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Directorship: A Job With Boundless Responsibilities

Published on Mon, Jun 16,2014 | 17:52, Updated at Mon, Jun 16 at 19:11Source : Moneycontrol.com 

By: Sunil S Kothari, Partner, Deloitte Haskins & Sells LLP

DIRECTORSHIP: A JOB WITH SEEMINGLY BOUNDLESS RESPONSIBILITIES

A recent global survey conducted by Deloitte to assess the board member concerns about risk revealed important findings. First and foremost finding was the Board-level risk committees are well-established and widespread in case of around 22% of the 400 Companies surveyed. Second - finance companies are more likely to have board-level risk committees than non-finance companies. Another important one to note was local regulations play a crucial role in building the risk oversight structures.

Globally countries are re-defining the roles and responsibilities of the Board of directors in light of the dynamic business environment and associated risks. India is not an exception and the new Companies Act, 2013 (the ‘Act’) comprises of many provisions that aim at self-governance and transparency by the corporate entities. The Act has raised the bar for the Board of Directors in India with several significant changes seeking to redefine the Board governance. Disclosures have been enhanced in Board’s report to shareholders, additional rigor has been added to strengthen the Directors’ Responsibility Statement; and the Independent Directors have been entrusted with new responsibilities to make their role more objective and purposeful.

The additional responsibilities casted on the directors both through their conduct and enhanced disclosures, is analysed below.

Additional disclosure in Annual Return: Section 92 of the Act requires additional disclosures in the annual return filed by the companies with the details of meetings of the Board and its various committees conducted during the year along with attendance and remuneration paid to the directors. In case of listed companies similar details are also required by the new Clause 49 of the Listing Agreement. Further the said section also requires disclosures regarding penalty or punishment imposed on the company, its directors or officers and details of compounding of offences and appeals made against such penalty or punishment.

Disclosure in the Board Report: Section 134 (3) of the Act prescribes significant new disclosures in the Board’s report, each of which is worthy of separate attention. To highlight some of the key new disclosures to be made:

  • Company’s policy on director appointment and remuneration including criteria for qualifications,
  • Comments on adverse remarks in auditors report and in the secretarial audit
  • Particulars of loans, guarantees or investments (as required in Section 186)
  • Particulars of contracts and arrangements with related parties
  • Particulars of defaults in repayment of deposits or interest thereon and non-compliances with the requirements under the Act
  • Statement on development and implementation of policies for risk management policy for the company including identification therein of elements of risk, if any, which in the opinion of the Board may threaten the existence of the company 
  • Details about the policy developed and implemented by the company on corporate social responsibility initiatives taken during the year
  • Statement on the manner of formal evaluation of performance of the board, its committees and individual directors for listed and prescribed public companies
  • In the case of listed companies, a statement on adequacy with reference to financial statements and operating effectiveness of Internal Financial Controls and Controls over compliance with all applicable laws. The term “internal financial controls” means the policies and procedures adopted by the company for ensuring  the orderly and efficient conduct of its business, including adherence to company’s policies, the safeguarding of its assets, the prevention and detection of frauds and errors, the accuracy and completeness of the accounting records, and the timely preparation of reliable financial information

The Board Report is to be prepared for standalone financial statements of the company with a separate section for performance and financial position, for each of the subsidiaries, associates and joint venture companies.

Though many of the above changes appear logical, building the compliance mechanism to bring these aspects to the Annual Report level is a challenge, for example, response or explanation of directors for the adverse remarks in the auditors and secretarial audit report shall require a company to analyze the basis of the remarks, its regulatory / accounting relevance, its impact on the financial statements and last but not the least a thought on the concluding remark to maintain the stakeholders’ confidence.

Board committees – Listed and prescribed companies are required to constitute the following Board committees -

-        Audit committee

-        Nomination and Remuneration committee

-        Corporate Social Responsibility committee

-        Stakeholder Relationship committee

The composition requirements, roles and responsibilities of these committees are also laid down in the Act and the notified rules thereunder. Increased responsibilities of the Audit committee have been prescribed, namely -  

-        Approval of related party transactions

-        Scrutiny of inter-corporate loans and investments

-        Valuation of undertakings or assets of the company, wherever it is necessary

-        Evaluation of internal financial controls (IFC) and risk management systems

-        Setting up Vigil Mechanism for directors and employees to report genuine concerns

-        Oversight over the financial statements and governance process of subsidiaries / associates and joint ventures.

Independent directors – All listed companies and prescribed public companies are mandated to have independent directors on the Board. Code for Independent Directors is prescribed in Schedule IV of the Act. Role of independent directors includes safeguarding interest of all stakeholders, particularly minority shareholders.

Related party transactions – all Related Party Transactions (RPTs) which are at arm’s length and in the ordinary course of business shall require the approval of the audit committee. In case of listed companies, as per amended Clause 49 with effect from 1 October 2014, prior approval of audit committee required for all material RPTs. To formalise the approval process, considerations that audit committees may look to include

-        Framing guidelines for evaluation of nature, timing, need and pricing of RPTs

-        Establishing thresholds and levels for approvals

-        Timing of reporting RPTs to facilitate review

-        Substantiate arms-length through external valuations, where appropriate

In case of RPTs  not at arm’s length or not in the ordinary course of business require approval of board or the shareholders (per defined thresholds) and need to comply with the relevant rules, for example Companies (Meetings of Board and its Powers) Rules, 2014 now requires the agenda of the Board meeting at which the resolution is proposed to be moved to contain disclosure for the manner of determining the pricing and other commercial terms, both included as part of contract and not considered as part of the contract.

The Act mandates stringent penalties, including imprisonment for directors of listed companies and any other employee of the company who has entered into or authorised the RPT in violation of the provisions of the Act. One can note the granularity of the specific performance insisted through the provisions of the Act.

Now let us look at some the objective guidance on the fiduciary duties of the directors. For the first time the Act enlists the specific fiduciary duties of a director are prescribed in Section 166. These include below:

  • to act in accordance with the articles of the company
  • to act in good faith to promote the objects of the company for the benefit of its members as a whole
  • to exercise his duties with due and reasonable care, skill and diligence, and independent judgment
  • not to be involved in a situation in which he may have a direct or indirect interest that conflicts, or possibly may conflict, with the interest of the company
  • not to achieve or attempt to achieve any undue gain or advantage
  • not to assign his office

Many of the above requirements are qualitative in nature and require thoughtful consideration from Company’s side as well as from directors to ensure compliance in each requisite transaction.

So, directorship is no more a straightforward job. Requirements such as additional disclosures in the Directors’ Responsibility Statement regarding internal financial controls and regulatory compliance and widely discussed provisions relating to class action suits, make the job further complex.

A systematic approach of identifying applicability, determining the responsibilities for compliance and monitoring the progress against timelines, shall help entities in ensuring compliance with the new law.

 
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