Do you think the shareholders can directly control the company? Can they run the company without prior knowledge ? Who control the organization in

Do you think the shareholders can directly control the company?

Can they run the company without prior knowledge ?

Who control the organization in day to day affairs?

What we do to overcome the problems?

Yes !We need a powerful person to control

the company. Then who is that person?

Guess !

BOARD OF DIRECTORS

Chapter -4

MANAGEMENT PERSONNEL

We know there is divorce between ownership and management.Due to following reasons.

SerialNumber

Points Explanation

1 Separate legal entity

Share holders are not legal owners of a company.And, therefore, they cannot participate in its day to day management

2 Large number of shareholders

All share holders cannot participate in the day to day affairs because of its large size.

3 Scattered members

Members are scattered throughout the country. such a heterogeneous group cannot be expected to manage.

4 Small investors Average share holders has a small investment. they don't want to participate in day to day management.

5 Transferability of shares

Because of its transferability of shares, members of the company is ever-changing. so there is no continuity.

6 Complex job Management of the shareholders do not possess the Necessary ability and skill to manage their company effectively.

Pattern of company management in India The Directors are collectively known as Board of directors

which act as the top level of management in a JSC. Directors are not usually the whole time employees of a

company. They meet periodically and lay down the objectives & broad

policies of the JSC. Another level of management is required to look after the

daily affairs of a company. One or a few persons are appointed by the board to act as the

Chief Executive of the company. Chief executive translate Board's decision into specific

instructions and policies. He is responsible for the overall management of the company

Pattern of company management in India

He works under the overall supervision and control of the board and is responsible to it.

Below the chief executive there are departmental heads or functional managers, each responsible for the operations of one department or function. These middle level executives work through supervisors and superintendents who directly supervise the activities of the workers or clerks.

Organs of company management SHAREHOLDERS

BOARD OF DIRECTORS

SECREATARY LEGAL ADVISORCHIEF EXECUTIVE

FINANCE MANAGERMARKETING MANAGERPRODUCTION MANAGER PERSONAL MANAGER

Elect

Appoint

Organs of company management

Board of Directors; The board of directors are the Top administrative organ of the company. The directors act as a collective body and they take decisions by majority.

Managing Director/Manager; He serves as the Chief executive of the company. He is responsible for implimentation of the plans and policies formulated by the Board of Directors. He acts as a link between the Board of directors and Departmental managers.

Departmental Managers; Each departmental manager is the head of one department of the company. He directs and controls the activities of his department. Departmental managers work under the charge of the chief executive.

Secretary; He is responsible for the secretarial work of the company. He controls office administration. He arranges meetings of the company.

Legal Advisor; He provides advice to the Board of Directors on various legal matters affecting the company.

Board of directors

The Board of directors consisting of the elected representatives of shareholders, namely directors, is the top organ of management in a company.

Directors have no authority as individuals. They must exercise all powers collectively as a board

meetings. Directors are collectively known as Board of Directors. Board of Directors generally lays down broad objectives

and overall policies of a company, leaving day-to-day administration to other executives.

In practice, decisions are initiated by executives but approved by the board.

Board is essentially a policy making organ.

Composition of the board of directors

Only a properly constituted board can act effectively as the top organ of management

The size and composition of the board varies from company to company.

It is difficult to lay down the essentials of an ideal board.

However, the main issues involved in the composition of a board are as under;

1) Size; The actual number of directors will depend upon the nature and size of a business. members should be compatible and able to perform as a group. If it is essential to have a large board, committees should be formed. under the companies Act, the minimum number of directors is 3 for a public company and 2 for a pvt company.

2) Abilities ;effectiveness of the board is depends upon the abilities and expertise of its members rather than on its size. Boards usually lacks technical knowledge of the industry must be included.othermembers should be chosen in such a way that they complement each others skill. A board should consist of men of varied talents and experience.It shouldn't be a mere rubberstamp.


Inside Vs outside directors; The most controversial issue concerning the

composition of Board of Directors is the relative proportion between full-time executives of the company and part-time outsiders. Inside directors are those who are in the whole time employment of the company and are associated with its day-to-day working.

outside directors are those who are not in the employment of a company and are not associated with its day-to-day working.

