Good Governance of Business House
Secret of Success in Business
Good Governance Day is observed in India annually on the twenty-fifth day of December (25th Dec) every year, the birth anniversary of the former Prime Minister of INDIA late Shri Atal Bihari Vajpayee.
So, I published this article on 25th Dec 2023. I am sure readers will enjoy this article. Written a little elaborately to present the idea of Good Governance in Business Houses, especially in Bharat.
This article is written keeping the Indian Business House in mind mainly.
Good governance in the business house creates transparent rules and controls, provides guidance to leadership, and aligns the interests of shareholders, directors, management, and employees. It helps build trust with investors, the community, and public officials
In this twenty-first century in the era of science & technology every field of business is growing very rapidly and globally and in every organization good Business House governance is very much necessary for the efficient consistent growth rate of the organization and to run the business at an optimum cost. By this period INDIA has become 5th Largest economy Globally, and by 2030 expected to become 3rd largest Economy Globally.
At the same time, because of the highly effective and sensitive era of social media, any information is available at the fingertip as a result all the stakeholders are also educated equally at present.
So transparency in totality plays a very important role for any stakeholder. Stakeholders' expectation has also gone up; in the case of the corporate house, the stakeholders do not expect boards to be simply compliant only through the YES/NO tick mark.
The expectation of the stakeholders in the matter pertaining to Equity, accountability, integrity, inclusivity, and corporate responsibility is to be handled with competency by the board as a part of Good Business House governance. Good Business House governance is a very important aspect of globalization and crosses any boundaries and evolves in a continuous manner. So there are significant developments happening in Business House governance globally, hence the role of independent directors, diversity & board practices are becoming very important with respect to stakeholders, audit, compensation, and fraud.
Business House governance is the combination of the strong commitment of the management to safeguard the interest of the different stakeholders, openness in ideas, fresh air for enterprises, and corporate ethics.
Historically few corporate scams indicate that the Business House governance is not so reliable and efficient.
1. Concept and Definition of Business House governance -
Governance is the process whereby elements in society wield power and authority, and influence and enact policies and decisions concerning public life, and economic and social development.
Business House governance is a system of structures and processes to manage, direct, and control companies, also specifies the distribution of rights and responsibilities among the company’s stakeholders and articulates the rules and procedures for making decisions on corporate affairs. In a way, Business House governance provides the structure for defining, implementing, and monitoring a company’s goals & objectives and ensuring accountability to appropriate stakeholders.
Business House governance refers to the framework of policies and guidelines that inform a company’s conduct, decision-making, and practice. This infrastructure is built upon four key principles: accountability, transparency, fairness, and responsibility.
Hence, As a result, good governance-
· Minimises the potential for corruption
· Increases inclusion and the ability to benefit from diverse thinking
· Reacts to the needs of society, both now and in the future
2. Perspective of Business House governance-
Business House governance covers the areas of environmental awareness, ethical behavior, corporate strategy, compensation, and risk management. The basic principles of Business House governance are accountability, transparency, fairness, responsibility, and risk management.
The governance perspective focuses on orchestrating your cloud initiatives while maximizing organizational benefits and minimizing transformation-related risks. It comprises seven capabilities shown in the following figure. Common stakeholders include the chief transformation officer, CIO, CTO, CFO, CDO, and CRO.
3. Principles of Business House governance-
Any Good governance has nine major principles or characteristics-
A. Participation
The “participatory” nature of good governance requires that boards — and organizations overall — become more equitable and diverse. Moreover, these diverse board members and employees cannot be silent partners; they need an active voice in the corporate decision-making process. The board may play a key role in driving diversity, but equally, diversity within the board itself drives better thinking. But beware of tokenism; the importance of transparency in good governance cannot be overstated. Strong, well-composed boards both include and value the views of people with various skills, talents, abilities, experiences, and perspectives.
Boards should expect all of their members to participate in board meetings, and a commitment to good Business House governance practices demands that board chairs facilitate meetings in ways that draw out the perspectives of all board directors.
B. Consensus-Oriented
The boardroom is an appropriate forum for hosting robust discussions and debates. In fact, it’s expected. Some of the most heated debates result in the best decisions, as representatives from many different walks of life come together with varying perspectives.
Good governance means securing agreement from these discussions. Consensus-oriented decision-making has to take on board the different needs and perspectives of this diverse group to deliver a broad consensus that will serve the best interests of communities and companies.
C. Accountability
Accountability is a crucial characteristic of good governance, just as it is in many other areas of business and societal life. Boards of directors are accountable to groups and individuals affected by their decisions, including their shareholders, stakeholders, vendors, employees, and the general public.
Transparency and the rule of law go hand-in-hand with accountability; transparency is one of the core values of good governance, and it both drives and evidences accountability.
D. Transparency
Good Business House governance requires that records and processes are transparent and available to shareholders and stakeholders. Financial records should not be inflated or exaggerated. Reporting should be presented to shareholders and stakeholders in ways that enable them to understand and interpret the findings.
Transparency means that stakeholders should be informed of key corporate contacts and told who can answer questions and explain reports, if necessary. Corporations should provide enough information in their reports so that readers get a complete view of the issues.
E. Responsiveness
All too often, the corporate world’s focus can be taken up by sudden crises and controversies. A timely response to the unexpected is crucial, with corporations that practice good governance usually able to prioritize swift and honest communication with shareholders and stakeholders.
F. Effectiveness and Efficiency-
- Effectiveness: the degree to which something is successful in producing the desired result.
- Efficiency: the ability of something to achieve the desired optimum results with the least amount of wasted time, money, resources, and effort.
As planners and overseers, board directors are responsible for conducting their duties effectively and efficiently. Many corporations also consider the environmental impact as they perform their duties and responsibilities. For example, using the drive for good governance as an impetus for digital transformation, an organization may transition from manual paper processes to more environmentally friendly software solutions, such as the integrated suite of board leadership and collaboration tools.
