The Companies Act, 2013 defines directors under Section 2(34). In this article, you'll learn more about the types of directors in the company under the Companies Act.
Introduction to Company Directors
Company directors play a crucial role in corporate governance, acting as key decision-makers responsible for its overall direction and performance. As members of the board of directors, they provide effective corporate management because they create policies and observe the conduct of management. The role of directors includes strategic planning, financial obligations, and the execution of practices in accordance with legal and ethical standards. They are to act in the best interest of the company and its stakeholders, exercising due care and reasonable judgement in their decisions.
Types of Directors Under Companies Act
There are different types of directors chosen in a firm. The Companies Act 2013 defines a director under Section 2(34) as a director appointed to the Board of a company; this primer will be divided into four sections, i.e., Functions, Appointment, and Residuary Types.
Type of Directors Based on Functions Performed
There are two types of directors: executive directors and non-executive directors.
Executive Directors
Executive directors are company officers who are present internally and are involved in the company’s day-to-day management, corporate decisions. There are two types. Managing Directors and Whole-Time Directors
- Managing Director: A director who is the CEO and entrusted with substantial management powers under s. 2(54) .
- Whole-Time Director: A director employed on a whole-time basis, not the CEO of the company, and is under a special contract, appointed under s.2(94).
Responsibilities of Executive Directors
An executive director oversees the general company administration that coordinates the everyday running of the company. Such includes;
- Financial Management: The executive director oversees the budgeting and accounting departments to ensure that records are well framed,
- Leadership– they create strategies for success and reports to the board of directors
- Compliance -the executive director must ensure that operations are carried based on existing legal provisions and regulatory bodies.
- Communication – management has to clearly communicate ideas to the employees
- Strategic Thinking -the administrator designs and adopts policies for the company.
- Decision Making -the administrator has to make crucial decisions, especially during challenging times.
- Board Development: Collaboration with the board for strategic input.
Other roles would involve designing growth initiatives, teaming across every level, offering constructive feedback to managers, preparing reports for the board, planning future investments, and ensuring the company’s financial sustainability through proper oversight of the departments as well as appropriate operational strategy in line with the principles of strategic management.
Non-Executive Directors
Non-executive directors are external professionals and are not involved uninvolved in the everyday activities of the company under Section 149(12). They are of two types: independent directors and nominee directors.
Independent Directors are appointed to ensure transparency and provideIndependent oversight,board advisory, governance, objective decision-making expertise. Must have the following qualifications:
- Industrial expertise and knowledge
- Must not have any stock options or stake in the company
- It can only be appointed for a maximum of 5 years and two terms, with a minimum cooldown of 3 years between the term sheet.
Duties of Non-Executive Directors
Non-Executive Directors (NEDs) have several key responsibilities, including:
- Risk Management: Identifying, analysing, and control of operational and strategic risks
- Strategic Direction: Providing input and challenging assumptions to drive long-term development
- Appointment or Removal of Executive Directors: They must be involved in the selection, removal, as well as succession planning of executive directors and setting their remuneration
- Fiduciary Duties: Exercising due care and loyalty to the organisation
- Independent Perspective: Bringing an outside view to enhance boardroom decision-making
- Best Interests of the Company: The interest of the firm as a whole and not of any group of shareholders
- Accountability: The management and executive directors should be answerable for performance against objectives
- Constructive Challenge: Boardroom challenge of the management for performance during board meetings.
Nominee Directors
Nominee Directors are hired for third-party representation and try to withhold shareholder interests and are appointed to the board of directors. Must have the following requirements under Section,149(7) and s.161(3)
- Must be appointed if provided in the Articles of Association (AoA)
- Must have unfettered discretion to protect the interests of both the company and the shareholders
Conflict of Interest Management for Nominee Directors
Nominee directors, who represent the investing institution, often have conflicts of interest as they juggle the needs of the company with those of their appointing entity. Here are some tips on how to manage these conflicts:
- Establish Clear Guidelines: Mechanics for identifying and managing conflicts should be set
- Define Roles and Responsibilities: The role, authority, and duties of the nominee director must be clearly described
- Communicate: The channels between the nominee director, the parent company, and the subsidiary’s board must always be open
- Build Relations: Educate board members, management, and stakeholders on the fact
- Stay Updated : Keep a close eye on any legal or regulatory amendment
- Consider Appointer Interests: Nominee directors might consider their appointer’s interests to whom they owe allegiance unless some actual conflict arises.
The management of potential conflicts of interest may lead to significant scenarios, such as decisions made illegally or ineffectively, which can also eliminate the rights of a director for future directorships.=
Types of Directors Based on Appointment
The Companies Act 2013 allows for three types of directors based on appointment to deal with contingencies, Additional Director, Alternate Director, and Casual Vacancy Director
Additional Director
A company may appoint an additional director under s.161(1) to deal with unexpected or additional work. Hence, it must fulfill the following requirements.
- Must be provided for in the AoA
- Cannot serve beyond the next Annual General Meeting
- Additional Directors cannot be appointed in special circumstances to strengthen the majority. You can become a Director of company law under the CPC Act by consulting experts in your field.
Alternate Director
An Alternate director can be appointed under s.161(2) in the absence of the director for more than three months to act on his behalf if provided under AoA
- They can only serve as a temporary replacement till the managing director returns, cannot serve beyond that point
- It must be a like-for-like replacement; only an independent alternate director may fill in for an alternate director.
