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Corporate Social Media Governance- A Key Boardroom Agenda!!

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Our Article on ” Corporate Social Media Governance-A Key Boardroom Agenda” Published in ICSI 44th National Convention Souvenir!

1.Introduction

Over the past few years, corporations around the globe have been trying to figure out how to enter the social media ecosystem. Some decided to jump in and quickly learn how to swim. Others were pushed into the deep end and figured it out after thrashing around a bit. And then there are those that choose to avoid it altogether, hoping to avoid risk. Unfortunately, if such organizations believe they can avoid social media – they cannot. The organization can choose not to participate, but that does not mean the organization, or its products, its services, its programs, or its own workforces are not being talked about by the social community. And so while there are risks in engaging the stakeholders of an organization using social media, there are also risks in avoiding it altogether. The key to managing such risks is developing a clear-cut social media governance program.

Social media governance is a set of business processes put in place to support the social vision of a company with relevant targets and guidelines. Its purpose is multi-fold – educate and guide the relevant stakeholders, define social media processes, maintain brand reputation across all channels online and offline, establish rules which govern conduct and broadly define company social media goals.

Since the rise of the Internet in early 1990s, the world’s networked population has grown from the low millions to the high billions. Over the same period, social media  has become a fact of life for corporate society worldwide, involving not only the large corporate organizations, but also the regular organizations, the workforce, activists and also the key board personnel who play a key role in establishing such key policies to address the risks and challenges of social media while also using the medium to prosper company’s set objectives, goals and its vision, and thus in turn making initiatives to ensure high level of social media governance.

Social media has become an indispensable business tool. Most organizations have strong controls in place for email but few apply the same rigor to new methods such as enterprise social networks and social media. Sound social media governance will not only enable the organization to manage the risks that arise from social media’s inherently public nature and global accessibility, but also allow to make the most of the opportunities it brings and stay ahead of change.

It is becoming increasingly a key strategic component for companies and its Board of Directors to understand the risks and challenges related to social media and has a clear strategy in place which sets out how they will use it and for what purpose. Social media blunders are becoming increasingly more commonplace in the news and getting social media wrong can have a serious impact on a company’s reputation and its brand value. Social media brings its own challenges but having a sound and practical strategy which is easy to understand will ensure risks are managed and benefits realized.

  1. Effective Social Media Governance Model- Key Agenda for Board of Directors:

An effective social media governance model is not limited to controlling of risks and challenges involved in social media but there should also be consideration for various other components that can help implement a sound and effective Governance Model. The Board of Directors of any organization should consider the following key components and integrate them in the company’s social media governance measures to effectively address various social media risks:

 Social Media Policy:

A social media policy is the foundation of any social media governance model. Its purpose is twofold: to guide the employees of the organization and to protect the organization and its customers from risk. Any organization should have a social media policy regardless of whether or not your business is actively engaged in a social media strategy.

At a bare minimum the social media policy should include specific guidelines for each of the top three social media platforms: Facebook, Twitter and Linkedin. But though social media has become synonymous with that trio of powerhouses, the landscape is vast, encompassing blogs, wikis, podcasts, video sharing, micro-blogging, community forums and other tools. While it’s not necessary to develop a set of best practices for each of them, the Board should have a clear and consistent set of expectations that covers all your organization’s primary social channels and its review should form part of Board Meetings Agenda from time to time.

Monitoring:

Your brand is likely being discussed on the social web whether you’re engaged in the conversation or not. Google Alerts and Twitter are two social medium that offer simple ways to search for the names of your brand, employees and competitors. Social Media Monitoring tools like Sysomos and Hoot Suite offer more robust tools for acquiring, analyzing and acting on intelligence. Regardless of the tool you use, monitoring is a must for everything from shaping consumer sentiment about your brand to heading off a potential PR crisis.

Training & Education:

A solid governance model should have plenty of educational resources for employees. This should include training on responding to customer feedback, both positive and negative. Typically, it’s the customer support and Public Relation organizations that are tasked with the responsibility of responding to customer feedback. However, social media is breaking down the traditional boundaries and depending on company’s social media engagement policy, it could be a marketing or salesperson that has to respond to a customer query. So it’s essential to have training as a cornerstone of your social media governance model.

