Business Ethics &
Corporate Governance
MODULE 9
Rohan Patwardhan,
Advocate
[Link], LLM (V.U. Pune) LLM (K.C.L., U.K.)
Founding & Managing Partner, LexRobe Legal®
Founder, The Juris Chronicles
Board of Directors
Introduction & Structure:
• Section 149 of the Companies Act of 2013, briefly outlines the appointment and
qualifications of the Board of Directors. The Board of Directors is the top-performing
decision-making authority of any company.
• The decisions of the Board of Directors give direction to the company to achieve specific
goals in a time-bound manner. The Board Directors are individuals who are elected or
appointed by the Board meeting specified criteria such as qualifications and experience as
mandated in the Act.
• The directors appointed to the board have diverse experiences and come from diverse
backgrounds. They have exceptional organizational skills and are responsible for the
overall performance of the company.
• The size of the board varies depending on factors such as the size of the company and the
type of industry. Typically, public companies are mandated to appoint a minimum of three
Directors.
Board of Directors
Introduction & Structure:
• However, the optimal number of directors in both the internal and external director
categories is eight to ten, with a mix of executive and non-executive directors. However, a
smaller board can be more agile and efficient, while a larger Board can offer diverse
perspectives.
• Directors on the Board can be classified into various types based on their roles,
responsibilities, and relationships with the company. Below are some common types of
Directors:
1. Managing directors: MDs are responsible for the day-to-day smooth operations of
the company.
2. Executive directors: EDs are full-time directors of the company directly involved in
the day-to-day operations and have higher responsibility for implementing board
decisions.
3. Non-executive directors: These directors are without executive roles and are not
involved in the routine/everyday working of the company. They provide independent
oversight and an objective perspective and, at times, challenge management’s
assumptions.
Board of Directors
Selection and compensation:
• Selection: The Companies Act, 2013 states that a private company must have at least two
directors, and a public company must have at least three.
• Compensation:
1. Board members can receive compensation in the form of cash, equity, stock options,
and ownership equity grants. The average mix of compensation is 40% cash and
60% equity.
Board of Directors
Selection and compensation:
Compensation structure: Boards can consider the following when structuring compensation
• Performance-based: Link compensation to the achievement of specific objectives.
• Long-term: Use a long-term performance-based compensation system to encourage
sustained goal achievement.
• Balance: Maintain an adequate balance between the different components of the
compensation package.
• Equity limits: Set limits on director equity grants to reduce exposure to lawsuits based on
director pay.
• Deferred compensation: Some companies offer deferred cash retainers or deferred stock
that can be cashed after leaving board service.
• Fairness: Decide in advance how to fairly compensate directors who attend many
committee meetings, as opposed to those who meet a few times per year
Board of Directors
Selection and compensation:
Compensation structure: Boards can consider the following when structuring compensation
• Performance-based: Link compensation to the achievement of specific objectives.
• Long-term: Use a long-term performance-based compensation system to encourage
sustained goal achievement.
• Balance: Maintain an adequate balance between the different components of the
compensation package.
• Equity limits: Set limits on director equity grants to reduce exposure to lawsuits based on
director pay.
• Deferred compensation: Some companies offer deferred cash retainers or deferred stock
that can be cashed after leaving board service.
• Fairness: Decide in advance how to fairly compensate directors who attend many
committee meetings, as opposed to those who meet a few times per year
Board of Directors
Removal: A board of directors can remove a director for a number of reasons, including:
1. A disqualifying event as defined in the Companies Act.
2. A prolonged absence from board meeting.
3. Entering into contracts that violate the Companies Act.
4. A court or tribunal disqualification order.
5. A court conviction for an offense that results in a minimum of six months in prison.
6. Failure to comply with the Companies Act.
7. The director's voluntary resignation
Board of Directors
Committees of the Board:
1. Audit committee: Oversees all the financial reporting, internal controls, and independent
audits, ensuring financial integrity and compliance.
2. Nominating and Governance Committee: The role of this committee is to identify and
nominate qualified candidates for board vacancies, form board composition, and
structure, and review the board’s performance.
3. Compensation Committee: Sets the compensation packages of senior executives aligned
with competitive pay based upon performance and company strategy.
