1. INTRODUCTION :
The Directors of a Company are selected according to the articles of Association of the Company and provisions of the Companies Act. They are in charge of the management of the affairs of the Company. The Directors are collectively called the Board of Directors. The Board is the Company’s executive authority. A director is an Officer of the company within the meaning of section 2(30). Section 2(13) states that a director includes “any person occupying the position of the director by whatever name –called.
The welfare the shareholders and of the company depends upon who the directors are and how they carry out their duties and responsibilities. To protect the interests of the company and of the shareholder s, the companies Act contains detailed rules regarding the appointment , remuneration , powers , duties, liabilities and various other matters concerning directors. Conflict of interest is not merely a matter of professional ethics. A person in a conflict of interest, either potential or actual, may be in the wrong, but conflicts usually occur in the course of being professional or a member of an organization. Directors must be conscious to avoid conflicts of interest. Director should also be mindful of, and seek to avoid, conduct which could reasonably be consistent as creating an appearance of a conflicts of interest. While Directors should be free to make personal investments and enjoy social relations and normal business courtesies, they must not have any interest that adversely influences the performance of their duties, functions and responsibilities as Directors of the company.
2. Qualifications of a Director:
A director need not have any academic qualification: he need not have any degree from the university: he need not have been to school. From the Contract Act and the Companies Act, it can be said that the director must have the following qualifications:
1. A director must be capable of entering into a contract, i.e.,
(a) He must have attained the age of majority,
(b) He must have sound mind and
(c) He must not be disqualified from contracting by any law to which he is subject.
2. A director must be a natural person, i.e. not an artificial person.
3. A director must have the requisite qualification shares.
4. A director must not be disqualified under the circumstances, e.g., if he is an undercharged insolvent or a person convicted by the Court.
Number of Directors
The number of directors to be appointed to the Board of directors of a Company is determined by the articles. The Act provides that there must be at least 3 directors in a Public Company and at least 2 directors in other Companies.
Mode of appointment of directors
1. First directors: Persons named in the articles of association as directors become the first directors of a company. Persons who sign the Memo: If no person is named in the articles as directors, the persons who sign the memorandum of association of the company (who are individuals not companies) become the first directors. – sec. 254.
Election: The normal mode of appointing directors is election by the members at the annual general meeting. The manner of holding the election must be provided for in the articles. –sec.255.
2. Appointment of directors by company: According to sec. 255 Directors must be appointed by the company in a general meeting.
3. Appointment of directors by the Board of directors: The Board of directors may appoint directors in the following circumstances:
(a) Additional directors:
(a) Casual vacancy:
(a) Alternate Directors:
4. Appointment of directors by third parties: The Articles under certain circumstances empower the debenture-holders or other creditors who have advanced loans to the company to appoint their nominees to the Board.
5. Nomination by the Central Government:
Under the Act, the Central Government can nominate some directors to the Board of a company as the Company Law Board may specify as being necessary to effectively safeguard the interest of the company, its shareholders or the public interest.
6. Nomination in Statutory Corporations:
The Government can nominate a director to the Board of a Company coming within the purview of the Industries (Development and Regulation) Act of 1951. Certain statutory corporations possess similar powers. Other rules regarding the appointment of directors are mentioned below:
ii. Qualification Shares:
The articles may provide that no person shall be eligible for appointment as director unless he holds a certain minimum number of shares. Such shares are called Qualification Shares.
In the case of public companies and private companies which are subsidiaries of public companies, when it is intended to propose the name of some person as director, notice of the fact must be given by the candidate or the propose to the Company at least 14 days before the date of the meeting in which the election will take place.
iii. Filing of Consent:
In the case of public companies and private subsidiaries of public companies every person proposed as director must sign and file with the company his consent to act as such if appointed, unless he himself notifies his candidature to the company.
iv. Method of Voting:
Every person, proposed for election as a director, must be voted upon individually.