Approval Processes:

A governance model should clearly call out what approval processes are in place for employees to engage in social media. It should answer questions such as: Can everyone participate? or only certain key executives, directors or authorized representatives can via your company’s social channels? What is the process for getting approval for an official account? Approval processes ensure an organization’s social media accounts are headed by responsible personnel and the risks of misuse is minimized.

Crisis Management Plan:

In 2009, Toyota launched the largest recall in the company’s history in response to hundreds of reported cases of sticking accelerator pedals on account of the pedal getting caught in the floor mat, making affected vehicles speed up uncontrollably, and it was linked to at least 50 reported fatalities. Rumors and panic spread across the web, and suddenly the brand, a model of automotive safety for decades, was embroiled in a digital disaster with little foundation in social media with which to combat it.

A PR crisis doesn’t have to be as dramatic as Toyota’s to be damaging. The Toyota recall illustrates a common thread that runs through all PR crises: a slow response from the organization exacerbates the crisis. At its basic level, a crisis management plan should outline how to use the social media channels to deliver a quick and appropriate response and it should form part of your social media governance initiative.

Toyota eventually turned to social media to repair its image, but its effort would have no doubt been more effective if it could have been leveraged to diffuse the controversy before it spiraled out of control.

While keeping in consideration such components of social media governance model, board should also first assess such social media risks and develop an eco system to effectively address such risks.

  1. Social Media Risk

Social Media risk becomes a prime concern for every business in the present global competitive and knowledge based environment. The company uses the social media platform to reach out its goals and at the same time social media has many risks which affects the growth of the Management. The risks are as varied as an unauthorized post, a social media account getting hacked or an authorized company post that ultimately proves ill-advised. A time-tested strategy of pre-emptive mitigation and comprehensive pursuit of insurance coverage post-loss provides the best protection against social-media related losses.

Whether it is a small, medium, or large-sized business, the brand’s health and reputation is often defined by the way they engage in public environments.  In short, the board need to identify the risks of social media, develop comprehensive governance policies to mitigate risk and then deploy the right technology to reinforce those polices.

Managing Social Media Risk

Every business entity in the world exists to provide value for its stakeholders. All entities face uncertainty or risk and the challenge for the board is to determine how much uncertainty or risk to accept as it strives to grow stockholder value. Uncertainty presents both risk and opportunity with potential to erode or enhance value.

Social media offers considerable advantages like Branding, Marketing/advertising, Corporate Communications, servicing, grievances resolution to business entities, but establishing and maintaining a social media presence can also expose companies to a broad array of risks. By considering the current scenario, companies are not taking the social Media risks seriously and inadequately prepared to for the challenges brought by social media.

Various types of Social Media Risk:

While offering a host of potential business benefits, the use of social media can expose companies to numerous business risks. Most of these risks result from a combination of organizational weaknesses and vulnerabilities exposed through data misuse and data sharing:

Reputational Risk :

Negative exposure on social media sites about the company’s name, can result in loss of trust and revenues. There are other several risks also connected to the reputational risks like Strategic risk, Business risk, Regulatory risk, Legal risk, Market risk. If reputational risk is not handled in a proper way, these connected risks can lead to serious negative consequences including fraud, intellectual property loss, financial loss, privacy violations and failure to comply with laws and regulations.

Fraud Risk:

While engaging directly with the public, in real time, mistakes are bound to happen. Employees may also be hacked in the social media and may lead to manipulate the information and it leads the way for fraudsters to gain access to company’s database.

Legal Risk:

Potential issues range from adherence with privacy laws, to content ownership, to intellectual property infringement, to human resources issues such as such as harassment, discrimination and defamation.

Data Risk:

Firms need to meet the regulatory requirements of collecting, processing, handling and storing data. The corporate network should be secured to prevent confidential client data and other information from leaking out, or even across, the organization. The firm should be protected from incoming threats when social media users inadvertently introduce malware into the organization or employees are targeted by cyber criminals. Global firms need to comply with local data protection regulations when employees are connecting with each other and sharing documents across borders.

Non Compliance Risk:

Industry regulations vary by industry, geography and culture. There are many rules and regulations are available to govern electronic communications. Categories of rules include recordkeeping, adhering to advertising requirements and supervision of employees. Firms must be able to provide proof of compliance when regulators conduct audits as well as respond to e-discovery requests.

