24  Board Structure and the Role of the Board

ImportantLearning Objectives

You will be able to:

  1. State what a board is for, and distinguish its role from that of management.
  2. Describe the composition requirements applying to Indian boards and the reasoning behind each.
  3. Explain the separation of chair and chief executive and the arguments on each side.
  4. Identify the conditions a board needs in order to function, including information, time and process.
  5. Analyse a board’s composition and working practices and identify where its capacity to hold management to account is weak.

24.1 Introduction

Chapter 23 established that governance exists because owners cannot supervise managers, and that in India the sharper conflict runs between controlling and minority shareholders. The board is the institution on which both problems land.

A board is often described as though its purpose were obvious. It is not, and the confusion has practical consequences. A board that behaves as though it were management gets in the way and adds nothing that management could not do faster. A board that behaves as though it were a ceremonial body ratifies whatever it is given. The useful formulation is that a board directs and controls rather than manages: it sets the framework within which management operates, appoints and assesses the people who operate within it, and satisfies itself that what is being reported is true (A. C. Fernando, 2019).

The Companies Act vests management of a company in its board (Government of India, 2013), which sounds like a grant of executive power and is not. The board exercises that power largely through what it delegates, what it reserves, and what it demands to be told.

flowchart TD
    S["<b>Shareholders</b>"] -->|"appoint and remove"| B["<b>Board</b>"]
    B -->|"<b>Direction</b><br>strategy, reserved matters,<br>risk appetite, values"| M["<b>Management</b>"]
    B -->|"<b>Control</b><br>internal control, risk,<br>financial reporting, compliance"| M
    B -->|"<b>People</b><br>appoint, assess, reward,<br>and if necessary remove"| M
    M -->|"reports"| B
    B -->|"<b>Accountability</b><br>report and answer"| S
    B --- C["<b>Committees</b><br>audit, nomination and<br>remuneration, stakeholder,<br>risk, CSR"]
    style B fill:#ede7f6,stroke:#7E57C2
    style S fill:#e3f2fd,stroke:#1976D2
    style M fill:#e8f5e9,stroke:#388E3C
    style C fill:#fff8e1,stroke:#F9A825

24.2 What a Board Is For

Four functions capture nearly everything a board legitimately does.

NoteThe Four Functions
Function What it involves What it is not
Direction Approving strategy, setting risk appetite, deciding matters reserved to the board, establishing the values the organisation will operate by Devising the strategy, which is management’s work brought to the board for challenge and approval
Control Satisfying itself that internal control, risk management, financial reporting and compliance systems exist and function Performing the controls, which is management’s, or auditing them, which is the auditor’s
People Appointing the chief executive, assessing performance, setting remuneration, planning succession, and removing where necessary Managing the executive team below the chief executive
Accountability Reporting to shareholders, convening meetings, answering for performance, and ensuring disclosure is complete and fair Communications management, which is a function reporting to the executive

The single most useful discipline is the schedule of matters reserved to the board: a written list of decisions that may not be taken without board approval. Typical contents include acquisitions and disposals above a threshold, borrowing beyond a limit, entry into or exit from a business, capital expenditure above a level, related party transactions, the annual budget, the appointment of key personnel, and any commitment that would materially change the risk profile.

The value of the schedule is that it is written in advance, when nobody knows which transaction will be the difficult one. A board that decides case by case whether something needs its approval will not be consulted on the case that matters.

24.3 Composition

NoteIndian Composition Requirements in Outline
Requirement What it provides for
Minimum and maximum directors A private company requires at least two directors and a public company at least three, with an upper limit above which shareholder approval is needed
Resident director At least one director must have stayed in India for the prescribed number of days in the financial year
Woman director Required on the board of prescribed classes of company, including listed companies
Independent directors Required in prescribed classes; at least one third of a listed company’s board, rising to half where the chair is an executive or a promoter (Securities and Exchange Board of India, 2015)
Retirement by rotation A proportion of non-independent directors of a public company retire and may be reappointed each year
Limits on directorships A cap on the number of companies in which one person may serve, with a lower cap for public companies

Each requirement addresses a specific weakness. Independence addresses the risk that a board answers to the people it monitors. Rotation gives shareholders a periodic opportunity to act. Directorship limits address the director who accepts more seats than the work permits, since the duty of care is judged against what a reasonably diligent person would do and attendance at nine boards is difficult to defend.

24.3.1 Size, Skills and Diversity

The statute sets bounds; it does not say what a good board looks like. Three considerations do.

