Board of directors are shareholders of the company. Mostly, the directors are elected by the shareholders and they in turn elect the Managing Director. The ultimate authority of the Joint Stock Company, lies with the board of directors. However, the authority of the board is subject to the limitations imposed by the Memorandum of Association, Articles of Association of the company and there relevant provisions of the Companies Act, 1956.
Appointment of Board of Directors
The functions and responsibilities of the board of directors differ based on the board composition and its relationship with the company regarding its management. Some directors on the board are appointed by the government to look after its interests.
Some directors are appointed by the financial institutions like Industrial Finance Corporation of India, Industrial Development Bank of India, Industrial Credit and Investment Corporation of India and State Financial Corporations which provide long-term loans and advances to the company, to safeguard their interest.
Some experts are also appointed on the board to offer their expertise to the company. Some companies emphasis only on legal aspects of board functions. However, many companies today emphasis on management aspects of board functions also.
Legal Functions of Board of Directors
The board of directors also perform certain legal functions required as per the Companies Act 1956 like criminal liabilities.
The following table presents legal functions of the boards.
Table1: Legal Functions of Board of Directors
I. Duty of Loyalty
- Avoiding conflicts of Interest
- Corporate Opportunity (Ahead of Personal)
II. Duty of Care
- A director performs his duties in good faith and in a manner that he serves for the best interest of the corporation, and as an ordinary person in a like position under certain circumstances.
- Attention at meetings, Reliance on management and professional information and Delegation (to management to operate the business)
- Decision Making – exercise reasonable business judgement.
Formal and Informal Functions of BOD
In fact, the board has to direct and lead the executives. The directing function has both formal and informal components. The board, formally reviews and screens the executive decisions and informally directs the activities in view of environmental factors. In general, the board directs, guides and controls the top executives in formulating, implementing, evaluating and controlling objectives, policies and strategies.
In Practice: Mace, in his research, found that the board of directors actually
1. Serve as source of advice and counsel;
2. Offer some sort of discipline, value; and
3. Act in crisis situations,” instead of performing (as per the concepts) of
- Selecting top executives;
- Determining policy;
- Measuring results;
- Asking discerning questions.
Duties & Responsibilities of Board of Directors
The duties and responsibilities of the board of directors are as follows
1. Trusteeship: The board of directors act as trustees to the property and welfare of the company. Hence, the board must use the company’s property for the long-run gain of the company, but not for their personal use.
2. Formulation of Mission, Objection and Policies: Board of directors must see the long run view and have long run perspective of the company. The board formulates, reviews and reformulates the company’s mission, objectives and policies which forms the basis for strategy formulation and implementation.
3. Designing Organizational Structure: The board designs the structure of the organization based on the objectives, policies, environmental factors, degree of competition, role of quality, expectations of employees etc.
4. Selection of Top Executives: The board should assume the responsibility of screening and selecting the top executives who can formulate and implement the strategies. Chief executives are key personnel in the process of strategy implementation.
5. Financial Sanctions: The important financial decisions like sanctioning of finances to various projects, reserves, distribution of profit to shareholders and repayment of loans and advances etc., are taken by the board. Further, the board reviews the financial performance of the company from time to time and reformulates the financial policies.
6. Feed forward and Feedback: The board has to obtain information from the external environmental factors and feed that information forward to various key points in the company in order to prevent possible hurdles and mistakes in the process of achieving organizational goals. Further, the board also obtains the information from internal sources of the organization, and feeds it forward to prevent possible failures in decision-making by the top level executives.
The board also feeds the information back to the executives regarding their failures in decision-making with a view to avoid the recurrence of such mistakes. Thus, feedback of information helps the board to check and control the activities as board has the ultimate responsibility for the success of the company.
7. Link between the Company and External Environment: The board acts a vital and continuous link between the company and external environment like government, other companies, social and economic institutions etc.
The charter of duties and responsibilities for board of directors as suggested by Mace, are shown below.
- Return on Investment
- Security of Investment
- Dividend Policy
- Social Accountability
2. Select and elect CEO (usually the president) and delegate to him all the duties to manage the company not specifically reserved to the board.
3. Evaluate the performance of the CEOs and division presidents for performance and compensation.
4. Evaluate performance of CEOs and division presidents quarterly in comparison with competitors.
5. Review and approve major corporate objectives, policies, budgets and strategies as initiated by the CEO. In reviewing the strategic plan, confirm its directors, or propose changes of direction.
6. Monitor, review and appraise management:
- Provide for orderly succession of CEOs
- Duties and limits of CEOs
- Selection of outside legal counsel
- Select all officers
- Compensation of officers
- Advise Managing Directors and others.
7. Monitor, review and approve employee relations.
8. Monitor company’s performance.
9. Management of the board.
10. Compliance with all laws affecting the business.
Changes in Boards: Changes in boards were forecasted and are as follows:
1. Boards will shrink in size — become working boards.
2. Boards will meet less often instead board committees will meet quite often.
3. Proportion of outside nominated and/or appointed members will increase.
4. Age of directors will remain constant.
5. Executive searches for directors — more diversified experience.
6. Less emphasis on stature and more-on experience, competence and commitment of directors.
7. Appraisal of directors based on quality and extent of contribution to the firm.
8. Directors will demand sufficient time and information to make decisions and will exercise power to change the company’s course when considered necessary.
9. More scrutiny of possible conflicts of interest.
10. Increase compensation of directors, based on increased time and talent commitment.”
Responsibilities of Board of Directors – International Scenario
A research study conducted by Jeremy Bacon and James K. Brown on, “The Board of Directors: Perspectives and Practices in Nine Countries,” shows that the director’s responsibilities are about the same in all the nine countries surveyed. They are
- Long-range corporate objectives.
- Corporate strategies or long range plans for meeting objectives.
- Allocation of major resources.
- Major financial decisions.
- Mergers, acquisitions, divestment.
- Top Management Performance Appraisal.
Role & Responsibilities of Board of directors in Smaller companies
Normally, the responsibilities of board of directors in small size companies vary from those of larger companies. However, certain responsibilities of the boards in small and large companies are common. They are compliance with legal requirements, formulation, evaluation and reformulation of objectives, policies and strategies etc. The need for outside help can be critical in small companies. Kumar Jain pointed out important means that outside directors can help small companies. They are:
- As a consultant
- Helping handle government regulations
- Public relationships
- Mediating conflicts between management and investors and regarding objectives, strategy, executive appointment and dismissal and decisions about assets and financial matters
- planning and other areas.
Role of Board of Directors in Strategic Management
Board of directors of many companies, in recent times, have actively engaged themselves in strategy formulation. Added to this, with the appointment of outsiders as directors in the boards, more boards are involved with linking strategy with the consequent corporate action.
These boards are supporting new strategies, mobilizing resources, protecting the organization from outside threats and linking the company with powerful outsiders.”
Boards actively involve themselves in formulating vital strategies like mergers, acquisition, takeover, expansion, diversification, backward and forward linkages, etc., evaluation of corporate strategy and performance, advising, guiding and directing the chief executives in strategic management, feeding the data and information back and forward to the top level executives in strategy formulation and implementation.
Thus, the board of directors plays a crucial role in formulation, implementation, evaluation and reformulation of strategies by constituting various committee and help in policy making.
- Appointment of Board of Directors
- Legal Functions of Board of Directors
- Duties & Responsibilities of Board of Directors