ROLES N RESPONISIBILTY OF IND. DIRECTORS

8/13/2019 ROLES N RESPONISIBILTY OF IND. DIRECTORS

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Statutory Role & Responsibility ofIndependent Directors and Familiarity

with Legal Aspects associated withdischarging their Duties

Atul Dhawan

4 August, 2006


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The genesis of SO!

A "orporate Tsunami

Corporate America was rocked by

scandal after scandal in a very short

span of time.

nron

!"art

#yco

$orldCom

%lobal Crossing


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Andersen collapsed#


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An Angered Response #

&oss of confidence in

regulators

'olitical ne(us

)nvestor confidence takes a dip

40*+k retirement savings

wiped outSponsored by US Senator Paul Sarbanes and US Representative Michael

Oxley, the Act was passed to re-emphasize the importance o ethical

standards in the preparation o inancial inormation reported to investors,

restore investor conidence and stren!then corporate !overnance"


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Types of Directors

$ominee%-irector whose function is passive in nature.

ominee director are sub/ect to directors responsibilities.

ominee director appointed by an institution which hasinvested in or lent to the company shall be deemed to be

independent directors.

hole Time%is e(ecutive director who is in whole time

employment of the company.

Independent%is a non e(ecutive director who has no material

pecuniary relationship or transactions with the company.


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Responsibility of Directors

"eaning thereof

tatutory 1esponsibility iduciary 1esponsibility

tatutory 1ole and 1esponsibility3

eed for familiarisation with legal aspects3 1elationship with duty discharge obligations


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'ey Issues

1esponsibility

-uty tatutory


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hat is (Duty)

%enerally speaking, duty is what we e(pect of others -uty is a task we look forward to with distaste, perform with

reluctance, and brag about afterwards #he trouble with the world is that so many people who stand up

for their rights fall down miserably on their duties #he best way to get rid of your duties is to discharge them e(t to doing the right thing, the most important thing is to let

people know you are doing the right thing5 3 ohn -. 1ockfeller

)t is not enough to be ready to go where duty calls. A manshould stand around where he can hear the call5 3 1obert&ouis tevenson


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Responsibility

1esponsibility walks hand in hand with capacity andpower

1esponsibility also is directly linked to one7s duties )t is easy to dodge our responsibilities, but we cannot

dodge the conse8uences of dodging ourresponsibilities

*ou cannot e+ade the responsibilities of tomorrow bye+ading it today

% Abraham Lincoln


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Responsibility

The price of greatness is

responsibility

% Sir inston "hurchill


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Dri+ers of "hange

-emocratisation of ownership &iberalisation%lobalisation of markets #echnologyCorporate %overnance

9's9ther influences 3 lenders, regulators, ta(

authorities


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The en+ironment in which we wor, in

Changing conomic #imes 'ressures to 'erform

: $all treet e(pectations: hareholder and ;oard of -irector e(pectations

Comple(ity and sophistication of ;usinesstructures and #ransactions: umerous risks and challenges of reportingtransactions in an easily understood manner

Comple( and


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The Role of a Director

A Director is part of a collecti+e body of

Directors called the -oard responsible forthe superintendence. control and direction

of the affairs of the "ompany


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Is an indi+idual Director as a member of the

"ompany -oard e/ually responsible as the"ompany -oard 0

o, unless he, the individual director, is charged with a

specific responsibility


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Is the "ompany -oard responsible for

management of the "ompany or for thesuper+isory o+ersight of the "ompany 0

#his depends on whether the Company has a C9 to

manage the affairs of the Company on a day:to:daybasis.


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Director1s duties

Act in the best interests of the company afeguard the interests of the stakeholders Attend ;oard "eetings and participate in decisions (ercise due care and skill Avoid conflict situations ot seek personal gains "aintain confidentiality iduciary duty eek opinion of e(perts when necessary -ischarge duties re8uired in specific committees of

the ;oard


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Directors1 duties

= -irectors are sub/ect to various duties, both common

law and statutory. At a very fundamental level, these

duties are directed at four well:defined ob/ectives >

= to compel directors to act in accordance with the

strict terms of their mandate?

= to compel them to e(ercise care and skill in carrying

out their various functions?