Size trades breadth against function. A small board is quick, informed and easily dominated by a strong chief executive or promoter. A large board carries more perspectives and tends toward passivity, with real discussion migrating to committees or to conversations before the meeting. Most Indian listed boards sit between eight and twelve for that reason.

Skills should be mapped rather than assumed. A skills matrix sets the competencies the company’s strategy and risk profile actually require against what the current directors hold, and it usually reveals that a board recruited over fifteen years reflects the risks of fifteen years ago. A company whose principal exposures are cyber and regulatory should not have a board composed entirely of accountants and retired bankers.

Diversity matters here for a reason specific to the board’s function rather than for general reasons. A board exists to challenge, and challenge requires people who see the same information differently. A board whose members share a background, a professional formation and a social circle will converge quickly, comfortably and sometimes wrongly, and it will not notice that it has.

WarningCommon Misconception: A Board’s Job Is to Approve the Right Things

Approval is the visible output and the least important part. Most decisions reaching a board arrive with a recommendation and an implicit expectation of assent, and a board that reads the paper, asks two clarifying questions and approves has performed almost none of its function.

What a board contributes is the quality of challenge before the decision is framed, which requires being brought into a question while options are still open, not at the point of sanction. It contributes the question nobody in management wanted asked, which requires directors willing to be the awkward voice. And it contributes the judgement of whether the reporting can be believed, which requires information from sources other than the executive presenting.

The diagnostic question for any board is not what it approved last year. It is what it changed, what it sent back, and what it asked for that it had not been offered.

24.4 The Chair

The chair’s job is distinct from the chief executive’s and is often underestimated. The chair sets the agenda, decides what the board spends its time on, ensures directors receive information in time to use it, draws out the members who would otherwise not speak, manages the relationship with the chief executive, and leads the board’s own evaluation.

24.4.1 Separating Chair and Chief Executive

Whether one person should hold both roles has been the most persistent structural debate in governance (A. C. Fernando, 2019). The arguments are worth holding accurately.

For separation For combination
A board monitors the chief executive; one person cannot lead the body that assesses them Unified leadership gives clear authority and avoids ambiguity for management
The chair controls the agenda and the flow of information, so combining the roles lets the executive decide what the board sees The chief executive knows the business best and can direct board attention to what matters
Separation creates a route by which directors can raise concerns outside management Separation risks two centres of power and friction at the top
It is the norm in most governance codes internationally A capable independent director in a lead role can supply the check without splitting the top job

The Indian position has moved toward separation without mandating it universally. The listing framework raises the proportion of independent directors required when the chair is an executive or a promoter, which is a proportionate response: where the roles are combined, the board is strengthened elsewhere. A recommendation of the Kotak Committee to require separation for large listed entities was adopted and subsequently made voluntary (Committee on Corporate Governance, 2017), and the debate continues.

24.5 Making a Board Work

Structure is necessary and not sufficient. A correctly composed board can be ineffective, and the causes are consistent.

NoteConditions for an Effective Board
Condition What it requires The common failure
Information Papers that are timely, concise, and include the case against as well as for Two hundred pages circulated the night before, with the difficult point on page one hundred and forty
Agenda Time allocated in proportion to significance rather than to routine Compliance items consuming the first two hours and strategy discussed after lunch
Independent channels Access to the auditor, the internal auditor, the compliance officer and the company secretary without management present All information reaching the board through the chief executive
Time Enough meetings, of enough length, with directors who have prepared Four meetings a year, each of two hours, with material read in the car
Executive sessions Regular meetings of non-executive or independent directors alone Never held, so no forum exists in which concerns about the executive can be voiced
Minutes An accurate record of the discussion, including dissent and conditions attached A record of resolutions passed, with no trace of what was contested
Evaluation Periodic assessment of the board, its committees and individual directors, with consequences An annual questionnaire completed by the people being assessed, filed and never acted on
TipPractitioner Insight: The Three Signals of a Board That Cannot Hold Management to Account

Board effectiveness is hard to observe from outside, but three signals are visible in public information and are reliable.

Attendance and tenure. Directors who attend a minority of meetings, or who have served for a decade and more alongside the same chair, are unlikely to be a source of challenge, whatever their formal independence.

The pattern of resolutions. A board at which no resolution has been deferred, modified or withdrawn over several years is either exceptionally well served by management or is not deciding anything. The base rate for the first explanation is low.

What the audit committee reports. A committee report that describes its terms of reference and the number of meetings, without any account of matters it considered difficult, is describing a committee that did not find anything difficult, in a company where difficulty certainly existed.

The strongest signal of all is the departure of an independent director before the end of a term, with a stated reason. Chapter 25 examines why that reason is so often given as personal commitments, and what it usually means.