. Amendment of provisions relating to appointment of Directors:
An amendment of any provision relating to the appointment or re-appointment of a director, whether that provision be contained in the Company’s memorandum or articles, or in an agreement entered into by it, or in any resolution passed by the Company in general meeting or by its Board of directors, shall not have any effect unless approved by the Central Government.
vi. Directors to be Individuals:
A body corporate, association or firm cannot be appointed director, only an individual can be so appointed
Resignation of a director:
A director is an agent of a company and, therefore, he can resign his office by notice. A resignation cannot be withdrawn without the consent of the company. A resignation is effective only when it is accepted by the Board of directors of the company.
Whole Time Director:
A whole time director is a director who is entrusted with certain duties and responsibilities. The appointment of a managing director or of a whole time director can be made by any of the methods
(i) An agreement with the company, or
(ii) A clause in a memo or articles of the company, or
(iii) A resolution passed by a company in its general meeting, or
(iv) A resolution of the Board of directors.
The powers and duties of a managing director are specified in:
(i) the agreement with the company by which he is appointed or
(ii) in the memorandum or articles of the company or
(iii) in a resolution passed by the company in general meeting or
(iv) a resolution by its Board of directors.
Number of Managing Directorships:
No person can ordinarily be managing director of more than one public company or private company which is a subsidiary of a public company.
He can be managing director of two such companies if the second appointment is approved by a resolution of the Board of directors with the consent of all the directors present in a meeting of which specific notice was given to all the directors in India.
Term of Office
No person can be appointed managing director for a term exceeding five years at a time for a public company. There is no bar to the reappointment of a person after the expiry of his term of service.
Remuneration of directors:
The remuneration payable to the directors must be determined according to the provisions of the Act either by the Articles or by the resolution of a company.
Rules regarding director’s remuneration are summed up below, for ex:
- The remuneration payable to the directors of a Company shall be determined either by the articles, or by a resolution passed in a general meeting of the members.
- If a director gives professional service to the company, he may be paid for it.
- The remuneration of directors is part of the overall managerial remuneration which cannot exceed Il% of the net profits. When profit is inadequate or company is in loss a managerial person is entitled to a minimum remuneration.
- A director may receive remuneration either by way of a monthly payment, or by way of a fee for each meeting of the Board.
Meetings of the board of directors:
The Companies Act contains the following rules regarding Board meeting:
- In the case of every Company, a meeting of its Board of directors shall be held at least once in every three months and at least four such meetings shall be held every year.
- Notice of every meeting of the Board of directors shall be given in writing.
- The quorum for a meeting of the Board of directors shall be one-third of its total strength or two directors, whichever is higher.
Powers of directors
Directors derive their power and authority from two sources
i) the Articles of Association of the Company and
ii) the Companies Act.
The articles of association generally contain a list of the powers which may be exercised by directors and the limitations on those powers if any.-The Companies Act provides that the Board of directors shall exercise the following powers and it shall do so only by resolutions passed at meeting of the Board:
(a) make calls on shareholders;
(b) issue debentures;
(c) borrow moneys otherwise than on debentures;
(d) invest the funds of the company; and
(e) make loans.
Validity of acts of Directors:
Acts done by a person as director are valid, notwithstanding that it may afterwards be discovered that his appointment was invalid by reason of any defect or disqualification or that his appointment as director had terminated by virtue of any provision contained in the Act or in the articles.
Rights of directors
i. Participation: A director validly appointed to the Board, and not suffering from any disqualification which would prevent him from acting as such, is entitled to attend meetings of the Board and participate in the direction of the company’s affairs.
ii. Remuneration: A director is entitled to receive the remuneration fixed by the articles or otherwise, subject to the provisions of the Act.
iii. Compensation: A whole-time director and a managing Director may be given compensation by the company in case of premature termination of service.
Duties of directors
1.Distribution of work: “The manner in which the work of a company is to be distributed between the board of directors and the staff is a business matter to be decided on business lines.“
2.Good faith: Every director must act honestly and in the interest of the company.
3.Reasonable care: A director, “must exercise such degree of skill and diligence as would amount to the reasonable care which an ordinary man might be expected to take in the circumstances on his own behalf.“
4: Degree of skill: A director, “need not exhibit in the performance of his duties a greater degree of skill than what can be reasonably expected from a person of his knowledge and experience.
5.To attend meetings: The meetings of any committee to which he is appointed, and though not bound to attend all such meetings, he ought to attend them when reasonably able to do so.