G. Equity and Inclusiveness
Each board director has an equal seat at the board table. Each director can and should use their voice to share their experiences, opinions, and philosophies to enhance and broaden discussions. No one should feel left out or that their views have less meaning than others.
This same ethos should pervade the entire organization, with a culture of diversity and inclusion underpinning all of your operations. Diversity, equity, and inclusion (DEI) are core elements of good governance.
H. Rule of Law
The rule of law means boards should be fair and impartial in their collaborations and decision-making. Certain circumstances may require boards to seek outside counsel, guidance, or expertise from external, third-party experts. Whether making decisions themselves or working with third parties, good Business House governance requires boards to act ethically, honestly, and with the utmost integrity.
I. Strategic Vision
One of the primary responsibilities of board directors is strategic planning, which includes the organization’s mission, vision, and values statements. Strategic planning leads boards to understand where the corporation is going and how it will get there. Good Business House governance requires a robust planning process, incorporating action plans, budgets, operating plans, analysis, reporting, and much more. The strategic plan holds board members accountable for their decisions and for monitoring their goals. Strategic planning also includes risk management and protecting the company’s reputation, and as such, is an opportunity for organizations to put into practice many of the good governance principles they espouse.
1. Business House governance Pillars –
Corporate Pillar means all Participants that are either Participant Companies or Engaged Companies. It is the foundation of trust among shareholders, directors, and managers. Business pillars are core areas of a business that a company believes maximizes its chances for success.
There are four corporate pillars — a. Accountability, b. Fairness, c. Transparency, d. Independence.
a. Accountability- Directors should be held accountable for their decisions and actions to shareholders and in certain cases to key stakeholders, submitting themselves to rigorous scrutiny.
b. Fairness- All shareholders should receive equal, just, and unbiased consideration by the directors and the management.
c. Transparency- Directors should clarify to shareholders and other key stakeholders why every material decision has been made.
d. Independence- directors should carry out their duties with honesty, righteousness, and integrity.
1. Business House governance Framework-
Regarding the company’s formation and its operation, every country has its legislation & regulations specifying its formation & operation requirements. However, there is often a body of additional laws that may affect the board’s behavior and decisions. These laws, rules, and regulations may involve-
1. Company
2. Insolvency
3. Director disqualification
4. Safety
5. Employment
6. Environment
7. Intellectual property
8. Consumer protection
9. Competition
10. Financial
11. Stock exchange listing regulations.
The Articles of Association may be known as the company’s constitution; provisions are like-
1. Maximum Authorised share capital
2. Shareholder’s rights
3. Alteration of capital
4. General Assemblies
5. Shareholders vote
6. Borrowing powers
7. Appointment/powers/duties of directors and the CEO
8. Disqualification of directors
9. Board proceedings
10. Appointment/powers/duties of the director and the company secretary
11. Issuance of dividends and company reserves
12. Accounts and audit
13. Special provisions associated with winding up/liquidation
Board of Directors- Who is the Board of Directors?- a body of elected or appointed members who jointly oversee the activities of a company or organization. The body sometimes has different names, such as the Board of Trustees, Board of Governors, Board of Managers, or Executive Board.
2. Composition and structure of Board of Directors-
A. As per section 149 of the Companies Act, 2013-
No. of Directors
A. As per regulation 17(1) of SEBI(LODR) Regulations, 2015 the composition of the Board of Directors of the listed entity shall be as follows-
a. Board of directors shall have an optimum combination of executive and non-executive directors with at least one woman director and not less than fifty percent of the board directors shall comprise non-executive directors, provided that the board of directors of top 1000 listed entities shall have at least one independent woman director.
b. When the chairperson of the board is a non-executive director, at least 1/3 of the board of directors shall comprise independent directors, and where the listed entity does not have a non-executive chairperson, at least half of the board of directors shall comprise independent directors, provided that where the regular non-executive chairperson is a promoter of the listed entity or is related to any promoter or person occupying management positions at the level of board of director or at one level below the board of directors, at least half of the board of directors of the listed entity shall consist of independent directors.
c. The board of directors of the top 2000 listed entities shall comprise not less than 6 directors.
d. Where the listed entity has outstanding SR equity shares, at least half of the board of directors shall compromise of independent directors (the top 500/1000/2000 entities shall be determined on the basis of market capitalization, as at the end of the immediate previous financial year)
Role of the board –
The board’s key role is to ensure the company’s prosperity by collectively directing the company’s affairs while meeting the appropriate interests of its shareholders and relevant stakeholders, keeping focus on Governance, Strategic direction, and Accountability.
The role of the board is as below-
a. Establish vision, mission, and values
b. Set strategy and structure
c. Delegation of authority to management
d. Exercise accountability to shareholders and be responsible for relevant stakeholders
a. Establish vision, mission, and values-
· Determine the company’s vision and mission to guide and set the pace for its current operations and future development.
· Determine the values to be promoted throughout the organization.
· Determine and review the organization’s Goals.
· Determine the organization’s policy
b. Set strategy and structure-
· Review and evaluate present and future opportunities, threats, and risks in the external environment and current and future strengths, weaknesses, and risks relating to the company.
· Determine the strategic options, select those to be pursued, and decide the means to implement and support them.
· Determine the business strategies and plans that support the corporate strategy.
· Ensure that the company’s organizational structure and capability are appropriate for implementing the chosen strategies.
c. Delegation of authority to management
· Delegate authority to management, and monitor and evaluate the implementation of policies, strategies, and business plans.
· Determine the monitoring criteria to be used by the board.
· Ensure the internal controls are effective.
