When Stakeholders own the ship, the directors appointed by them run the ship. The board of directors stands in a fiduciary relationship with shareholders and is expected to protect their interests. A system should be developed to ensure selection of right individuals as directors. If you are a first-time entrepreneur or a serial one, this blog will guide you deciding Company board.
Proven to be effective practices while deciding on Board of Directors:
Separation of the position of the Chairman and the CEO:
The Chairman leads the board, while the CEO leads the executive team. Therefore, governance is likely to be affected adversely if an individual holds both the positions. At an early stage, an individual can handle both roles, after the company grows, the structure could be changed.
Presence of non-executive directors:
Particularly independent directors who do not have any significant pecuniary interest in the company improves the performance of the board. It is expected that independent directors will bring varied relevant experience and will evaluate the executive management more objectively as they will not be subservient to the CEO like executive directors.
In India, the Corporate Governance Code11 requires that:
- Total non-executive directors should be at least 50% of the board size;
- The number of independent directors should be at least 50% of the board size if the chairman is an executive director;
- Total independent directors should be at least 33% of the board size if the chairman is a non-executive director.
Size of the board of the company:
It is suggested that ideally, the size of the board should be between 10 and 15 members. The Indian Companies Act stipulates that the size of the board should not exceed 15 members.
Functioning through committees:
It is a global trend that a board functions through committees like the audit committee, remuneration committee, shareholders grievance committee and nomination committee. Majority of members in each of these committees are independent directors. The reason behind such a division of members into committees is to avoid any discrepancies in disposing of responsibilities.
In conclusion, any company while deciding on the size of the board of directors, should give due consideration to the best practices to lead a well-organized company. At Wazzeer, we insist our clients exercise the three main rights available within company law, those are:
- Shareholders’ right to appointment and or remove directors;
- Shareholders’ right to subject directors to exercise their discretion in the interests of the shareholders as a class;
- Shareholder’s right to structuring the incentives of the members of the board so as to induce them to promote the interests of the shareholders as a class.
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