24.6 Case Studies

24.6.1 Case Study 1: The Board That Approved Everything

The following situation is constructed rather than reported.

A listed company’s board meets five times a year. Papers are circulated two days before, running to a hundred and eighty pages. The chairman is the promoter and also the managing director. Of nine directors, three are independent, one of whom is a former business associate of the chairman. Over four years no board resolution has been deferred or amended. Board evaluation is conducted through a questionnaire circulated by the company secretary and reported as satisfactory. The audit committee met four times, and its report lists its terms of reference.

Discussion questions

  1. Apply the seven conditions for an effective board. Which are met, which are absent, and which cannot be assessed from these facts?
  2. Apply the three signals. What does each suggest, and what further information would confirm it?
  3. If you were appointed as a new independent director, name the first three changes you would seek and the order in which you would raise them.

24.6.2 Case Study 2: The Reserved Matters That Were Not Reserved

The following situation is constructed rather than reported.

A company’s schedule of reserved matters requires board approval for acquisitions above a stated value. Management restructures a proposed acquisition as a series of three staged investments, each below the threshold, and completes it over eleven months. Each stage is reported to the board as a note in the information section of the agenda pack. The board learns the full shape of the transaction when it is complete. Nothing in the schedule has been breached.

Discussion questions

  1. Was the schedule breached in substance? Distinguish the legal answer from the governance answer.
  2. Redraft the reserved matters clause so this cannot recur, in no more than three sentences.
  3. What does this episode reveal about the relationship between the board and the executive, beyond the drafting point?

24.6.3 Case Study 3: One Person, Two Roles

The following situation is constructed rather than reported.

A rapidly growing company is led by its founder, who is chairman and chief executive and holds a substantial stake. The company has performed well and the founder’s judgement is widely credited for it. A large institutional investor requests separation of the roles, or at minimum the appointment of a lead independent director. The founder’s response is that the board is free to appoint anyone it wishes as chair, but that he would then reconsider his executive role, and that the company’s success rests on unified leadership.

Discussion questions

  1. Set out the strongest case for combination in this specific company, not in general.
  2. What does the founder’s response tell the board about its own position, and how should it read that?
  3. Design an arrangement short of full separation that would give the board genuine capacity to assess the chief executive. State what would have to be true for it to work.

24.7 Applying the Chapter

ImportantExercise: A Board Effectiveness Review

You have been engaged to review the board of a listed Indian consumer products company with a market capitalisation placing it among the larger mid-cap firms. The facts available are these. The board has eleven directors: the promoter chairman who is also managing director, two other promoter family members in executive roles, two nominee directors from a lending institution, and six described as independent. Of the six, two were appointed at listing fourteen years ago, one is a retired civil servant who chairs two other boards in the group, and one is the founder of the company’s advertising agency. There is one woman director, who is a promoter family member. The board met four times last year; average attendance among independent directors was sixty per cent. The audit committee met four times and its report runs to eleven lines. Board evaluation was conducted internally and reported as satisfactory. Two independent directors resigned in the last three years, both citing personal commitments. Board papers are circulated forty-eight hours in advance. There is no skills matrix. Related party purchases are eighteen per cent of the total.

Working in a group, produce the review. CO-4 requires analysis of structures and responsibilities to identify governance gaps, so gaps must be named specifically.

  1. Test the composition against the statutory and listing requirements. Identify anything that appears non-compliant and anything that is compliant in form but hollow in substance, keeping the two categories separate.
  2. Assess independence in substance for each of the six independent directors, on the facts given, and state what additional information you would seek about each.
  3. Build the skills matrix the company lacks. List the six competencies this company’s strategy and risk profile require, and assess from the facts whether the board is likely to hold them.
  4. Apply the seven conditions for an effective board, marking each as met, weak or absent with the supporting fact.
  5. Apply the three signals, and state what the two resignations most probably indicate and what you would do to find out.
  6. Identify the five most serious governance gaps, ranked. For each, state the harm it permits, who bears it, and the specific change that would close it.
  7. Recommend. Propose a twelve-month programme of changes, separating those within the board’s own power from those requiring shareholder approval or promoter agreement, and state which single change you would insist on first and why.

Present the review as a compliance-and-substance table, a gap register, and a two-page report to the nomination and remuneration committee.

24.8 Summary

NoteChapter Summary

A board directs and controls rather than manages: it sets the framework within which management operates, appoints and assesses the people who operate within it, and satisfies itself that what is reported is true (A. C. Fernando, 2019). The Companies Act vests management in the board (Government of India, 2013), and the board exercises that power largely through what it delegates, what it reserves and what it demands to be told. The schedule of matters reserved to the board is the central discipline, and its value comes from being written before anyone knows which transaction will be the difficult one.