Role and Limitations of Alternate Directors
An alternate director substitutes for a primary director, who may not be able or willing to attend to all his or her duties. To perform the duties of the primary director including attending meetings, casting votes, and participating in the discussion of such meetings. Must be aware of all company’s affairs, privy to everything that transpires within the organisation, and should act for the best interest of the company. An alternate director is only obliged to perform duties and subject to the following restrictions:
- Acts only when the primary director is absent and is deprived of the right to remunerations due in the company
- They shall be independent and not agents for the direct or indirect benefit of the parent company or shareholders
- Alternate directors are as liable as the usual directors in regards to action taken
- They communicate with other members of the board, management, and stakeholders but note key events experienced to the parent director
- Ensure they are in full compliance with all relevant laws and governance standards
- Identify existing conflicts of interest; disclose them; and manage them appropriately.
Casual Vacancy Director
- Can be appointed under s.161(4) on the death, resignation, disqualification, or incapacity of a director
- Need not be provided for under AoA
- Can only serve till the term of the director who has vacated.
- This only applies to public companies.
Miscellaneous Types of Directors
This section deals with classification of directors based on categories that may overlap with earlier categories. This section covers residential directors, women directors, and small shareholders directors.
Residential Directors
- Provided in s.149(3) that every company must have at least one director who resides in India for at least 182 days in a year
- For newly incorporated companies, the requirement shall apply proportionally (50%) to the end of the FY
Women Directors
- Provided for in s.149(1), requires three types of companies to have a minimum of one women director
- Every listed company
- Every public company without a paid-up share capital of 100 cr or a turnover of 300 cr.
- Companies registered before the Companies Act, 2013: https://www.mca.gov.in/Ministry/pdf/CompaniesAct2013.pdf shall appoint women directors within a year of this act coming to force, while new companies post-2013 act shall appoint women directors within six months of registering.
Small Shareholders Director
- There is no mandate to appoint a small shareholders director under s.151, left up to the company’s discretion
- Companies must fulfill two criteria to be eligible to appoint a small shareholders’ director
- It must be a public company
- It must have at least 1000 or more small shareholders.
Independent Directors
An independent director is a board member who does not join the list of executive management and does not have a material relationship with the firm. They are also called non-executive or external directors. These directors provide diversified skills and an objective view, which are very important in corporate governance.
To this end, these independent directors are expected to perform several key functions like providing independent judgments on strategy, performance, and risk management. Independent directors also compare the board’s performance with that of its management; indeed, the performance of the management should always be in line with the objectives set or established by the board.
Of course, these directors are also responsible for ensuring that financial information is accurate and for defending the rights of all equity holders, especially those who are minority shareholders.
Legal Requirements for Independent Directors
Independent directors must meet specific legal criteria to ensure their impartiality and effectiveness in corporate governance:
Independence:
Do not have any interests or relationships that may compromise independence, which comprises:
- Neither has been a partner in, nor is an executive director of, the auditors, lawyers, or consultants to the Group and its companies at any time during the three years preceding appointment.
- Neither holds 2% or more of issued share capital of the Group and its companies.
- Neither has any financial relationship with the Group, its holding, subsidiary, or associated entities or their promoters or directors.
Declaration:
Should be made to declare at the first board meeting, in the opening of every financial year, and in case any reason that compromises their independence.
Experience:
Should have experience and skills in the fields of finance, law, sales, management, marketing, research, or corporate governance.
Integrity:
Should be able to show the highest integrity and willingness to pose tough questions
Commitment in Time:
Should be willing to take and spare ample time for the company’s affairs.
Professional Conduct:
They are supposed to maintain the highest standards of ethics, work objectively, and represent the interests of the company.
Shadow Directors
A shadow director is an individual who assumes the responsibilities of a director without being formally registered or appointed to the board. Essentially, a shadow director acts as a substitute for a real director who is unable to fulfill their duties.
This person, sometimes referred to as a de facto director, can significantly influence board decisions and management actions. However, shadow directors may also face legal liabilities similar to those of officially appointed directors, particularly regarding decision-making and compliance with corporate governance standards.
Legal Implications of Being a Shadow Director
Being a shadow director carries several legal risks, including:
- Personal Liability: Shadow directors may be personally accountable for any losses or damages incurred by the company.
- Criminal Sanctions: They could face criminal penalties if found to be reckless or dishonest in their actions.
- Disqualification: Shadow directors may be barred from serving as directors in the future.
- Reputation Damage: Failing to meet their responsibilities can lead to significant harm to their professional reputation.
FAQs
What is the difference between an executive director and a non-executive director?
An executive director is directly involved with the daily running of a company whereas, on the other hand, a non-executive would look after more of a strategic overview rather than a management type role.
The role of an independent director?
This person would ensure that there is objective oversight of corporate governance, hence meaning that an objective view will be obtained upon board decisions being made.
Who can be a nominee director?
A nominee director represents other people's interests or third-party interests on the board.
What is a shadow director and are they liable under law?
A shadow director is a person who, although he may not be officially represented, makes decisions for the company to the board behind the scenes. Under some situations, he or she may be liable under the law.
How are alternate directors appointed?
The Board appoints alternate directors to replace a regular director who is temporarily absent. This provision is generally made through a board resolution.
Non-executive directors liable for company failure?
Yes, in case non-executive directors fail to discharge their fiduciary functions, or obligation of oversight.
Legal protection given to directors?
They may have some legal protection through indemnity clauses and directors' liability insurance which can indemnify them for specific liabilities.
