Companies Act 2013 Changes and new requirements impacting Directors

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Walter Horn
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1 Companies Act 2013 Changes and new reqirements impacting Directors Febrary 14, 2014

2 Introdctory video Barings Bank ( ) Page 2

3 so who do yo think is accontable? most people think of the CEO, CFO and Board of Directors Page 3

4 Key changes and new reqirements in Companies Act 2013 Page 4

5 Directors & Independent Directors: Key changes and new reqirements (1/4) New reqirement 1 Women director: Company shold appoint at least one woman director on the Board for sch class or classes of companies as may be prescribed. A transitional period of one year has been prescribed to companies for compliance with this reqirement 2 Domicile of director: Company shold have at least one director who has stayed in India for a total period of not less than hndred and eighty two days in the previos calendar year 3 Maximm nmber of directors: Company can have a maximm of fifteen directors on the Board and will be applicable to all companies. Any frther increase in nmber of directors, the company will need to pass a special resoltion at its General Meeting and no approval from the Central Government is reqired 4 Cap on directorship: A person will be able to become director in only 20 companies. However, ot of this, not more than 10 companies can be pblic companies Page 5

6 Directors & Independent Directors: Key changes and new reqirements (2/4) New reqirement 5 Composition: At least 1/3 rd of the total nmber of directors will be independent directors. If higher nmber has been prescribed nder any other governing law/reglation then sch company shall comply with the same 6 Applicability Independent directors: Listed companies or pblic company having: Paid-p-capital of INR. 100 cr. or more, Trnover of INR. 300 cr. rpees or more, In aggregate, otstanding loans or borrowings or debentres or deposits, exceeding INR. 200 cr. 7 8 Rotation: The independent director will be appointed for a period of five years and be eligible for reappointment sbject to certain conditions for two terms. Thereafter, the independent director shall be eligible for reappointment after a cooling period of three years Qalification: Majority of the adit committee members inclding its chairperson will have an ability to read and nderstand the financial statements Page 6

7 Directors & Independent Directors: Key changes and new reqirements (3/4) New reqirement Manner of selection: Independent directors to be selected from a data bank maintained by a body, institte association, as may be notified by the central government minee director: minee directors appointed to the board by financial instittions/investors shall not be considered as independent directors Relationship with external firms: A person is prohibited to be appointed as an independent director, if the person or his/her relative is/was a partner/ exective in an external adit firm, internal adit firm, legal firm and/or conslting firm(s), which have association with the company 12 Stock options: An independent director will not be entitled to any stock options in the company. The Act is not clear as to how a company will deal with stock options granted in the past and which are otstanding at the date of its enactment Page 7

8 Directors & Independent Directors: Key changes and new reqirements (4/4) New reqirement Code for independent directors (Schedle IV): Schedle IV sets ot a code of condct for the role, responsibilities and fnctions of the independent director. Key reqirements inclde need for independent directors to hold at least one meeting in a year to review performance of non-independent directors and framing an evalation mechanism to evalate performance of each independent director Protection for independent directors: Independent directors shall be held liable, only for sch acts by a company which had occrred with their knowledge, attribtable throgh board processes and with their consent or connivance or where they have not acted diligently Page 8

9 Analysis of key changes Listing agreement may be amended to bring it inline with the 2013 Act. In case of any conflict, stricter of the two is expected to apply Listed companies have to revisit the appointment of independent directors. The time frame dring which data bank has to be prepared has not been defined Mandatory rotation period is a significant change and is aimed to improve objectivity of the independent director. The availability of qalified personnel to act as independent director cold pose challenges in its implementation clarity provided for stock options granted in the past and remaining otstanding at the date of enactment Most of the attribtes listed in the code of condct for independent directors are qalitative in natre and it may not be possible to demonstrate compliance Class action sit provide empowerment to minority stakeholders to come together and seek action against management, advisors and aditors of the company for mismanagement. The new risks and liabilities will definitely enforce more responsibility into the role of a director Page 9

10 Translating the changes in Companies Act 2013 on grond Page 10

11 2013 Act: Role of Directors/Independent Directors Board Leadership Board Accontability Director/ Independent Director Board Effectiveness Stakeholder Relationships Aligned to Comply or Explain approach being sed in matre markets 11

12 Qestions to consider 1 Where is my company s Board on a continm to comply with Schedle IV? 2 What and who can I rely pon for ensring effective compliance with the new provisions? 3 How mch time is needed as an Independent Director to flfil my responsibilities? 4 How do I balance my fidciary responsibilities? 12

13 1. Board engagement continm where are we? Least Involved Most Involved Passive Board Certifying Board Engaged Board Intervening Board Operating Board Limits it s activities, accontability and participation Certifies to shareholders that the management is doing what the board expects and the management will take corrective action when needed Willing to change management to be credible to shareholders Provides insight, advice and spport to the management team Seeks ot sfficient indstry and financial expertise to add vale to decisions Ensres adeqate deliberations on key isses Becomes intensely involved in decision making arond key isses Convenes freqent, intense meetings, often on short notice Balances conflicting interests of stakeholders Makes key decisions that management then implements Fills gaps in management experience Framework adapted from Harvard Bsiness School Companies Act Expectations of a Board? 13

14 1. Board engagement continm self assessment Focs area as per the new Companies Act Crrent Engagement Desired Engagement Financial Management Internal financial controls Exclsive Exclsive Policies and procedres Financial reporting Adit Risk Management Enterprise risk management Exclsive Exclsive Frad risk & vigil mechanism Corporate Governance Board effectiveness Exclsive Exclsive Board & Director performance Selection - Directors/KMP External relations Conflict management related party transactions Exclsive Exclsive Compliance Corporate Social Responsibility Management Performance Performance assessment Exclsive Exclsive Code of condct Hman Resorces and Organization Remneration Exclsive Exclsive Corporate cltre 14

15 2. What & who can I rely pon? 1 st line of defence Identified Key Management Personnel Senior management and fnctional heads 2 nd line of defence Company Secretary Aditors: Secretarial External, Internal, Cost Advisors / consltants 3 rd line of defence Exective Board members Board Committees Office of the Board / Adit Committee 15

16 3. Where shold I spend my time? Provide insights, advice and spport Board & other meetings Selection & performance assessment Key managerial personnel Senior management Exective directors Self Assessment Committee performance Board performance Strategy & planning Committee meetings & consltations Board meetings Shareholder meetings Special meetings Financial management Compliance CSR Stakeholder engagement & conflict management Risk management Strategic direction Board effectiveness 16

17 4. How do I balance my fidciary responsibilities? Obligations & expectations as an Independent Director Independent jdgment on Board s deliberations Safegarding interests of stakeholders Moderating and arbitrating in sitations of conflict Ensring integrity of financial information How do I balance and safegard my fidciary responsibilities? Wider dties and responsibilities as part of the Board Exercising dties with reasonable care, skill & diligence t attempting to achieve any nde gain Participating constrctively and actively in Board and Committee meetings Keeping well informed abot the company and external environment 1 My contract with the 2 Director s and officers 3 Company insrance Effective mintes 17

18 Key takeaways 1 Don t get caght in the mintia remember and actively consider the for broad themes 2 Ultimately effective board governance is all abot implementation and adhering in tre spirit 18

19 Q&A

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