· Communicate with senior management.
d. Exercise accountability to shareholders and be responsible for relevant stakeholders
· Ensure that communications both to and from shareholders and relevant stakeholders are effective.
· Understand and take into account the interests of shareholders and relevant stakeholders.
· Monitor relations with shareholders and relevant stakeholders by gathering and evaluating appropriate information.
· Promote the goodwill, and support of shareholders and relevant stakeholders.
What is a balanced board?
A balanced Board will typically comprise a dynamic mix of personalities from a wide range of backgrounds, with varying interests and frames of reference, and different viewpoints and approaches to problem-solving.
According to Tony Kellett in ‘Board Dynamics’, there are four independent and interdependent forces that combine to make up the optimal Board capability or skill set. These are:
- Strategic — the big picture or vision for the organization.
- Operational — the detail around the actions and plans to deliver the strategy.
- Drive — the company accelerator and entrepreneurial ‘forward force’, which drives it around obstacles and towards achieving strategic goals.
- Risk Monitor — the company breaks and objective governance, to identify risk areas and prevent the company from making mistakes or taking the wrong turn.
These four areas must remain in balance. For example, a Board leaning too far towards Risk Monitoring may become overly cautious, while too much emphasis on Drive could make for a reckless and cavalier leadership team. This underlines why the regular review is so essential.
1. a. Role of the chairman-
The Chairman is responsible for leading the Board and focusing it on strategic matters, overseeing the Group’s business, and setting high governance standards.
The Chairman shall chair all Board and general meetings of the Company. set the Company’s values and standards and ensure that its obligations to its shareholders and others are understood and met. As a non-executive Chairman, you shall have the same general legal responsibilities to the Company as any other Director
The roles of a chairperson are to set the agenda, lead the meeting, maintain order at the meeting, ensure the conventions of the meeting are being followed, ensure fairness and equality at the meeting, represent the group to the public, and approve the formal minutes of the meeting after they have been formatted. Also
The role of a chairperson is to help meetings run smoothly and efficiently while ensuring the agenda is followed. It is their responsibility to lead the meeting, maintain order, and ensure everyone gets to have their say
The chairman is responsible for making sure agreed tasks are carried out, and making decisions between meetings if necessary. Before meetings, the chair should plan and understand the agenda and ensure all necessary information is available.
During the annual general meeting, the Chairman Chairing the Board and Nomination Committee meetings and encourages effective engagement of all Board members by drawing on their skills, experience, and knowledge. b. Setting the Board agenda, taking into account the issues and concerns of all Board members and the Company Secretary.
In committee, the chairperson is responsible for organizing the agenda and ensuring that each committee member attends every meeting. They may also be tasked with preparing reports and presenting them to the rest of the committee members.
The roles of a chairperson are to set the agenda, lead the meeting, maintain order at the meeting, ensure the conventions of the meeting are being followed, ensure fairness and equality at the meeting, represent the group to the public, and approve the formal minutes of the meeting after they have been formatted.
b. Powers of Chairman of the Board-
The chairperson of the board is the leader of the corporate board and is responsible for directing its activities. This includes planning board meetings, presiding over them, and setting board resolutions. The board chairman may also work with the CEO to appoint new board members and assess the performance of the board.
The chairman of a company’s board of directors is superior to the CEO. A company’s CEO must seek board approval to make any significant decisions. As head of the board, the chairman holds considerable sway over how the board votes on decisions proposed by the CEO.
The chair of the board is voted into his or her position by a majority vote within the board of directors. Because the position has substantial interaction and influence with both the board and management, the chair is arguably the most powerful position in the company.
The powers of a chairman are stated below-
i) Casting the vote of the chairman in case of equality of votes, unless otherwise provided in the articles.
ii) Power to adjourn the meeting in extraordinary circumstances.
iii) Power to order a poll in a general meeting.
iv) Power to regulate the manner in which voting is conducted at the meeting.
v) Power to exclude from the minutes, matters which in his opinion are or could reasonably
2. Duties of the directors-
Set the organization’s strategic direction, defining its mission, vision, and values.
Approve and monitor the implementation of strategic plans and initiatives.
Evaluate the organization’s performance against strategic goals and make adjustments as needed.
As per Section 166, chapter XI of the Companies Act, 2013, the following are the duties of directors-
i) A director of a company shall act in accordance with the articles of association(AOA) of the company.
ii) A director of a company shall act in good faith in order to promote the objects of the company for the benefit of its members as a whole and in the best interests of the company, its employees, the shareholders, the community, and for the protection of the environment.
iii) A director of a company shall exercise his duties with due and reasonable care, skill, and diligence and shall exercise independent judgment.
iv) A director of a company shall not be involved in a situation in which he may have a direct or indirect interest that conflicts, or possibly may conflict, with the interest of the company.
v) A director of a company shall not achieve or attempt to achieve any gain or advantage either to his relatives, partners, or associates, and if such director is found guilty of making any undue gain, he shall be liable to pay an amount equal to the organization.
vi) A director of a company shall not assign his office and any assignment so made shall be void.
vii) If a director of a company contravenes the provisions of this section, such director shall be punishable with a fine which shall not be less than One lakh INR but which may be extended to INR five Lakh.
