A corporation is a fictitious person. An actual individual with intellect and body, capable of carrying out all the corporation's daily operations. Although only living people can act on behalf of the company. The directors of a firm are those living people, and the board of directors is in charge of the company's operations. As a result, the function of a director is perhaps the most crucial one in determining a company's success.
Before we analyse the many types of directors in an organisation, it is essential to understand the various duties that a director performs and the composition of directors in various kinds of firms.
Did you know?
An individual can be a director in 20 different corporations at the same time!
Composition of Board of Directors
Section 149 of the Companies Act of 2013 outlines the makeup of a company's board of directors, i.e., how a company's board of directors must look like:
Minimum number of directors – 3
Maximum number of directors – 15
Also, at least one-third of all the directors must be independent.
Minimum number of directors – 2
Maximum number of directors – 15
One person company (OPC):
Minimum number of directors – 1
Maximum number of directors - 15
If a corporation needs more than 15 directors, it must adopt a special resolution.
Duties of a Director
- To behave in conformity with the Company's Articles of Association (AOA)
- A corporation's director is obligated to behave responsibly in order to encourage the corporation's objectives for the welfare of the shareholder as a whole, as well as in the highest interests of the firm, its workforce, stakeholders, and the public, as well as for environmental preservation.
- A corporate director must display independent judgment and apply due and reasonable care, devotion, and competence in carrying out their obligations.
- A corporate director should not be involved in circumstances that may clash or potential dispute the firm's interests. There should not be any conflict of interest.
- A company's directors should not acquire or try to gain an unwarranted benefit or advantage for themselves, their relatives, companions, or colleagues.
- A corporation director must not transfer his authority, and any such assignment is unlawful.
As per the Companies Act of 2013, there are several types of directors. Let's take a closer look at each one.
Executive directors are institutional professionals, meaning they work for the firm and are engaged in its day-to-day operations. An executive director works full-time for the firm or is in charge of the corporation's daily administration. As a result, an executive director could be a managing director as well as a full-time Director. Executive directors typically get paid much more than non-executive directors. Non-executive directors are usually hired for their extensive knowledge and experience in that particular industry. He is primarily in charge of the corporation's executive activities in terms of management and administration. Being an executive director necessitates the development of specific skills.
Executive directors receive an appointing contract, and their qualifications and salary are considered in depth before recruitment.
Tenure: A company assigns a managing director or a full-time director for a maximum of 5 years. They have the opportunity to be re-appointed. Re-appointment is possible for the next term but within one year of the present term's expiration.
Age restriction: A director must be at least 21 years old. And the highest age limit could be 70 years. A shareholder's consent in the General Body meeting is essential for a person over the age of 70 years.
External professionals serve as non-executive directors. Non-executive directors are not defined under the Companies Act of 2013, although their significance is evident from the description of executive directors. Non-executive directors are not participating in the corporation's day-to-day functions or activities. Although not active in day-to-day operations, they remain on the board of directors. The rationale for this is that the board requires their assistance in specific areas, or they may be required by law to be on the board. Non-executive directors visit the organisation solely to participate in Board meetings and make relevant decisions.
Types of Directors
1. Independent Director
Independent directors have expertise or connections in a specific area or field. Ex-officials are frequently hired for such positions since they have the industry competence and experience to manage a firm efficiently. Women can be selected as independent directors as well. Independent directors preserve the company's integrity, which is especially important in the corporate world. Independent directors must make up at least 1/3 of board members in every publicly traded firm.
Qualifications: An independent director has to have expertise, experience, and understanding in at least one of the following areas: law, management, marketing, governance practices, administration, technical operations, or any other discipline relevant to the company's activities.
Tenure: The tenure of an independent director cannot be more than five years, and they can run for re-election for a second term. After the second term ends, a three-year cooldown period is required. Corporations can nominate independent directors for fewer than 5 years, but they can't be appointed for more than two terms.
2. Nominee Director
The board may designate any individual as a director appointed either by the institution in accordance with the provisions of any legislation currently in force or any memorandum of understanding or by the central government under its controlling interest in a government company if the company's Articles of Association (AOA) approves it. Only when the company's Articles of Association permit it may a nominated director be appointed by the board.
On the board of directors, they advocate the interests of the stakeholders. In simple words, a nominee director is a shareholder spokesperson who safeguards the shareholder's interests. It is their responsibility to ensure that the firm does not operate in a harmful way to the interests of the stakeholders they represent.
3. Additional Director
Provided the board of directors is under a lot of work, the board of directors can designate an additional director if the Articles of Association of the organisation allow it. A rotational director could also be an auxiliary director. The extra directors will have the same powers and authority as the company's current directors.
4. Alternate Director
Whenever a corporation's director is overseas for more than three months, an alternate director gets recruited in their place. When a director is absent from the office for more than three months, a substitute or alternative director operates in their place.
Also Read: What is Certificate of Incorporation?
5. Residential Director
The Companies Act established the notion of a resident director. The act stipulates that a director must reside in India. It states that every organisation must have at least one director who has spent at least 182 days in India during the past financial/ calendar year. This legislation applies to all businesses, whether public or private. A resident director is obligated to attend at least one Board Meeting per year, just like every other director.
6. Women Director
Certain firms must designate a woman director under the Companies Act of 2013.
The board of directors and the shareholders might nominate a woman director at the stage of the company's registration or after incorporation.
The board of directors is known as a business's mind, and an organisation can only operate via them. Each of these directors represents their respective companies, and their duties are crucial to their success. The Companies Act of 2013 gave the board of directors additional rights, allowing them to devote their full attention to the company.
Besides these powers, the act also creates limitations to prohibit such authorities from being oppressive. Directors hold a variety of positions and functions in a firm. The division of powers contributes to the system's transparency. Additionally, the separation of powers avoids abuse of power and improves efficiency.
Follow Khatabook for the latest updates, news blogs, and articles related to micro, small and medium businesses (MSMEs), business tips, income tax, GST, salary, and accounting.