Legal provisions under companies act

The key provisions of the companies Act with respect to corporate boards are:

1. Strength: A public limited company must have at least three directors.
2. Meetings: The board of directors must meet at least once in a quarter.
3. Composition: There is no fixed number of non-executive directors. No person can be a director of more than twenty companies.
4. Powers: The board of directors has the powers to (a) borrow, lend, and invest funds, (b) recommend dividends, and (c) appoint the managing director.
5. Remuneration: The total remuneration of the directors is subject to a ceiling of 11 per cent of net profits.
6. Duties: The board has the duty to present financial statements and directors’ report to members.
7. Liabilities: The board is punishable for breach of trust, dishonesty and fraud.
8. Audit committee: There shall be an audit committee in all companies having a paid capital of not less than Rs 50 million.

The SEBI code:

The key elements of the SEBI code, which are based on the recommendations of the Kumaramangalam Birla Committee report is as follows:

1. At least one half of the board shall comprise non-executive directors and at least one third of the board shall comprise independent directors.
2. An audit committee of at least non-executive directors shall be set up, majority of the being independent. It shall meet at least thrice a year.
3. The remuneration paid to all directors shall be disclosed in the annual report.
4. A Management Discussion and Analysis Report should form part of the annual report.
5. Details of new appointees as directors shall be provided to the shareholders.
6. The annual report shall have a section on corporate governance.
7. The auditors of the company should give a certificate regarding compliance on corporate governance.

Reforming Corporate Governance:

True, there are a number of provisions in the regulatory framework (the companies Act, the Securities Exchange Board of India Act, and so on) to guard the interest of investors. However enlightened companies will have to go beyond them and measure that they are not run primarily for the benefit of dominant shareholders.

To build a healthy, mutually beneficial, relationship with all its investors, it behooves on every company to improve the standard of its corporate governance. Some of the ways of strengthening corporate governance are:

1. Regard institutional investors as strategic partners, not adversaries.
2. Separate the office of the chairman from that of the chief executive officer.
3. Expand the role of non-executive directors
4. Ensure that the board of directors is information ally well equipped.
5. Link managerial compensation to performance.
6. Give employees stock options
7. Improve corporate accounting and reporting practices.

Reform of corporate governance thus calls for a multi pronged approach. It is indeed a tall order. Is it feasible to achieve such reforms? A cynic might say that vested interests tend to perpetuate inefficient corporate governance and the political and economic market place is not likely to deliver efficient governance. Understanding of the politics of corporate governance is rather limited, heightened competition that we are witnessing in all spheres of economic activity will lead to improvement in the quality of corporate governance. Access to external capital on economical terms is now a major competitive weapon and there seems to be better way to ensure this than to improve the quality of corporate governance. Enlightened self interest should prod a company to raise its standards of corporate governance. After all, the price of independence is active self discipline.

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