Apart from the duties set out in section 166, directors are also responsible for various obligations provided under other sections of the Companies Act 2013, for example-
i) The board needs to lay the financial statements for approval and adoption at the annual general meeting of the shareholders (Section 129).
ii) The directors are responsible for devising proper systems to ensure compliance with the provisions of all applicable laws and to ensure that such systems are adequate and are operating effectively.
iii) The board shall ensure that in the preparation of annual accounts, the applicable accounting standards have been followed along with a proper explanation of material departures (section 134).
iv) The directors are required to select such accounting policies and apply them consistently and make judgments and estimates that are reasonable and prudent to give a true and fair view of the state of affairs of the company at the end of the financial year and of profit and loss account for that period (section 134).
v) The directors are required to take proper and sufficient care for the maintenance of adequate accounting records following the provision of the act for safeguarding the assets of the company and for preventing and detecting fraud and other irregularities (section 134).
vi) Directors should prepare the annual accounts on a going-concern basis (section 134).
vii) Directors in the case of listed companies have to lay down internal financial controls to be followed by the company and such internal controls should be adequate and should be operating effectively. (section 134).
viii) Directors need to ensure that the company complies with obligations relating to corporate social responsibility provided under section 135.
ix) The board is responsible for appointing the first auditors within 30 days of incorporation of the company, and such auditor shall hold the office until the conclusion of the first annual general meeting (section 139).
x) A director needs to disclose his concern or interest in any company or companies or body corporates, firms or such association of individuals including the shareholding to the company at the First meeting of the board in which he participates, the first board meeting in the financial year and whenever there is any change in the disclosure already made, then at the first board meeting held after such change (Section 184).
xi) The board is responsible for the appointment of whole-time key managerial personnel (section 184)
xii) The directors are responsible for the issuance of notice and holding of board meetings and general meetings etc.
1. Power of Board –
The board of directors is the highest authority in any company. According to Section 179, Companies Act 2013, the power of directors of a company — are entitled to make any and all decisions, and thus exercise all the power, that the company has the authority to enact, As per Section 179, the Board of Directors can, using a resolution passed at a board meeting, delegate its powers to borrow money, invest funds, grant loans, or give securities to any committee, managing director, manager or principal officer of the branch office.
Powers of the board under the Companies Act 2013
i) The board of directors of a company shall be entitled to exercise all such powers and do all such acts and things as a company is authorized to do.
ii) No regulation made by the company in a general meeting shall invalidate any prior act of the board which has been valid if that regulation had not been made.
iii) The board of directors of a company shall exercise the following powers on behalf of the company using resolutions passed at meetings of the board, namely-
a) To make calls on shareholders in respect of money unpaid on their share.
b) To authorize the buyback of securities under section 68.
c) To issue the securities including debentures, whether in or outside INDIA.
d) To borrow money.
e) To invest in the fund of the company.
f) To grant loans or give guarantees or provide security in respect of loans.
g) To approve financial statements and the board’s report.
h) To diversify the business of the company.
i) To approve the amalgamation, merger, or reconstruction.
j) To take over a company or acquire a controlling or substantial stake in another company.
k) To make political contributions
l) To appoint or remove any key managerial position
m) To appoint internal auditors and secretarial auditor
iv) The company in general meetings can impose restrictions and conditions on the exercise by the board of any of the powers specified above.
Delegation of the powers by the board-
i) A delegate is a person or entity designated to act for, or represent, another or others, in this case, the board, when a function is designated, the board is not absolved of the responsibility and remains accountable for what occurs on account of such delegation. A board may delegate responsibilities to a subcommittee, CEO, board member, or employee.
ii) Delegation of powers is an effective instrument for expeditious decision-making and efficient management
iii) The board may, by a resolution passed at a meeting, delegate to any committee of directors, the managing director, the manager, or principal officer, the following powers-
a. To borrow money
b. To invest the funds of the company
c. To grant loans or give guarantee or provide security in respect of loans.
iv) The word delegation implies that powers are committed to another person or body, which is as a rule always subject to resumption by the power delegating.
v) It is advisable that all decisions that are not in the ordinary course of business should always be authorized by a board resolution.
vi) The decisions taken by the board in the larger interest of the stakeholders are to be exercised with caution and diligently.
Restrictions on the power of boards-
i) To sell, lease, and otherwise dispose of the whole or substantially the whole of the undertaking of the company, or where the company owns more than one company.
ii) To invest otherwise in trust securities, the amount of compensation received by it as a result of any merger or amalgamation.
iii) To borrow money, where the money is to be borrowed.
iv) To remit or give time for the repayment of any debt due from a director.
2. Disclosure of interest by Director-
i) Every director shall at the first meeting of the board in which he participates as a director and thereafter at the first meeting of the board in every financial year or whenever there is any change in the disclosures already made, then at the first board meeting held after such change, disclose his concern or interest in any company or companies or bodies corporate, firm or other association of individuals which shall include the shareholding, by giving a notice in writing.
ii) Every director of a company who is in any way, whether directly or indirectly, concerned or interested in a contract or arrangement or proposed contract or arrangement entered into or to be entered.
iii) A contract or arrangement entered into by the company without disclosure or with participation by a director who is concerned or interested in any way directly or indirectly, in the contract or arrangement, shall be voidable at the option of the company.
iv) It shall be the duty of the director to give notice of interest to cause it to be disclosed at the meeting held immediately after the date of the notice.
v) If the director of a company contravenes the provision of point(1) or subsection(2), such director shall be liable to a penalty of one lakh rupees.
vi) All notices shall be kept at the registered office and such notices shall be preserved for eight years from the end of the financial year to which it relates and shall be kept in the custody of the company secretary of the company or any other person authorized by the board for the purpose.
3. Role and function of Independent Directors(ID)-
Facilitate withstanding and countering pressures from owners. Fulfill a useful role in succession planning. On issues such as strategy, performance, risk management, resources, key appointments, and standards of conduct he or she must support gaining independent judgment to bear the board’s deliberations. The independent director must try to keep himself updated about the company and the external environment under which it operates.
An independent director
i) Helps in bringing an independent judgment to bear on the Board’s deliberations, especially on issues of strategy, performance, risk management, resources, key appointments, and standards of conduct.
ii) Brings an objective view in the evaluation of the performance of the board and management.
iii) scrutinizes the performance of the management.
iv) Satisfy themselves with the integrity of financial information and financial controls.
v) Safeguard the interest of all stakeholders, particularly, the minority shareholders.
vi) Balance the conflicting interests of the stakeholders
vii) Determine appropriate levels of remuneration.