6.The director’s duty of disclosure: The Companies Act makes it obligatory upon directors to disclose certain facts to the company: for example, If a director is interested in any contract or arrangement proposed to be entered into by the company, he must disclose the interest to the Board of directors.
Disabilities of directors
The Companies Act imposes certain disabilities on directors, with a view to protect the interests of the company and of the shareholders. A list of the disabilities is given below, for ex:
- Loans to director: There are restrictions on the giving of loans to directors.
- Contract with directors: There are restrictions upon contract with directors.
- Number of directorships: There are certain restrictions upon the number of ‘ directorships.
Liabilities of directors:
The liabilities of directors may be analyzed with reference to liability of directors to third parties, liability to the company, liability for breach of statutory duties and liability for acts of his co-directors. Directors’ liability may be civil, criminal and unlimited liability.
i. Civil Liability:
The directors may be liable to pay compensation to the company and to outsiders. Some of these circumstances are mentioned below, for ex:
n The directors are liable for untrue statements in the prospectus.
n The directors are liable to the company for ultra virus acts.
n If a director performs his duties negligently and the company thereby suffers damage, he must pay compensation to the company.
n A director is liable for any act amounting to a breach of trust relating to the properties and funds of the company.
n Directors are liable for any breach of duty which causes loss to the company.
II. Criminal Liability
For certain breaches of duty the Companies Act imposes a criminal liability upon directors. Various sections of the Act provide for the imposition of fines for non-performance of the prescribed duties. There is provision for imprisonment in certain cases. Examples-untrue statements in prospectus; failing to keep certain register; falsification of books and reports etc.
III. Unlimited Liability of Directors
The memorandum of association of a company may provide that the liability of the directors or any director or manager, may be unlimited.
CODE OF CONDUCT FOR DIRECTORS
This code of conduct (“Code”) reflects the business practice and principles of behavior that support this commitment .The Board Of Directors (“the Board”) is responsible for setting the standards of conduct contained in the Code and for updating these standards as appropriate to reflect legal and regulatory developments .The Code is intended to provide guidance and help in recognizing and dealing with ethical issues and to help foster a culture of honesty and accountability. Every director is expected to read and understand this Code and its application to the performance of his or her duties, functions and responsibilities.
EVERY DIRECTOR MUST
(i). Represent the interest of the shareholders of the Company,.
(ii). Exhibit high standard of integrity, commitment and independence of thought and judgment,
(iii). Dedicate adequate time, energy and attention to ensure the diligent performance of his/her duties including making all reasonable efforts to attend Board or CommitteeMeetings, and
(iv) Comply with every provision of this Code.
Directors at their discretion may make any report or complaint provided for in this Code to the Chairman of the Board of the Company or to the Compliance Officer. The Compliance Officer will refer complaints submitted to the Chairman of the Board.
COMPLIANCE WITH APPLICABLE LAWS:
In the discharge of their duties and responsibilities, Directors must comply with all applicable laws, rules and regulations. These would include securities laws, insider trading laws and the Company’s insider trading compliance policies.
Conflicts o f interest :
A conflict of interest can arise when a Director or a Member of his/her immediate family receives improper personal benefits as a result of his/her position as a Director of the company. A conflict situation can also arise when a Director takes an action or has an interest that may make it difficult for him or her to perform his / her duties, functions and responsibilities objectively and effectively.
Directors must avoid conflicts of interest. Director should also be mindful of, and seek to avoid, conduct which could reasonably be construed as creating an appearance of a conflicts of interest. While Directors should be free to make personal investments and enjoy social relations and normal business courtesies, they must not have any interest that adversely influences the performance of their duties, functions and responsibilities as Directors of the Company.
While the Code does not attempt and indeed it would not be possible, to describe all conceivable conflicts of interest that could develop, the following are some examples of situations which may constitute conflicts of interest:
• Working in any capacity, for a competitor, customer, supplier or other third party while employed by the Company.
• Competing with the Company for the purchase or sale of property, products, services or other interests.
• Directing business to a supplier owned or managed by, or which employs, a relative or friend.