Four functions cover what a board legitimately does: direction, control, people, and accountability. Each has a boundary. The board challenges and approves strategy rather than devising it, satisfies itself that controls function rather than performing or auditing them, appoints and assesses the chief executive rather than managing the team below, and answers to shareholders rather than running communications.

Indian composition requirements address specific weaknesses: independence against a board answering to those it monitors, rotation to give shareholders a periodic opportunity, and directorship limits against the director who accepts more seats than the duty of care permits. Beyond the statute, size trades breadth against function, skills should be mapped against the company’s actual risk profile rather than assumed, and diversity matters because a board exists to challenge and challenge requires people who see the same information differently.

Approval is the visible output and the least important part of the work. What a board contributes is challenge before a decision is framed, the question nobody in management wanted asked, and a judgement about whether the reporting can be believed. The diagnostic is not what a board approved but what it changed, sent back, or asked for that it had not been offered.

On separating chair and chief executive, the case for separation is that a board monitors the chief executive and controls the agenda and information flow; the case for combination is unified leadership and business knowledge. India has moved toward separation without mandating it universally, raising the required proportion of independent directors where the roles are combined (Securities and Exchange Board of India, 2015), with the Kotak Committee’s recommendation for large listed entities later made voluntary (Committee on Corporate Governance, 2017).

Structure is not sufficient. Effectiveness requires timely and concise information including the case against, an agenda proportioned to significance, channels independent of management, adequate time, executive sessions without management present, minutes recording dissent, and evaluation with consequences.

TipKey Terms

Direct and control · Four board functions · Schedule of reserved matters · Delegation · Board size · Skills matrix · Diversity as challenge · Independent director proportion · Resident director · Woman director · Retirement by rotation · Limits on directorships · Chair’s role · Separation of chair and chief executive · Lead independent director · Board papers · Agenda proportioning · Independent information channels · Executive session · Minutes recording dissent · Board evaluation · What the board changed · Attendance and tenure · Pattern of resolutions

Summary

Concept Description
What a Board Is For
Direct and control The board's role of setting the framework and testing what is reported, rather than managing
Direction Approving strategy, setting risk appetite, reserving matters, and establishing values
Control Satisfying itself that internal control, risk, reporting and compliance systems function
People Appointing, assessing, rewarding, planning succession for and if necessary removing the chief executive
Accountability Reporting to shareholders and answering for performance and the completeness of disclosure
Schedule of reserved matters The written list of decisions that may not be taken without board approval
Written in advance The feature giving the schedule its value, since case-by-case judgement fails on the case that matters
Delegation The mechanism through which a board exercises power vested in it by the Act
Composition
Board size The trade-off in which small boards are quick and dominable, and large ones passive
Skills matrix The tool setting competencies the strategy requires against what the directors actually hold
Diversity as challenge The reason diversity matters to a board specifically: challenge requires differing perception
Independent director proportion The listing requirement, rising where the chair is an executive or a promoter
Resident director The requirement that one director have stayed in India for the prescribed period
Woman director The requirement applying to prescribed classes including listed companies
Retirement by rotation The periodic retirement giving shareholders an opportunity to act on non-independent directors
Limits on directorships The cap addressing the director whose seats exceed what the duty of care permits
The Chair
Chair's role Setting the agenda, controlling information flow, drawing out members, and leading evaluation
Separation of roles The argument that one person cannot lead the body that assesses them
Case for combination The argument from unified leadership and superior knowledge of the business
Lead independent director The arrangement supplying a check where the top roles remain combined
Making a Board Work
Board papers Material that should be timely and concise and should include the case against
Agenda proportioning Allocating board time in proportion to significance rather than to routine
Independent channels Access to auditor, internal auditor, compliance officer and secretary without management present
Time and preparation Enough meetings of enough length with directors who have read the material
Executive session The regular meeting of non-executives alone, without which concerns have no forum
Minutes recording dissent The record of what was contested and on what conditions, not merely what passed
Board evaluation Periodic assessment of board, committees and directors, meaningful only where it has consequences
Diagnosing a Board
Approval is not the work The point that approval is the visible output and the least important part of the function
What the board changed The diagnostic question replacing what a board approved with what it altered or refused
Attendance and tenure The first external signal, since low attendance and long shared tenure rarely produce challenge
Pattern of resolutions The second signal, where years without a deferral suggest the board is not deciding
Resignation with a stated reason The strongest signal of all, and the reason a stated reason is so often anodyne