4. Guidelines for professional conduct for Independent Directors-
An independent director shall:
· Uphold ethical standards of integrity and priority.
· Act objectively and constructively while exercising his duties.
· Exercise his responsibilities in a bona fide manner in the interest of the company.
· Devote sufficient time and attention to his professional obligations for informed and balanced decision-making.
· Not allow any extraneous consideration that will vitiate his exercise of objective independent judgment in the paramount interest of the company as a whole, whole concurring in or dissenting from the collective judgment of the board in its decision-making.
· No abuse of his position to the detriment of the company or its shareholders or to gain direct or indirect personal advantage or advantage of any associated person.
· Refrain from any action that would lead to loss of his independence.
· Where circumstances arise that make an independent director lose his independence, the independent director must immediately inform the board accordingly.
· Assist the company in implementing the best Business House governance practices.
5. Board meetings- The Board can exercise its powers in the board meetings through a board process.
i) Physical Board meeting- A board meeting held in person where the directors are personally present.
ii) Circular resolutions-
a) The Companies Act 2013 requires a certain business to be approved only at meetings of the board. However, other business that requires urgent decisions can be approved using resolutions passed by circulation under section 175. Resolutions passed by circulation are deemed to be passed at a duly convened meeting of the board and have equal authority.
b) No resolution shall be deemed to have been duly passed by the board or by a committee thereof by circulation, unless the resolution has been circulated in draft, together with the necessary papers.
c) A resolution shall be noted at a subsequent meeting of the board or the committee thereof.
d) Secretarial std1 issued by The Institute of Company Secretaries of India prescribes the matters which cannot be passed by circulation.
iii) Video conferencing or other audio-visual system-
· Video Conferencing or other audio-visual means audio-visual electronic communication facility employed which enables all the persons participating in a meeting to communicate concurrently with each other, without an intermediary, and to participate effectively in the meeting.
· Directors participating through electronic mode in a meeting shall be counted for Quorum.
· Company secretary shall keep records of the request and details furnished by the directors, which shall be noted and recorded in the minutes.
Quorum, Frequency, and Calling Notice -
a) Every company shall hold the first meeting of the Board of Directors within 30 days of its incorporation and thereafter hold a minimum number of four Meetings of its Board of Directors every year in such a manner that not more than one hundred and twenty days shall intervene between two consecutive meetings of the board.
b) A one-person company, small company, dormant company, and a pvt limited company which is a startup to conduct at least one meeting of the board of directors in each half of the calendar year, and the gap between the two meetings to be not less than 90 days.
c) Notice: A meeting of the board shall be called by giving not less than seven days notice in writing to every director at his registered address with the company and such notice shall be sent by hand delivery or by speed post or registered post (Courier not allowed) or by email or by electronic means. Provided that a meeting of the board may be called at shorter notice to transact the urgent business subject to the condition that at least one independent director, if any, shall be present at the meeting.
Provided further that in case of absence of independent directors from such a meeting of the board, decisions taken at such a meeting shall be circulated to all the directors and shall be final only on ratification thereof by at least one independent director, if any.
Provided further where there is no independent director or the company is not mandated to appoint an independent director, a meeting of the board may be called at a shorter notice subject to the condition that the majority of the directors of the company are present at the meeting.
Provided further that if the majority of the directors are present at the meeting, called at shorter notice, decisions taken at such a meeting shall be circulated to all the directors and shall be final only on ratification thereof by the majority.
d) Agenda: Sets out the business to be transacted at the meeting, and shall be given to the directors at least 7 days before the date of meetings, unless the articles prescribe a longer period. It shall be sent to all directors by hand or by post (by speed post or registered post ( Courier not allowed) or by email or by electronic means.)
e) Quorum: The quorum for a meeting of the board of directors of a company shall be one-third of its total strength or two directors, whichever is higher and the participation of the directors by video conferencing or by other audio-visual means shall also be counted for quorum under this subsection.
The quorum for every meeting of the board of directors of the top 2000 listed entities would be one-third of its total strength or three directors, which is higher, including at least one independent director (WEF 01/04/2020).
Explanation: Participation of the directors by video conferencing or by other audio-visual means shall also be counted for such quorum.
The top 2000 listed entities shall be determined based on market capitalization as of the end of the immediate previous financial year.
f) Finalization of the Minute: Within 15 days from the date of the conclusion of the meeting of the board of the committee, the draft minutes thereof shall be circulated to all the members of the board or the committee for their comments by hand or by speed post or by registered post or by email or by any other recognized electronic means. Where a director specifies a particular means of delivery of draft minutes, these shall be sent to him or her by such means.
6. Board effectiveness –
i) The board’s role is to provide the entrepreneurial leadership of the company within a framework of prudent and effective controls that enable risk to be assessed and managed.
ii) An effective board develops and promotes conducting its business. In particular, it.
a) Provides direction for management.
b) Demonstrates ethical leadership, displaying and promoting throughout the company behavior consistent with the culture and values it has defined for the organization.
c) Creates a performance culture that drives value creation without exposing the company to excessive risk of value destruction.
d) Makes well-informed and high-quality decisions, based on a clear line of sight into the business.
e) Is accountable, particularly to those that provide the company’s capital and
f) Thinks carefully about its governance arrangements and embraces evaluation of their effectiveness.
iii) An effective board shall not necessarily be a comfortable place. The challenge, as well, as teamwork, is an essential feature. Diversity in board composition is an important driver of the board’s effectiveness, creating a breadth of perspectives among directors, and breaking down a tendency toward groupthink.
iv) An effective board shall create a board mandate, which is a clear list of board responsibilities, so there is clarity as to what the responsibility of the board is and what the responsibility of the management is. Developing such a list is a useful way of ensuring that everyone understands their role is not stepping on anyone’s toes and that there are no surprises.
v) An effective board shall establish several committees that are responsible for company-specific matters. Commonly established committees include the audit committee, Nomination and remuneration committee, risk management committee, stakeholders’ relationship committee, Business House governance committee, etc.
