Composition of board of directors describes the structure of the companys highest governing body. The company ensures its operation with the best interests of stakeholders and compliance with laws and moral governance. Focus on the board of directors making up corporate governance, which is important in balancing power, decision-making, and corporate responsibilities. The type of companies where this board structure is relevant will depend on the board, the industry, the company size and the regulations that target them. Moreover, the committees structured within the board help increase efficiency, improving general oversight over corporate management.
Who are the Board of Directors (BOD)?
The board of directors (BOD) consists of individuals who are voted in to serve shareholders and make decisions on the general direction of the company. The board guarantees that the company acts ethically and legally, and maximizes profits and shareholder value.
As per the Companies Act 2013, the meaning of a company is given under section 2(20). A section titled company states that company means the incorporation of a company by association of different persons under the laws established by the Companies Act 2013 or any other previous company act..
The individuals who manage the business are referred as Directors of the business. The word director means as per Section 2(34) of the Companies Act, 2013. According to the definition of the act, a director is someone who manages the day to day functionality of the company and the board of the company appoints the director.
Board of Directors Meaning
The role of the board is to represent the shareholders, look after their interests and to ensure that legal frameworks are adhered to. Among the bad decisions made, the board of directors is the supreme one. It offers strategic direction, oversees executive performance, and upholds corporate responsibility.
Composition of Board of Directors
The board of directors composition varies with companies but the basic concept remains same executive directors i.e. the management is always in a minority with more non-executive directors.
The board of directors of a company holds a pivotal role in decision-making and governance. There are laid down some specific rules with respect to the composition of the board in order to secure accountability and transparency under the Companies Act 2013. Here are the essential pieces that determine how a company board of directors is structured:
- Minimum Number of Directors: As per section 149(3) a public company must have a minimum of three directors, a private company must have at least 2 and a one-person company must have only 1 director. You know how many directors you should have to facilitate smooth decision-making and adherence to legal requirements.
- Maximum limit on Directors: To be appointed upto fifteen directors. However, if it wants in excess of that, it must pass a special resolution in a general meeting. By expanding the board, companies can inject with varied experience and leadership skills.
- Resident Director: One of the director must stay in India 182 days in a previous calendar year so that they can be in consideration of the Resident director. This requirement is there to ensure that at least one of the board members is familiar with local regulations and business conditions.
- Restriction on Number of Directorships: A person shall not be appointed as a director of more than 20 companies at the same time. This restricts potential conflicts of interest and prevents out-of-date directors from performing their function..
- Compulsory Woman Director: Strict mandates passed to promote parity in corporate governance and gender diversity. As part of mandates, the companies are required to appoint at least one woman director. The power of diversity think in the board of directors increases decision-making and equitable leaders.
- Independent Directors: The concept of Independent Directors is mandatory for all listed companies to augment unbiased decision-making by having at least one-third of the Members of the Board be Independent Directors. They protect shareholder interests and ensure transparency.
Criteria Under LODR for Listed Companies
To determine the composition of board of directors in listed companies, SEBI (Securities and Exchange Board of India) has framed Listing Obligations and Disclosure Requirements (LODR) regulations.
- Independent directors: A minimum one-third of the board to be constituted of independent directors in the event the chairperson is a non-executive director. The board should consist of at least 50% independent directors, where the chairperson is an executive director.
- Mandatory Woman Director: Each listed company shall have at least one woman director on the board.
- Board Size: The size of the board should be just right to enable effective decision-making.
- Separation of Roles: SEBI urges separation of roles between CEO and Chairperson for accountability.
- Annual Board Meetings: A listed company is required to hold at least 4 board meetings within one year with the gap between two consecutive meetings not exceeding 120 days.
- Evaluation of Performance: Independent directors should evaluate the board’s and its committees’ performance at least annually.
Committees Under the Board of Directors
The board of directors conducts its business through various committee functions that facilitate more focused governance issues. Some would be audit committees, nomination & remuneration committees etc.
Audit Committee
The audit committee oversees financial reporting as well as internal audits and risk management. It can all help significantly to make sure that with a company the accounting practices are transparent and conform with legal and regulatory standards. This committee prevents fraud while fostering accountability and maintaining the trust of investors by reviewing the financial statements and audit reports.