• Receiving loans or guarantees of obligations as a result of one’s position as a Director.
• Accepting bribes, kickbacks or any other improper payments for services relating to the conduct of the business of the Company.
• Accepting, or having a Member of Director’s family accept, a gift from persons or entities that deal with the Company, where the gift is being made in order to influence the Directors actions as a member of the Board, or where acceptance of a gift could otherwise reasonably create appearance of a conflict of interest.
Conflicts of interest may not always be clear-cut .Any question therefore about a Director’s actual or potential conflict of interest with the Company should be brought promptly to the attention of the Chairman of the Board, who will review the question and determine a proper course of action, including whether consideration or action by the full Board is necessary. Directors involved in any conflict or potential conflict situation shall recluse themselves from any discussion or decision relating there to.
Ways to Mitigate Conflicts of Interest or Managing Conflicts of Interest :
There are many means for managing conflict of interest . Most corporations have a section in their code of ethics that specially addresses the problem . In some Industries , specially financial services, companies comprehensive compliance programs for ensuring the utmost integrity. The management of conflicts of interest requires a variety of approaches. The following is a list of the major means by which professional group and business organizations can manage conflicts of interest .
- 1.Objectivity : A commitment to be objective serves to avoid being biased by an interest that might interfere with a person’s ability to serve another . Virtually all professional codes require objectively. Indeed, the code for certified public account ants, which requires objectivity and independence, identifies objectivity ( the obligation to be impartial and intellectually honest ) with avoiding actual conflicts of interest and independence ( avoiding relations that would impair objectivity ) with potential conflicts.
- 2. Avoidance: The most direct means of managing conflicts of interest is to avoid acquiring any interest that would bias one’s judgment or otherwise interfere with serving others. Avoidance is easier said than done. However, first it may be difficult to anticipate or identify a conflicting interest. for example , law firms typically conduct a review of new clients to avoid conflicts of interest , but when the number of relations on both sides are numerous , such a review may miss some potentially conflicting interests .
- 3. Disclosure : Disclosure serves to manage conflict of interest primarily because whoever is potentially harmed by the conflict has the opportunity to disengage or at least to be on guard . For example , a stock broker who is paid more to sell a firm’s in house mutual funds faces a conflicts of interest in recommending a fund to a client . A client who knows of the potential bias can seek out another broke r who is uninfluenced by the difference in compensation or can evaluate more carefully the broker’s advice to detect any bias. In short , forewarned is forearmed. In legal ethics , there is no conflict of interest if the lawyer discloses the conflicts and is confident that the client will be unaffected and the client accepts the lawyer’s service under those conditions.
- 4. Competition :Strong competition provides a powerful incentive to avoid conflicts of interest , both actual and potential . For example , at one time commercial banks gave their brokerage business to firms that were already bank customers. This practice , know as reciprocation or `law_article`recip, “, has virtually disappeared because of the need for returns on trust accounts to compare favorably with alternative investments. Competition dictates that the allocation of brokerage commissions be based on the “best execution” of trades and not on keeping bank customers happy. . of course , no firms would use increased competition as a means for managing conflict of interest , but industry regulators should recognize that the power of competition to reduce conflict of interest is another reason to encourage competition.
- 5. Rules and Policies : As already noted , most companies have policies concerning conflicts of interest . These typically require employees to avoid acquiring adverse interest s by not accepting gifts or investing in potential suppliers, for example. Rules and policies may also prohibit the kind of conduct that would constitute a conflict, as when a broker trades ahead of large customer, a practice know as “ front running” . Conflicts of interest may managed by other rules and policies that do not address conflict of interest directly and have other purposes. Example, controls on the flow of information that affect who has access to what information are necessary for many reasons, but the rules and policies in question also limit conflict of interest. Thus , a portfolio manger of a particular mutual fund who has no knowledge of pending purchases by other funds in the firm has fewer possibilities for conflicts.
- 6. Independent Judgment : Insofar as a conflict of interest results in biased judgment, the problem can be corrected by utilizing a third party who is more independent . in Court of law ,judge who , say, owns stock in accompany affected by a case is generally obligated to recluse himself or herself and allow the decision to be rendered by other judges. Companies usually require an executive with a conflicting interest to pass the next level. Independent appraisers are often utilized in cases where an insider , such as an executive or a director , is engaging in a property transaction with a corporation. In firms with frequent conflict exists among various units, a standing independent advisory board is often formed to consider matters referred to it .