Keys to improving the board's effectiveness-
a. Evaluate the Board’s performance
b. Create a climate of trust and candor
c. Foster a culture of open dissent
d. Ensure individual accountability
7. Dysfunctional boards- a dysfunctional board can cause multiple headaches for one’s business or organization. Not only will a dysfunctional board often fail to make decisions that are in the best interest of the organization, but its dysfunction also has the potential to move outside the confines of the boardroom, causing negative publicity. Knowing the signs of a dysfunctional board of directors will help one fix the board before larger problems occur.
i) Lack of confidentiality- Much of what the board of directors discusses should be kept within the organization. When board members do not keep this information confidential, problems often ensue. Members of the board may think they are simply sharing the information with close friends, but it could be misconstrued and released to stockholders, causing undue stress, or shared with competing organizations. Leaking information is a sign of dysfunction within a board.
ii) Conflicting agendas- Board members need to be on the same page when it comes to the future of the organization and its initiatives. If board members have conflicting agendas related to the direction of the organization, it will be hard for the board to make decisions. In addition to being on the same page as one another, board members must also be on the same page as the head of the organization. conflicting agendas are another sign of dysfunction within an organization’s board of directors.
iii) Lack of order- Meetings involving the board of directors should function in an orderly manner. If board members quickly jump from topic to topic, argue with one another, or fail to discuss the most important matters at hand, the board is dysfunctional. Board meetings should contain a designated leader and an agenda to make them productive.
iv) Lack of Respect- Occasionally the board members experience a lack of respect for the CEO of a company and vice versa. This often happens when board members have been in a place for a long time, and a new CEO enters the company. All parties must develop respect for one another based on their common interest in working for the good of the organization to keep the board from being dysfunctional. A lack of respect between new and old board members of factions is a sign that there might be dysfunctionality within the board.
v) Hostile environment- A meeting of the board of directors can be a hostile environment, particularly when board members do not get along with one another. This type of environment stifles productivity and prevents board members from sharing constructive opinions. A meeting may become a venue for personal attacks rather than focussing on coming to business decisions or providing constructive discourse.
vi) Secret Meetings- While some information the board discusses should remain confidential, organizations should become concerned if a board of directors regularly holds secret meetings or meets on an unofficial basis. Not only may some board members be left out of these meetings, but decisions could be made without the input of crucial members of the organization, or with unethical motives.
vii) Personal and political agendas- Board members should not allow personal & political agendas to cloud their decision-making. If board members continually propose moves that would benefit them personally or take a political stance, the image of the company could be compromised. Personal and political agendas also lead to more disagreements among board members, and they are inactive on a dysfunctional board.
viii) Lack of Trust- Employees in an organization must trust the board of directors for it to be functional. If the majority of the employees do not trust members of the board, the advice and decisions the board makes may be ignored or may lead to high turnover rates within the company, among other things.
ix) Dominating Members- Members of a board should work as a team to make decisions to benefit the organization. The board’s ability to make the best decisions is compromised when one or two board members are allowed to dominate the meetings. This may involve harassment of other board members, talking loudly to dominate the conversation, or immediately shooting down any dissenting opinions. When certain members dominate the meetings, you are looking at a dysfunctional situation.
x) Non-Participants- Some board members sit on the board only for the prestige of the position. These members may attend meetings but rarely speak or offer any opinions on decisions. Those who refuse to participate in the conversation may be as damaging as members who control the conversation and take up space that could be filled by members who work to advance the organization. Too many non-participants around a board table spell “dysfunctional”.
1. Different Board committees-
There are many reasons as to why it is desirable to form committees.
i) The board is large, making it difficult to call a meeting and obtain a quorum on short notice
ii) The board members are dispersed over a wide geographic area and are difficult to reach or travel frequently making it difficult to convene a meeting in an emergency, making it impossible to convene a meeting in an emergency, making it impossible for the board to meet regularly.
iii) Committees subsist the board in crucial decision-making through research and in-depth study on the issue. The committees are the extended executive arms of the board. Who can do exhaustive research for the board on the different executive and legislative issues like handling complex, time-consuming, specialized issues that require persistent attention?
Many types of committees can be formed by the board from time to time, however, there are the requirements of mandatory committees under the Companies Act, 2013, like-
i) Audit committee.
ii) Nomination & remuneration committee.
iii) Stakeholders relationship committee.
iv) Corporate social responsibility committee.
2. Corporate Directors-
A corporate director is a business individual who is an elected or appointed member of the board of directors that directs or manages a corporation. Corporate directors are responsible for making decisions regarding the supervision of the entire enterprise as well as their products and services. As per section 2(34) of the Companies Act, 2013 “director means a director appointed to the board of a company.
Classes of Directors-
a) Independent directors- Independent Directors as the name suggests are directors on the board of a company who are independent individuals, not having any other relationship or transaction with the company.
b) Woman Director- As per section 149 read with rule 3 of companies (appointment and qualification of directors) rules, 2014 and regulation 17 of SEBI regulations, 2015, the following class of companies shall appoint at least one woman director, like Every Listed company, Every Other Public Company having, paid-up share capital of one hundred crore rupees or more, turnover of three hundred crore rupees or more, Top 1000 listed entities from April 1, 2020 would be required to appoint at least one woman independent director on their board.
c) Nominee Director- As per Companies Act, 2013, section 149(7), defines ‘nominee director’, means a director nominated by any financial institution in pursuance of the provisions of any law for the time being in force or of any agreement or appointed by any government or any other person to represent its interest.
d) Managing Director- A managing director is the one who is responsible for the overall management and operation of the company.
e) Whole-time Director- The Companies Act, 2013 inclusively defines the term ’whole-time director’; it includes a director in the whole-time employment of the company.
f) Non-Executive Director- A non-executive director is a member of a company’s board of directors who is not part of the executive team.