The ideal choice, therefore, seems to have a balanced Board consisting of both full time executives and part time outsiders

Nominee directors are appointed by banks and financial institutions which extends loans to a company. they work as part-time directors.


Specialists Vs generalist; specialists or professional directors are experts in

management.specialised talent is desirable so that a degree of expertise may be brought to bear on a wide range of policy decisions. But a board also needs a wide viewpoint to perform its functions effectively. the best approach would be to select persons who can contribute to the board's deliberations in general as well as in specific areas of management. these are professional directors.


Age distribution; An ideal board should consist of both young persons who have maturity and experience. The chairman of the board should be competent to inspire and lead the board as a team.

Compatibility ;Members of a board should have matching outlook and temperament .A heterogeneous board cannot function effectively as a team. Differences of opinion are essential to a healthy board, but there should be harmony of interests.

Active Vs Nominal directors. There is a wide spread practice of including in the

board well-known persons who have little time to take active parts in board's activities. Such dummy directors may add to the prestige of the company but they lack the necessary qualification and interest in the company.


An effective board should not consist of such persons. At least the majority of the directors should have required knowledge and experience of business.

Interlocking and multiple directors. To a certain extent it may be worthwhile to have some

common directors. But persons with many dictatorship can contribute little to the effectiveness of the board.

Functions/executive powers of the Board of Directors

1) Planning; As the top organ of management the board of Directors,

Determines the overall long term objects and general policy of the company.

Approves overall budgets and pogrammes for the company and terms and conditions of new security.

Designs and develops appropriate information and control systems for the company.

Identifies the key areas of firms environment and keeps the management alert to changes in it.


2) Organising and staffing; Decides the general organisation structure of the company

and creates the frame work within which executives are to operate.

Establishes relationships with subsidiaries and affiliates. Ensures continuity and stability of the managerial

structure of the company Selects the chief executive and other key executives of

the company and decides their remunerations. Acts as the supreme court for the deputes between the

various parts of the company. Makes important contracts for the purchase and sale of

property etc on bekhalf of the company.


3) Review and control; Issuing orders and instructions to chief executives. Evaluating the performance of chief executive and taking

corrective action. Regulating the capital expenditure and financial plans of

the company including issue of additional securities. Appraising the progress of the company to ensure its

solvency and profitability. Watching the spirit of organization to ensure optimum

utilization of company's resources. Reviewing and revising the plans of the company. Coordinating the activities and operations of the company

with its plan and to ensure harmony b/w the different branches and subsidiaries of the company.


4) Trusteeship; Board of directors serves as the trustee of the

company’s asset and property.

Role of Board of Directors

The board of directors is thus essentially a policy making and controlled body.

It is an organ of review and appraisal rather than of action.

Board of Directors plays the following types of roles in a company.

1) Entrepreneurial role; This means looking for and accepting opportunities

and challenges in the external environment. Board of Directors takes initiatives and assumes

calculated risks to further interests of the company.


2)Decisional role; Board of directors takes long-term decisions about the goals

and strategies of the company. For example, it decides foreign collaborators with which the company will associate.

3)Developmental role; In this role ,the board of directors is expected to safe guard,

promote and enhance the assets, facilities and resources of the company.

4)Leadership role; Board of directors provides leadership to the company as a

whole by directing it on the right path to success.5)Coordinating role; As a coordinator, the Board Of Directors integrates and

harmonizes the different divisions, subsidiaries and departments of the company so that all these work together as a team


6)Trusteeship role; Board of directors serves as the custodian of the

company’s wealth. it also serves to reconcile the interests of various stakeholder group in the company.

Appointment of Directors

1) Number of Directors; Every public company must have at least 3 directors

and every Pvt company must have at least 2 directors to manage the affairs.

Subject to this minimum number, the AOA of a company can fix the actual number of directors. Any increase in the number of Directors beyond that prescribed in the AOA can be made with the approval of the central government except when the number does not exceed twelve directors.

A person cannot be a director in more than 15 public limited companies at a time.However,he can be a director in any number of private limited companies.