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Directors1 duties

= to compel them to use their wide discretionary

powers in good faith and proper purpose

= and finally, to compel them to act loyally in

advancing the interest of their company.5

arah $orthington, Corporate %overnance :

1emedying and 1atifying -irectors7 ;reaches


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Directors1 Duties

$hat is a director7s duty of skill @

-irectors are not re8uired to bring any special

8ualifications into their office.

"a/or &aw 1eform re8uired in this area


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Directors1 Duties

$hat is the duty of care re8uired for a -irector @ #he upreme Court of )ndia has held in Official Liquidator

v P.A. Tendolkar (1973) 43 Com Ca!e! 3"# as follows> A director may be shown to be so placed and to havebeen so closely and so long associated personally withthe management of the Company that he will be deemedto be not merely cogniant of but liable for fraud in theconduct of the business of the Company even though no

specific act of dishonesty is proved against himpersonally. Be cannot shut his eyes to what must beobvious to every one who e(amines the affairs of theCompany even superficially


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Directors1 Duties

$hat is the non:e(ecutive director7s duty of skill and care @ #he nglish Court after reviewing many cases in $orc%e!ter

&inance Co. Ltd v 'tein* 19"9 +CLC49" (C% $) held asfollows>

A -irector is to e(hibit in the performance of his duties suchdegree of skill as may be reasonably e(pected from a person ofhis knowledge and e(perience

A -irector is to e(hibit in the performance of his duties suchcare as an ordinary man might be e(pected to take on his ownbehalf

A -irector must act in good faith and in the best interests of theCompany

#hese standards of duty of care and skill apply e8ually to non:e(ecutive -irectors


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Directors1 Duties

Acting in good faith a valid defense for the -irectors

)n 1e #he $alt -isney Company, the Court in its

decision decided in August 200D upheld the rule of

acting in good faith by saying that the concept of

intentional dereliction of duty, a conscious disregard

for one7s responsibilities, is an appropriate +although

not the only, standard for determining whetherfiduciaries have acted in good faith


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Directors1 Responsibilities

'resent directors

'ast directors"embers of Audit Committee

(plicit and implicit1esponsibility for subsidiaries


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Statutory Responsibilities ection 2E4 of the Companies Act list out dis8ualifications of directors.

-irector should conduct himself in such a way that he does not incursuch dis8ualification

-irector should maintain absolute secrecy of confidential information -irector should not derive undue personal advantage or benefit by

virtue of his position -irector should ensure that company at all times complies with

statutes, rules and regulations in letter and spirit -irector with other -irectors of the ;oard is responsible that report and

recommendation of Audit Committee and hareholders7 F )nvestors7%rievance Committee receive due consideration

-irector is accountable for the company practicing the higheststandard of corporate governance with a underlying view of increasingthe shareholders7 value


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Fiduciary Duty of Directors

-irector should not enter into engagements

in which he can have a personal interestconflicting with the interest of the company.

-irector must display the utmost good faith

towards the company in their dealings with it

or on its behalf.


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Directors1 Responsibilities

Arthur &evitt7s views

;lue 1ibbon Committeeection 2G2A and Audit

Committees

ection 2*E +2AAClause 4G of &isting Agreement


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Recommendation of -lue Ribbon

"ommittee

"ember of the Audit Committee to be independent of the

company +not employees

#he Audit committee to be composed e(clusively of none(ecutive directors

#he Audit Committee to consist of at least three member

with specialist e(pertise in the field of finance and

accounting #he Audit committee to have a written charter

#he charter to be published at least every three years in a

pro(y statement


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Recommendation of -lue Ribbon

"ommittee

#he e(ternal auditors to be accountable to the ;oard of-irectors and particularly to the audit committee.

#he e(ternal auditors to report annually on theirindependence from the company.

#he audit committee to discuss the 8uality of accountingprinciples with the e(ternal auditors.

#he audit committee to produce a report on its activities.

Huarterly financial statements +form *0:H to undergo acritical review by the e(ternal auditors


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Section 23452AA6

1eport by ;oard of -irectors includes -irectors responsibility

tatement indicating therein

)n preparation of annual accounts, applicable accountingstandard has been followed along with e(planations to material

departures.

