve the working relationship between a company's board and its
management
• Changing roles and rewards for corporate directors
• Growing number of corporate scandals and boards failure to control
• Increasing expectation of market for boards to perform
• Governance code requirements of several countries
Areas to be evaluated
• Resources
- Knowledge, information, power, motivation and time

- Knowledge
• There must be a match between knowledge of directors and strategic demands

- Information
• information should be available from internal and external source

- Power
• The Board requires effective powers

- Motivation
• Stock v/s cash
-Time
• How often boards meet
• Time devoted

• Board Structure and Process

- Size
- Composition
- Secretarial Assistance
- Agenda, Notices, Minutes, etc.
- Schedule of meetings
- Duration
- Board room dynamics
- Chairman, CEO and Board Relationship