Nomination and Remuneration Committee
The nomination & remuneration committee, is to ensure proper selection and fair remuneration of the directors and senior management. It lays down explicit directions for picking board members on the basis of their capabilities and expertise. The framework for compensation is also created by the committee, which coordinates competitive salaries that will help ensure the company is attractive to competent leaders and that executive compensation reflects shareholder interests and company performance.
Stakeholders Relationship Committee
Mainly the stakeholders relationship committee deals with redressing the grievances of the shareholders and the investors of the company. This provides for quick answers to shareholder questions, dividend payments, and stock-related matters. It enhances investor relations and boosts the company’s brand in the market by practicing transparency and trust.
Corporate Social Responsibility (CSR) Committee
Corporate Social Responsibility (CSR) The CSR committee will look after all the activities related to CSR of the company and ensuring compliance of corporate social responsibility. It plans the delivery for programs in environmental sustainability, community development, and ethical business practices. Through CSR committees, firms can participate in improving the company and brand reputation, as well as the society and brand that is relevant to them, as a CSR initiative.
Risk Management Committee
Establish a risk management committee to identify and control business potential risks. It assesses financial, operational and market risks and develops plans to address them. Such a committee assists organisations in improving the degree of stability and long-term rightfulness and thus in protecting the stakeholders better by dealing with the uncertainties in advance.
Relevance to ACCA Syllabus
The composition of board of directors (BoD) remains one of the hot topics to discuss in the Strategic Business Leader (SBL) as well as Corporate Governance & Risk Management under the ACCA syllabus. An understanding of executive and non-executive directors, independent board members and diversity requirements is critical for ACCA professionals. It is essential for maintaining good corporate governance, transparency, and effective organizational decision-making.
Composition of Board of Directors ACCA Questions
Q1: What role does the Board of Directors play in corporate finance decisions?
A) Through the authorization of large monetary policies, and the maximizing of shareholder value
B) Through administration of everyday financial transactions
C) By analyzing financial statements quarterly
D) Through setting the salaries of individual employees
Ans : A) By approving major financial policies and maximizing shareholder wealth.
Q2: Why do you feel that investors care about having an independent Board of Directors?
A) It helps maintain transparency and minimizes potential conflicts of interest
B) It gives executives total authority for financial choices
C) It allows them not to vote their shares as shareholders
D) short term profit maximization only
Ans: A) To ensure transparency and to avoid conflicts of interest
Q3: What is the most important approach to ensure monitoring effectiveness?
A) An equilibrium between executive and independent Directors
B) The CEO controlling the board completely
C) Removal of independent board member
D) That the board is not accountable to shareholders
Ans: A) A mix of executive and independent directors
Q4: What does the Board of Directors do to help ensure ethical investment?
A) Through the adoption of corporate governance policies and investor protections
B) Through lack of oversight, prioritizing high-risk investments
C) At the expense of revealing financial risks
D) Through the discouragement of shareholder engagement
Ans: A): Through corporate governance policies and investor protections
Q5: What is a significant function in protecting shareholder rights that the Board of Directors is responsible for?
A) Including investor concerns in strategic decisions
B) Management interests over investors
C) Deciding not to require any transparency in investment decisions
D) Limiting voting rights of minority shareholders
Ans: A) Making sure investor interests are incorporated in strategic decisions
Relevance to US CMA Syllabus
The composition of the Board of Directors is one key area of Corporate Governance and Financial Management in the US CMA syllabus. It is up to management accountants to assess how the board structure can facilitate financial decision-making, strategic planning and risk oversight.
Composition of Board of Directors CMA Questions
Q1: Why Governance principle on Separation of CEO and Chairman?
A) Between avoiding integrity issues when making decisions
B) Giving the CEO full rein on the board
C) Making executive directors lord it over the board.
D) Diminishing visibility in corporate governance
Ans: A) Eliminating conflicts of interest in decision-making
Q2: What is the role of the Board of Directors in financial reporting?
A) Ensuring transparency and adhering to regulatory requirements
B) By preparing statements of accounts in their own?
C) By limiting improvements to operational management
D) Removing the need for external audits
Q: How would you build trust between yourself and the clients you work with? Ans: A) Through transparency, by aligning with them, and ensuring compliance with the regulatory requirements.
Q3: What is one of the core tasks of the Corporate Governance Committee in the Board?