#hat accounting policies has been selected and applied

consistently and made /udgment and estimates that are

reasonable and prudent. 'roper and sufficient care for the maintenance of accounting

records in accordance with the act for safeguarding the assets

of company and for detecting and preventing fraud

'repared annual accounts on a going concern basis


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Section 247 clause 5g6

= such person is already a director of a public company+A has not the annual accounts and annual returns for any continuousthree financial years commencing on and after the first day of April *GGG?

or

+; has failed to repay its deposit or interest thereon on due date orredeem its debentures on due date or pay dividend and such defaultcontinues for one year or more>

'rovided that such person shall not be eligible to be appointed as adirector of any other public company for a period of five years from thedate on which such public company, in which he is a director failed to fileannual accounts and annual return or has failed to repay its depositorinterest or redeem its debentures on due date or pay dividend


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Section 282A

Audit committee shall consist of at least three directors other

than managing director or whole time director.

Audit Committee shall have discussion with auditors aboutinternal control systems, the scope of audit and review half

yearly and annual financial statements.

Audit committee has authority to investigate into any matter.

#he recommendations of the Audit committee is binding on the

;oard #he chairman of the Audit Committee shall attend the annual

general meeting to provide clarification on matters relating to

audit


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"lause 78 of Listing Agreement

#he non e(ecutive director on the board should not be less than fifty

percent of the ;oard of -irectors or in the case of non e(ecutive

chairman at least should comprise of independent directors

#he board meeting is to be held at least four times in a year.

#he difference between two ;oard meeting should not e(ceed four

months

#he Annual 1eport of a company should comprise a separate section

in Corporate %overnance. on compliance of any mandatory

re8uirement which is a part of listing agreement to be specificallyhighlighted with a reason for such non compliance.

#he compliance of conditions of corporate governance is to be certified

by auditors and the same is to be anne(ed with directors report and

also sent to the tock (change with return


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"lause 78

!umarmangalam ;irla committee on

corporate governance 3 ;) 3 *GGG

arayana "urthy committee on corporate

governace


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Definition

(cludes any relatives of promoters, senior

management

Cooling:off 'eriod : for any member of any

advisory firm +not /ust statutory auditors, but

also lawyers, consultants and internal

auditors


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Increased responsibilities

nhances the responsibilities of the board

Company7s compliance with all applicable laws to be

disclosed

nhanced oversight over its subsidiaries3 ;oard members also have to review all significant

transactions entered into by any subsidiary

3 1eview minutes of all the subsidiaries7 board meetings3 ign:off on compliance with the company7s code of conduct


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Impro+ing /uality of disclosure

-isclosure of directors7 shareholding in the company -isclosure of compensation paid to non:e(ecutive

directors -isclosure of all related:party transactions se of funds raised through public issues +in case of

any use of funds for purposes other than thatoriginally stated in the offer prospectus,

An audited statement on the deviation to be includedin the annual report,

Any changes in accounting policies and practices.


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Liability

or company debts

ltra:vires acts

Criminal liability under egotiable )nstruments Act

-amages for breach of contract

-irector7s responsibility statements

&iability of directors under other laws +labour, foodadulteration, essential commodities, etc.


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Some "ompany Law 9ro+isions

on compliance of various provisions of theActAvoidance of provisions relieving liability of

officers 3 voidnlimited liability +ection I2I 3 permissible

tatutory 'rotection to -irectors +ection6II-irectors7 1esponsibility tatement


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":O ; "FO responsibilities

#he C9, i.e. the "anaging -irector or "anager appointed interms of the Companies Act, *GD6 and the C9 i.e. the whole:time inance -irector or any other person heading the finance

function discharging that function shall certify to the ;oard that>+a #hey have reviewed financial statements and the cash flow

statement for the year and that to the best of their knowledgeand belief >

+i these statements do not contain any materially untruestatement or omit any material fact or contain statements that

might be misleading?+ii these statements together present a true and fair view of the

company7s affairs and are in compliance with e(istingaccounting standards, applicable laws and regulations.


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=uidance for Independent Directors%

The Taste and Smell Tests

1eputation of company

Capability to meet the re8uirements ande(pectations

-emonstrate independence

$hether the company has ade8uate controls

and whether they can be relied upon

Ability to resist pressure


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=uidance for Independent Directors%

The Taste and Smell Tests

!nowledge on current developments

Aware and abide by corporate code ofconduct

eek e(pert help

'repare in advance for board meetings

"aintain confidentiality


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ay Ahead

)ndependent directors here to stay

;oard and audit committee procedures willneed to be revamped

eed to be more proactive at watching over

compliance

)dentify and manage risks

Bave processes to test and evaluate controls

Documents

ROLES N RESPONISIBILTY OF IND. DIRECTORS