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Corporate board basics: Deciding the numbers

The word ?systems' includes structural and organisational aspects that facilitate better corporate governance. It is well known that a company being an artificial and juristic entity cannot function by itself. The person of a company is manifested through the Board of Directors.

india Updated: Feb 12, 2006 13:38 IST
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The word ‘systems' includes structural and organisational aspects that facilitate better corporate governance. It is well known that a company being an artificial and juristic entity cannot function by itself. The person of a company is manifested through the Board of Directors.

In fact, the most important body in a corporate house is its Board of Directors. It is often said that the cause of corporate governance is served depending on how well the Board of Directors of a company is organised and structured. The companies Act, 1956, does not exhaustively describe the powers and duties of the board. It can be said that some of the shareholders' agreements talk more extensively about the power and duties of boards of companies than the Act.

While dealing with the issues connected with the Board of Directors in the context of corporate governance, the following aspects have to be borne in mind:

(a) the optimum size of the board;

(b) the optimum composition of the Board in terms of both full-time and part-time directors;

(c) whether the chairman of the Board should be different from the CEO of the company;

(d) the role of nominee directors;

(e) personal competencies and qualifications of individual directors;

(f) the frequency with which the Board (will meet) and the optimum size of the board.

Various studies have been undertaken both in the US and the UK on what should be the optimum size of a board. One conclusion of these studies is that a Board should ideally have about 12 directors.

This, of course, does not take into account the peculiarities that the company may have warranting a variation in this number. The Companies Act, one may note, also talks of up to 12 directors.

Regarding the appropriate composition of a board, studies have revealed that out of the 12 directors only three or four should be full-time and the remaining part-time.

The ratios of full-time directors to part-time ones should be heavily in favour of the latter to ensure maximum independence of the boards.

Whether a Chairman should be different from the CEO of the company: The Cadbury Committee which went into the financial aspects of corporate governance in the UK had come out with a definitive recommendation that the Chairman of the Board should be a person different from the CEO of the company.

It was felt that this would ensure the right accountability of the CEO to the Board and that the independence of the Board to a large extent would be whittled down if the Chairman and the CEO were one and the same person.

It is of the considered view that in the Indian context it will be advisable to have as Chairman, a person of a great stature and eminence, who is not in the executive management of the company. This will ensure greater independence and credibility in Board proceedings.

Courtesy: Business Ethics — an Indian perspective by Dr. Raj Agrawal & Prof. P.S. Bajaj, published by Wiley
Dreamtech India

First Published: Feb 12, 2006 13:38 IST