A) Compliance with governance policies and regulatory regulations
B) Overseeing strategies for product development
C) In it review of IT and cybersecurity policies
D) Dealing with frontline customer complaints
Ans: A) Governance policies and regulatory compliance adherence
Q4: What is the purpose of the Nomination Committee in the Board of Directors?
B) Co-opting board members trick to prevent effective leadership
B) Monitoring compliance with financial reporting
C) Preparing the company’s tax strategy
D) Managing investor relations
A) Choosing and assessing board members to maintain strong governance
Q5: More about Board of Directors and its function in the risk management
A) Through policies to identify, assess and mitigate corporate risks
B) By outsourcing all risk-based choices to third-party vendors
C) Taking risk assessments out of corporate governance
D) Risk disclosures
Ans: A) By implementing policies to identify, assess, and mitigate corporate risks
Relevance to US CPA Syllabus
Corporate Governance is highly critical in Business Environment & Concepts (BEC) and Auditing & Attestation (AUD) sections of US CPA Syllabus. CPAs need to analyze how the board of directors structure impacts corporate governance, internal controls, and financial transparency.
Composition of Board of Directors CPA Questions
Q1: WhaInterprofessional Education in the health profession students; key role of Board of Directors within corporate strategy?
A) AMENDMENT: Endorsing strategic plans and overseeing their execution
B) Payroll management and employee hiring
C) Determining product pricing and customer relationships
D) Performing technical operational work
Ans: A) Approval of strategic plans and monitoring of their implementation
Q2: What is the key function of the Audit Committee in the Board of Directors?
A) Overseeing financial reporting and ensuring compliance with laws and regulations
B) To help define staff performance goals
C) For handling customer relations
D) To evaluate marketing tactics
Ans: A) For governance of financial reporting and ensuring compliance with laws and regulations
Q3: What role does Board of Directors play in promoting corporate governance?
A) Ethics-based leadership and adherence to governance frameworks
B) By eschewing shareholder activism
C) At the expense of stakeholders by putting executive compensation first
D) By making independent audits unnecessary
Ans: A) Through ethical leadership and adherence to governance frameworks
Q4: What is a main role of the Remuneration Committee in a Board of Directors?
A) The pay of other executives and whether it is tied to performance
B) Conducting external audits
C) Control of cash flow and liquidity planning
D) Preparing tax returns
Ans: A) Control executive pay and links it to performance
Q5: What role does Board independence play?
A) Unbiased oversight reduces conflicts of interest
B) They get rid of financial regulations
C) They usurp the place of internal management
D) They assume the operation functions of the company
Ans: A) Ensure impartial supervision and minimize conflicts of interest
Relevance to CFA Syllabus
The composition of the Board of Directors is a key topic in the Ethics and Professional Standards and Corporate Finance topic areas on the CFA syllabus. At this fickle balance of risk versus reward, CFA professionals need to consider all angles on board effectiveness, investor protection mechanisms, and governance practices if they are to provide ethical decision-making advice when advising the investment process.
Composition of Board of Directors CFA Questions
Q1: What should be the main core responsibility of the Board of Directors within a company?
A) Day to day business operation management
(c) charting the strategic direction and overseeing management performance
C) Performing audits of the company’s finances
D) Authorizing employee pay and bonuses
Ans: B) Setting the strategic direction and overseeing management performance
Q2: Why is board independence so crucial in the corporate governance structure?
A) It removes over-reach from the company executives
B) You get all the board members as employees of the company
Q) It enables the Ceo to have absolute authority on decisions
D) It minimizes the use of external audit
Ans: A) It protects against too much power of the company executives
Q3: What is the name of the committee of the Board of Directors which oversees financial reporting and internal controls?
A) Nomination Committee
B) Audit Committee
C) Remuneration Committee
D(Corporate Social Responsibility Committee
Ans: B) Audit Committee
Q4: Identify one key principle in respect of the composition of the Board of Directors pursuant to the UK Corporate Governance Code.
A) Only executive directors shall serve on the board
B) The board should consist of independent non-executive directors at least 50% of the time
C) There should be no independent members on the board
D) The CEO and Chairman shall always be the same person
Ans: B) Minimum 50% of the board should have Independent non-executive directors
Q5: Why is you a non-executive director?
A) Everyday business dealings
B) Providing autonomous scrutiny and opposing managerial choices
C) Conducting internal audits
D) The preparation of the financial statements
Ans: B) Independent oversight to management