- 7. Structural Changes : Because conflicts of interest result from providing many different services to different customers or clients, they can be reduced by compartmentalizing these services. Advertising agencies , for example , form separate creative teams for each account ; accounting firms separate auditing an advisory services; and commercial banks split trust management from the retail side of the business . Within multifunction institutions, conflicts can be reduced by strengthening the independence and integrity of each unit. For example , instead of treating the investment research division as an arm of their brokerage units investment banks are being urged to upgrade their status and insulate them from pressure.
Managing Conflicts of Interest at the Institutional Level
Strategies are emerging to manage institutional conflicts of interest, several of which are similar to conflicts of interest that occur on the individual level.
- Encourage transparency via disclosure of conflicts of interest among trustees and former trustees as well as university officials who often have close connections with boards of companies doing business with the institution.
- Place limits on involvement of faculty members and other institutional officials in companies.
- Exercise caution when technology-transfer official’s remuneration is tied to stock values, as personal biases can influence judgments regarding stock sales or the acceptance of sponsored research agreements.
- Manage and review conflicts of interest using independent sources and external reviewers.
- Build organizational firewalls so that potentially conflicted parties do not interact. The institutional technology-transfer office should not be in the decision chain of identifying or managing conflicts of interest.
- Anticipate situations that could be perceived as compromising research and fiduciary integrity.
The sources of institutional conflicts of interest are myriad. But they must be addressed if we are to both avoid undermining the credibility of our scientific enterprise and ensure that the highest standards of ethical conduct of research are sustained. The search for truth must not be contaminated by even a perception of bias.
REPORTING ANY ILLEGAL OR UNETHICAL BEHAVIOUR:
Directors are encouraged to promptly contact the Chairman of the Board or the Compliance Officer if the Director believes that he or she has observed illegal or unethical behavior by any employee, officer or Director or by any one purporting to be acting on the Company’s behalf or any violation or possible violation of this code and the reporting Director has any doubt as to the best course of action in a particular situation. Confidentiality will be maintained to the extent permitted by law.
The Company has set the policy in the Code of Conduct for Directors and Employees to avoid the conflicts between the personal interest and the corporate interest as follows. Directors and employees shall not be engaged as directors or advisors of other companies, organizations, and associations that may conflict with the interest and the business of the Company. Acknowledgment by the Board of Directors must be sought before taking such engagement. Directors will promptly notify the Board when any of the conflict of interest occurs and must consider whether to refrain from participating in the debate and/or voting on the matter, whether to be absent from discussion of the matter, whether to arrange that the relevant board papers aren’t sent, or, in an extreme case, whether to resign from the Board.
The Company aims to avoid the conflict of interest between the personal interest and corporate interest in dealing with suppliers and outside parties. As such, the following policies are set:- The Company has set the following measures to prevent directors and management from inside trading and misusing the Company’s information for their own or other benefits. Directors and employees must at all time observe the rules and regulations issued by the SET, the Securities and Exchange Commission (SEC), and other governing laws which include the equitable disclosure to shareholders and the public. Directors and employees will not use inside information wrongly or in a way that will damage the Company. Any information disclosure to the public that would affect the business and the Company’s stock must be approved by the President. Only the President or the assigned staff member is authorized to disclose such information. Directors and employees who have the inside information relating to financial statements should refrain from their own security trading within 45 days before and 24 hours after a disclosure date. For other significant inside information, Management and employees should refrain from security trading from the day of acknowledgement until 24 hours after disclosure to public.
- Commercial Law ( including company law ) And Industrial Law , Twenty –First Revised Edition , Arun Kumar Sen , Jitendra Kumar Mitra . ( Edited and Revised by Prof. Sakti Mukherjee. (Director .Chapter)
Ethics and the Conduct Of Business written by John R. Boatright Fourth Edition . Chapter 6. Trade secrets and Conflict of Interest .
- From Internet ( google.com)