Appointment of Directors Qualification of directors or disqualifications; Only an individual can be a director .No

firm ,association or body corporate can be appointed director of a company

A person with unsound mind An undercharged insolvent Convicted by court for moral turpitude Person who has not paid the call on his share within

six months of demand. Below the age of 25 or above the age of 70 A person disqualified by court for fraudulent

activities cannot become a director.

Appointment of Directors Qualification shares; The AOA of a company may

be provide for certain shares which a person must hold in the company to become its director. such shares are called qualification shares.

If the articles so provide then the directors must obtain their qualification shares within two months after their appointment unless they already hold shares of that amount.

The nominal value of the qualification shares must not exceed five thousand rupees.In case of new company, directors must pay for their qualification shares before the certificate of commencement of business is obtained.

Methods of appointment of directors

Appointment of directors by promoters; The first directors of the company are usually appointed by

the promoters in the manner laid down in the Articles of Association. Their names are usually

given in the company’s AOA or prospectus. Appointment of directors by members. subsequent appointment of directors of the company is

made by the members in the annual general meeting. Unless the AOA provide for the retirement of all directors at every annual general meeting.atleast two thirds of the total number of directors of a public company shall be subject to the retirement.onethird of such directors shall retire by rotation every year.


Appointment of directors by the board; a) Additional director. If authorized by the AOA,the

board of directors may appoint an additional director. such an additional director shall hold office till the next

annual general meeting. This provision enables the company to coop eminent

persons who do not want to contest elections. it must be noted that the number of directors including the

additional directors must not exceed the maximum number of directors fixed by the AOA of the company.

But additional directors are not to be counted for determining the number of directors who are to retrive by rotation at the annual general meeting.

Appointment of Directors Apointment of directors by the board b) casual director. A casual vacancy caused by the resignation,death,etc.of

a director may be filled by the board of directors provided the Articles of association so permit.

The person so appointed shall hold office only upto the time his predecessor would have continued.

c) Alternative director; If so authorized by the AOA or by a resolution passed

by the company in the general meeting, the board of Directors may appoint an alternate director to act for a director during his absence for a period of not less than three months from the state in which meetings of the board are ordinarily held. Such an alternative director will vacate office immediately on the return of the original director to the state.


In case the original director has not returned, the alternate director should hold office till the expiry of the term of the original director.

An alternate director is not included in determining the maximum number of directorships a person may hold at a given time.

The central government may appoint any number of person as additional directors for a period of not more than three years at a time either on its own motion or on the application of 100 members(Equity&preference)or members holding 10 % or more of the total voting rights.

The central govt.will appoint directors to prevent the affairs ofd the company being conducted in a manner which is oppressive to any member or prejudicial to the interests of the company or public interest.

Appointment of Directors by the central government

Appointment of Directors by the central government

A director appointed by the central government shall not bee;

Required to hold qualification shares Required to retire by rotation Consideration for the purpose of rechecking two

thirds or any other proportion of the total number of directors of the company.

A central govt. can remove any such director from his office at any time and appoint another person.

Appointment of Directors by third parties

A company may authorise, by its AOA ,debenture holders and financial corporations, who have advanced loans to the company, to appoint their nominees on the board of directors.

The number of such Board of Directors shall not exceed one third of the total number of directors.

These directors are not required to hold any qualification shares.

They are not required to retire by rotation.

Appointment of Directors by proportional representations;

Directors of a company may be appointed either by of majority of votes through a system of proportional representations.

The defect of the system is that any majority of 51% can elect all the directors and the persons having even 49% of the votes may fail to elect any director.

Appointment of Directors by High court

The high court may appoint a new director in place of misfit director on the application of the central government.

FULL TIME AND PART TIME DIRECTORS

Full time or whole time directors can give adequate time and attention to their duties. But they are more expensive and more difficult to obtain. Moreover, to keep himself fully occupied such a director may involve himself too much in operating details,theirby undermining the authority of departmental executives.

Part-time directors may bring wider experience and are more economical, But they lack the detailed knowledge of company's affairs and are usually unable to devote required time a nd attention to the company.