4. Risk Management Committee: This committee is formed to oversee risk identification,
risk assessment, and the design of mitigation strategies.
5. Mergers and Acquisitions Committee: This committee evaluates potential merger or
acquisition opportunities and gives recommendations.
6. Corporate Social Responsibility Committee: A company having a net worth of rupees five
hundred crores or more, a turnover of rupees one thousand crores or more or a net profit
of rupees five crores or more during any financial year is mandated by the Act to
constitute a Corporate Social Responsibility Committee of the Board consisting of three
or more Directors, out of which at least one Director shall be appointed as an Independent
Director.
Board of Directors
Committees of the Board:
1. Audit committee: Oversees all the financial reporting, internal controls, and independent
audits, ensuring financial integrity and compliance.
2. Nominating and Governance Committee: The role of this committee is to identify and
nominate qualified candidates for board vacancies, form board composition, and
structure, and review the board’s performance.
3. Compensation Committee: Sets the compensation packages of senior executives aligned
with competitive pay based upon performance and company strategy.
4. Risk Management Committee: This committee is formed to oversee risk identification,
risk assessment, and the design of mitigation strategies.
5. Mergers and Acquisitions Committee: This committee evaluates potential merger or
acquisition opportunities and gives recommendations.
6. Corporate Social Responsibility Committee: A company having a net worth of rupees five
hundred crores or more, a turnover of rupees one thousand crores or more or a net profit
of rupees five crores or more during any financial year is mandated by the Act to
constitute a Corporate Social Responsibility Committee of the Board consisting of three
or more Directors, out of which at least one Director shall be appointed as an Independent
Director.
Board of Directors
Committees of the Board:
1. Audit committee: Oversees all the financial reporting, internal controls, and independent
audits, ensuring financial integrity and compliance.
2. Nominating and Governance Committee: The role of this committee is to identify and
nominate qualified candidates for board vacancies, form board composition, and
structure, and review the board’s performance.
3. Compensation Committee: Sets the compensation packages of senior executives aligned
with competitive pay based upon performance and company strategy.
4. Risk Management Committee: This committee is formed to oversee risk identification,
risk assessment, and the design of mitigation strategies.
5. Mergers and Acquisitions Committee: This committee evaluates potential merger or
acquisition opportunities and gives recommendations.
6. Corporate Social Responsibility Committee: A company having a net worth of rupees five
hundred crores or more, a turnover of rupees one thousand crores or more or a net profit
of rupees five crores or more during any financial year is mandated by the Act to
constitute a Corporate Social Responsibility Committee of the Board consisting of three
or more Directors, out of which at least one Director shall be appointed as an Independent
Director.
Board of Directors
Role of Audit committees of the Board:
• Audit committee members have a critical role in overseeing many aspects of a company’s
activities and performance. The audit committee has responsibility for overseeing
financial reporting and related internal controls, risk, independent and internal auditors,
and ethics and compliance.
• Responsibilities may also fall to the audit committee indirectly resulting from
requirements for independent auditors imposed by the government. Increasingly,
additional responsibilities are also falling to the audit committee, including cybersecurity
and environmental, social, and governance reporting.
• According to the Audit Committee Practices Report, a survey conducted by Deloitte and
the Center for Audit Quality finds audit committees are being challenged by increased
complexity in their core responsibilities as well as scope creep across other areas within
their organizations.
Board of Directors
Role of Audit committees of the Board:
• Complex accounting and reporting areas and how management addresses them.
• Significant accounting policies, judgments, management estimates, and their impact on
the financial statements.
• Any prior internal control issues and how they have been resolved. The design and
components of the company’s antifraud and anticorruption compliance programs to
confirm that those programs have sufficient oversight, autonomy, and resources.
• The company’s strategy for managing tax risk, tax controversy, and volatility in the
effective tax rate and to consider potential reputational risks associated with tax positions.
• Uncertain tax positions taken by the company and their potential impact on financial
reporting. Pending financial reporting and regulatory developments, with a focus on
understanding how they may affect the company
• Suggestive Readings:
1. Opinions of Professional Cases discussed in class.
2. Reading material as prescribed in the Course Outline