3. Business House governance procedures- A Business House governance policy puts procedures and policies in place to keep the company on track and operating efficiently. A good Business House governance policy should address financial management, conflicts of interest, hiring practices, and the roles of board members.
The eight key effective Business House governance practices
· Governance Frameworks. …
· Governance Documentation. …
· Policies in line with the law and applicable regulations. …
· Documenting processes and procedures. …
· Effective board reporting. …
· Agenda and minutes. …
· Director training and board evaluations. …
· Subsidiary governance policies.
Meetings-
· Annual General Meeting
· Extraordinary General Meeting
Corporate Finance-
· Financial Controls- Directors should ask the following questions about the information they are receiving-
- Accuracy
- Relevance
- Timelines
- Clarity
- Risk management
- Depth
· External audit- statutory audit
· Internal Audit- focus on control and efficiency of operations
4. Strategic leadership- Strategic leadership is when managers use their creative problem-solving skills and strategic vision to help team members and an organization achieve long-term goals.
5. Business House governance and family business — Business House governance is a form of governance applied to business setups or organizations and as such, could include within its ambit all the rules, norms, and procedures that operate, regulate, and control businesses.
6. Business ethics and integrity — “Ethics” are principles that guide behavior, while “integrity” suggests that we should carry out ethical principles in our daily lives and activities, rather than espousing an ideal and then doing something contradictory. Behaving with integrity means consistently acting according to certain values and moral principles. We have created several codes and policies to ensure we do business honestly and properly, in full compliance with all national rules and regulations, to secure the long-term future of our organization.
Integrity-
i) There are strong linkages between ethics and business. Companies displaying a clear commitment to ethical conduct have been found to consistently outperform those, that do not display ethical conduct.
ii) Ethical conduct promotes sustainable growth and builds the brand image, while failure to do so may result not only in loss of image, and market share but also its very right to exist.
iii) An organization with a strong ethical environment places its customers’ interest as foremost, which helps in promoting a strong public image.
iv) Ethical work culture provides a solid foundation for efficiency, increased productivity, and sustainable loyalty of all stakeholders, including investors.
v) An ethical work environment helps in attracting and retaining the best talent available in the market and creating an efficient and committed workforce which in turn gives them a strong competitive advantage over poorly managed organizations.
Ethics committee- writing a code of conduct, supporting it at top levels, and communicating it to employees is just the beginning of inculcating a culture of ethics in an organization. Effective deployment of a code of ethics and its monitoring would be required. Companies should have a committee of independent non-executive directors who are responsible for ensuring that systems are in place in the company to ensure employees comply with the code of ethics.
1. Board and directors’ performance evaluation — Globally it has been considered a good Practice, India has also moved to the forefront of the governance challenge with its SEBI(LODR) Regulations, 2015 and Companies Act,2013, which mandates that the Board of every listed company and every other public company with paid up capital of INR 25 Crore or more calculated at the end of the preceding financial year shall include in the report by its board of directors, a statement indicating how formal annual evaluation has been made by the board of its performance and that of its committees and individual directors.
An exhaustive board evaluation should examine the following; Roles and responsibilities — Measure the extent to which the members successfully fulfill their responsibilities and key roles. Also, determine the extent to which the directors contribute to achieving the company’s objectives
Why should the board of directors evaluate its performance? Or what is the purpose?
The board evaluation benefits of regular assessments encourage collaborative decision-making and high performance by individual directors. It also encourages directors to work together effectively to reduce conflict in the boardroom and embed a culture of good governance and team spirit.
There are seven main benefits of Board and directors’ performance evaluation
· #1 Improved Board Performance.
· #2 Increased Accountability.
· #3 Better Risk Management.
· #4 Builds Organisational Collaboration.
· #5 Better Decision Making.
· #6 Increased Transparency.
· #7 Improved Boardroom Equity.
Evaluation Process- The underlying principles governing the processes and methodologies of evaluation of the board and individual directors are now more or less standardized in the US, UK, and most of the OECD countries. The levels of disclosures vary.
The evaluation process generally involves the critical examination of the following aspects-
a) Identification of areas of evaluation.
b) Formulation of a questionnaire on the areas for evaluation.
c) Obtaining responses of individual directors to the questionnaire on a rating scale.
d) Conducting interviews with individual directors and
e) Analysing the responses to the questionnaire and interviews.
f) Reporting the finding results from the analysis to the full board.
The process is usually tailored to the requirements of the company.
How to conduct the evaluation process effectively-
1. Provide regular, informal feedback to employees. …
2. Be honest with employees during a performance review. …
3. Conduct face-to-face employee performance reviews. …
4. Use tangible, pertinent examples during the performance review. …
5. End the performance review on a positive note.
Internationally, the performance evaluation is conducted –
i) In-house by chairperson or governance and nomination committee.
ii) By an external independent body or expert.
2. Global trend of Business House governance — Business House governance refers to the structures and processes for the direction and control of companies. Business House governance concerns the relationships among the management, board of directors, shareholders, and other stakeholders.
The models of global Business House governance-
i) The Anglo-Saxon model.
ii) The German model.
iii) The Japanese model.
iv) The Family Model.