A whole time director can be appointed along with a M.D

POSITION OF DIRECTORS

Directors as agents; Directors are elected by the share holders to

conduct the management of the company. They are men of business and commercial skills.

They are authorized to manage the affairs of a company.

The company is liable for the contracts made by the directors in the name of the Company.

Therefore, Directors are said to be the agents of the company.


Directors as Trustees A trustee is a person who is in custody of

assets of a beneficiary and is expected to use assets for the beneficiary’s interests. Directors are called trustees of the company because they control the company's property and are expected to use the company's property in the best possible way.Directors,thus,stand in a fiduciary relation ship with the company.

However ,directors do not have legal control over the company's property.


Directors as Managing Partners; Sometimes directors are

regarded as managing partners because the company operates through its directors. Like active partners, directors are authorized to manage the affairs of the company. Common share holders act as sleeping or inactive partners.


Directors as officers; Directors are held legally

responsible for gross negligence and fraud in the performance of the assigned duties. Therefore directors may be regarded as officers of the company.

Rights of Directors

Right to attend board meeting Right to acquire shares Rights to inspects books of accounts Right to receive remuneration Right to receive compensation only

at premature termination)

Powers of directors

According to the companies Act, at least one meeting of the board must be held in every 3 calendar months at least four meetings in a year

Powers of Board of directors Those to be performed by the board itself by passing

resolutions in a board meeting. 1) To issue debentures 2) To make calls on shareholders in respect of money

unpaid on their shares. 3) To fill up casual vacancies on the Board 4)To sanction contracts in which one or more directors

have an interest 5)To issue and allot shares. 6)To forfeit shares. 7)To recommend dividends 8)To decide the terms and conditions of issue of shares

and debentures. 9)To appoint unanimously a person as the managing

director or manager of the company if he is managing director or manager of another company.

Powers of Board of directors

Powers which may be delegated to other managerial personnel by resolutions passed at the Board meeting;

To borrow money by means other than through debentures say through public deposits.

To invest company’s funds To make loans To make contracts for the purchase and sale of

property on behalf of the company.

Powers that can be exercised only with the consent of share holders through resolutions at general meeting.

Share holders may authorise the board to exercise the following powers;

1.To sell, lease or dispose of the whole or substantially the whole of undertaking of the company

2. to remit any debt or extend the time for repayment of any debt due from a director

3.To invest the amount of compensation received by the company in respect of the compulsory acquisition of any undertaking or property of the company

4.To borrow money in excess of the paid-up capital plus free reserves of the company.

5.To donate for charitable and other purpose any amount exceeding Rs.50000 OR 5% of the average net profits based on three previous years, whichever is greater

6 To issue bonus shares 7 To appoint sole selling agents of the company.

Powers which can be excercised with the prior approval of the shareholders and the Central Government.

To grant loans to a director or to give guarantee or security for such loans

To invest in the share of another company in excess of the limits prescribed under the companies Act.

To appoint or reappoint any person as the managing director or manager of the company

To amend any provision relating to the appointment of a managing director or manager.

To increase the remuneration of any managerial personnel

Duties of Directors To regularly attend meetings of the Board of Directors. To act in the best interests and exclusive benefits of the

company. To protect the property and assets of the company. To act honestly with reasonable skill and care and make

bonafide use of their powers. Not to go beyond their authority in the performance of

their duties. Not to make any secret profits from the business of the

company. Not to allow their personal interest to come in conflict with

the interests of the company To comply with all the statutory requirements.

Remuneration of Directors

By way of monthly, quarterly, or annual payment with the approval of the central government

By way of commission if the company by special resolution authorises such payment. But the remuneration paid to such categories of directors shall not exceed.

One percent of the net profit of the company if the company has a managing/whole time director or manager.

Three percent of the net profit if the company has no managing/whole time director or manager.

Remuneration of Directors With appointment/reappointment or remuneration of a

managing/whole time director or manager, the central government may fix such remuneration ,within the statutory ceilings, as it may deem fit. while fixing the remmuneration,the central government shall have regard to:

The financial position of the company The remuneration or commission drawn by the individual

concerned in any other capacity, including his capacity as a sole selling agent;

The remuneration or commission drawn by him from any other company

Professional qualifications and experience of the individual concerned.

Public policy relating to the removal of disparities in income.

Removal of directors

Removal by members; A company may remove a director before

the expiry of his period of office, by giving a special notice and passing an ordinary resolution in a general meeting of members.

In case some shareholders want to move for the removal of a director they must give a notice to the company at least 14 days before the meeting.

A removed director cannot be reappointed but he can claim compensation in the case of wrongful termination of his appointment.

Removal of directors

The shareholders cannot remove the following types of directors;

A director appointed by the central Government A director representing special interest e.g.

debenture holders. A director representing special interest

eg;debentureholders A director elected under the system of proportional

representation.

Removal of Central government

The central government can remove a director on the recommendation of the company Law Board. The power can be exercised where, in the opinion of the central government, there are circumstances suggesting;

That the concerned person in the conduct and management of the affairs of the company is or has been in connection therewith guilty of fraud, misfeasance, persistent negligence or default in carrying out his obligations or functions or breach of trust

That the business of the company has not been conducted in accordance with the sound business principles or prudent commercial practices.

Removal of Central government

That the company is or has been conducted and managed by such person in a manner, that it has caused or is likely to cause serious injury or damage to the interest of the trade, industry or business to which the company belongs;

That the business of a company is or has been conducted and managed with intent of defrauding its creditors or members or any persons or for a fraudulent or unlawful purpose or in a manner prejudicial to public interest.

Removal by court

Court may remove a director on an application for prevention of oppression of minority or mismanagement of the affairs of the company.

The person so removed cannot hold a managerial office in the company for a period of five years except with the permission of the court. He cannot claim compensation for the termination of his appoint.

Disqualification of a Director Fails to acquire the qualification share. Fails to pay the calls due within six months from the last

date fixed for the payment of calls Ceases to hold qualification Remains absent for the three consecutive meeting Unsound mind’ Insolvent Contravenes any of the provisions of law regulating his

conditions of employment Debarred by court from holding office of a director in any

company on account of fraud..etc Is convicted of any offence involving moral turpitude and

sentenced to imprisonment. Removed from the post of director by the members.

CHIEF EXECUTIVE

The chief executive is appointed by the Board of Directors to coordinate and control the day-to-day administrative activities and functions of the company.

He is responsible for translating the plans and policies of the Board into actions.

He carries out the orders and instructions of the Board of Directors.

He act as a link between the Board of Directors and shareholders.

He also tries to develop and maintain good relations with government agencies and other stake holders.

Functions of Chief executive are as follows

Translating the broad plans and policies of the board into departmental policies and programmes.

Finalising budget proposals for submission to the board. Establishing priorities and setting standards of

performance Allocating resources and organise activities. Arranging selection and development of executives. Maintaining harmony and discipline among executives. Providing able and dynamic leadership Evaluating performance of departments Maintaining public relations and contacts with government

and other agencies. Advising the Board if and when his advice is sought.

MANAGING DIRECTOR

SELECTION; A Managing director can be only an individual not a

firm Being a director, he is always member of Board of

Directors. He is to exercise his powers subject to the

superintendence ,control and direction of the board of directors.

A public company must appoint its first managing director within three months of its incorporations.

Appointment

Appointed by an agreement with the company by resolution in the general meeting or board meeting or by MOA or by AOA.

TERM OF OFFICE; The M.D of a company can be appointed for a maximum period of 5 years at one time. He can be reappointed.

A person cannot be appointed at a time a managing Director of more than two public companies without the approval of the central Government.

Disqualification No person can be appointed a managing/ whole time

director who: A) is an undercharged insolvent or has been

adjudged insolvent at any time; B) suspends or has at any time suspended payment

to his creditors; or makes or has made a composition with them;

C) is or has been convicted by a court of an offence involving moral turpitude.

Remuneration; The remuneration payable to a managing/whole time director cannot be more than five percent of the net profits of the company.

Documents

Do you think the shareholders can directly control the company? Can they run the company without prior knowledge ? Who control the organization in