The Anglo-Saxon model-
Anglo‐Saxon capitalism is associated with generally deregulated labor markets, primarily firm‐level patterns of wage bargaining, a system of Business House governance dominated by the financial owners of the firm, and a system of finance depending primarily on capital market-based financing rather than long‐term bank debt.
The Anglo-Saxon model is characterized by the dominance in the company of independent persons and individual shareholders. The manager is responsible to the Board of Directors and shareholders, the latter being especially interested in profitable activities and receiving dividends.
Core values of the Anglo-Saxon Model- i. Be loyal. ii. Tell the truth. iii. Be brave.
The German model-
The German model, sometimes referred to as the continental model or European model, is carried out by two groups. The supervisory council and the executive board. The executive board is in charge of corporate management; the supervisory council controls the executive board.
Germany has one of the most solid Business House governance systems in the world owing to both its well-balanced control mechanisms and capital preservation and market transparency rules, but also because of the equal opportunities it guarantees to women and men.
In the German model, there are two key players: the banks and the corporate shareholders. Other corporations are also shareholders under the German model. As you’ll see below, the composition of the board is very different and influences the key players in the system.
The German economy owes its competitiveness and global connections to great innovation and strong export orientation. Exports account for more than half of all turnover in industries such as the production of cars, machinery, and equipment, as well as in the chemical industry and medical technology.
Code of the German Model members of the Management Board shall disclose conflicts of interest to the Supervisory Board without delay and inform the other members of the Management Board thereof.
The Japanese model –
The Japanese Business House governance model is characterized by a stakeholder-oriented system with a weak market for corporate control, as cross-shareholding practices favor stable shareholding. Management and employees are at the center of the Japanese Business House governance.
The key players in the Japanese Model of Business House governance are banks, affiliated entities, major shareholders called Keiretsu (who may be invested in common companies or have trading relationships), management, and the government. Smaller, independent, individual shareholders have no role or voice
Keiretsu refers to the Japanese business structure consisting of a network of different companies, including banks, manufacturers, distributors, and supply chain partners.
The drawbacks of the Japanese model of Business House governance- Lack of opportunity for rapid growth. Low level of foreign investments. Low involvement of individuals in the management of the organization.
The family Model-
Family governance is a framework for joint decision-making among family members based on shared values, a common mission or purpose, and a collective vision for the family’s future.
The main purpose of a family governance structure is to enable long-term harmony between family members; it achieves this by keeping all family members engaged with and informed about the trust, and by placing some important decision-making powers in their hands.
In this model, organizational leaders function in many respects as parental figures in group dynamics. They help make decisions, set goals and boundaries, and guide the next generation to become responsible and productive leaders in their own right. Uncover and maintain the values by which the family and related enterprises will operate. Educate the family about the rights and responsibilities of ownership, family history, and values, and prepare for the future.
The family governance system rests on the family’s shared beliefs and values. Formal elements often
Components of a family system- In its most basic form, a family system consists of one or two parents and their children, whether they are biological or were adopted, perhaps considered half-siblings or step-siblings. Other members of a family system may include grandparents, aunts, uncles, and cousins
3. Code of corporate ethics-
A code of ethics sets out the standards that an organization expects in line with its core ethical values. It could be called “The Way We Work Around Here”, or “The [Company] Way”, but it will set out the organization’s obligations and responsibilities to its staff and other stakeholders
There are about 12 ethical principles: honesty, fairness, leadership, integrity, compassion, respect, responsibility, loyalty, law-abiding, transparency, and environmental concerns.
A. SEBI’s listing regulations require, as part of Business House governance, the listed entities to lay down a code of conduct for directors on the board of an entity and senior management.
B. The code of ethics states the principles and expectations governing the behavior of individuals and organizations in the conduct of business.
C. Every Director must-
i) Represent the interests of the shareholders of the company
ii) Exhibit high standards of integrity, commitment, and independence of thought and judgment.
iii) Dedicate sufficient time, energy, and attention to ensure the diligent performance of his or her duties.
iv) Comply with every provision of this code.
D. The company must maintain a set of standards for its-
i) Customers- It will conduct business with the customers only by lawful and ethical means.
It will not compromise the quality of their products and services. All advertising, labeling, literature, and public statements shall be accurate.
ii) Partners: It will conduct business only with partners who follow lawful and fair practices and will debar those found indulging in business practices or misleading the customers.
iii) Employees- It will treat all employees with dignity and respect.
It will hire and promote employees based solely on merit & suitability.
iv) Investors- It shall take all decisions to create long-term shareholder value, it will abide by the laws, regulations, and norms of Business House governance to provide true and comprehensive information to investors.
v) Government- It shall conduct its business as a law-abiding corporate citizen, in each of the countries where it operates. It shall stand by the written commitment made by our representatives to government agencies.
vi) Communities- They shall always operate keeping in mind the health, environment, and safety concerns of the community amongst which we live.
vii) National Interest- It shall be committed in its all actions to the benefit of the economic development of the countries in which it operates and shall not engage in any activity that would adversely affect such objective.
viii) Financial Reporting & Records- It shall prepare and maintain its accounts fairly and accurately by the accounting and financial regulatory standards which represent the generally accepted guidelines, principles, standards, laws, and regulations of the country in which it conducts its business affairs.
ix) Competition- It shall fully strive for the establishment and support of a competitive open market economy in INDIA and abroad and shall cooperate in the effort to promote the progressive and judicious liberalization of trade and investment by a country.
E. Conflicts of Interest-
i) Directors must avoid conflicts of interest.
F. Business relationship with Directors.
G. Use of corporate information, opportunities, and assets
H. Data protection & information systems security.
I. Protection of confidential information.
J. Compliance with laws, rules, and regulations
K. Fair dealing
L. Accountability
M. Political contributions & activities
N. Foreign Payments
References –
1. The Companies Act, 2013.
2. A handbook on Business House governance by the Institute of Directors.
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