Financial Risk:

Missteps can have a negative impact on share prices and result in fines from regulators or data protection enforcement agencies.

Costs Risk:

 Although social media is viewed as “free”, firms may need to hire experts to work through their governance issues, third party vendors to provide platforms to manage access and retain records and writers or agencies to develop content.

Bandwidth Risk:

Resources are required to develop, manage, supervise and adjust both internal and external social media programs. Updates may be reviewed by departments that could include corporate communications, marketing and compliance.

4.Social Media Governance by Board- A key element of Corporate Governance:

1.The Board shall frame the policy for Managing the Social Media Risk that helps in identifying and exploring many of the potential negative consequences posed by social media in terms of brand, strategy, regulatory, legal and market risk. More important, it outlines a holistic approach to identifying, assessing and managing those risks.2. Engage in enterprise-wide change management activities to create a more risk-aware culture in the organization which will give exposure to both the significant benefits and the distinctive risks of social media and putting in place the compliance and performance management capabilities that can lead to changed behavior in social media usage.3. Assess uncertainties arising from social media.4.Restructure the existing risk governance structures.5.Enforce advanced tools and technologies for monitoring social media.6.Evaluate the performance management capabilities to analyze and act on the metrics delivered from monitoring activities.8.Engage in enterprise-wide change management activities to create a more risk-aware culture.

 Steps involved in Implementing Social Risk Management Policy

  1. Governance:

Governance is focused on creating new structures, policies and accountabilities for managing social media risk, as well as the awareness of how the organization is using social media strategically and operationally. Although general governance principles apply in the realm of social media as with other corporate strategies, some specific differences and permutations need to be noted in several areas, including the need to coordinate effectively across functions and the need to have well-defined crisis management procedures that can be instituted at a moment’s notice.

An established social media risk management structure including:

  1. Formally defined roles and accountabilities enterprise-wide and within exposed functions.
  2. Coordination among business units.
  3. Acceptable-use policies for social media.
  4. Well-defined risk tolerance levels.
  5. Defined escalation pathways.
  6. An operating model for crisis management.

II. Process:

Effective social media risk management processes protect operations and the brand in a cost-effective way—adjusting operations for proactive social media risk assessment and monitoring. Companies are already aware of the importance of having consistent processes in place to handle identifying, measuring, managing and reporting on risks. However, such processes will often look somewhat different in the social media world, in part because of the always-on nature of social networking platforms.

Consistent processes to manage operations while identifying business opportunities. Processes include:

  1. Social media risk identification across categories (e.g., reputation, intellectual property, fraud prevention, business disruption)
  2. Risk assessment, reporting and monitoring.
  3. Cost-effective risk mitigation/transfer.

III. System:

Board should be capable of monitoring social media networks in real time to identify what is being said about your company and what issues arise from that chatter from the standpoint of regulatory, business and brand risks. Such monitoring is now largely dependent on advanced technology. Improving the effectiveness of IT systems in the context of social media risk management is primarily about improving the management and analysis of data and using new technologies to monitor social media sites as a means of mitigating risks. Vast amounts of data are now on social media platforms and so companies need and want to manage that data effectively. Several capabilities are important here.

Effective use of technologies to improve data management and the monitoring of social media activity, including:

  1. Social media data mining and capture (e.g., analytics, web crawlers)
  2. Text analytic engines
  3. Data security and storage
  4. Reporting and dashboards

5. Opportunities and Challenges Of Social Media On The Company and the Strategies to be adopted by the Board:

Hence, in today’s world of Social Media as discussed above, we feel that a blow to an organization’s reputation may prove to be fatal even without any actual wrong doing by the entity itself- Perhaps as a result merely of a perception of inappropriate behavior  or even just the grievances of one or two individuals. Such attacks on the reputation of the organization can have a drastic effect typically on the brand value of the company.

In order to mitigate the risks, challenges and opportunities as discussed earlier and to keep in mind the effective functioning of the Board amidst the scenario of such risks, opportunities and challenges , effective strategies shall be planned and implemented at the right point of time in the Organization.

It is essential that the Board takes pro active interest in the Governance of the Social Media, since in the Light of present circumstances of increasing participating stakeholders, a good board leads to good decisions and good decisions lead to value oriented sustainable stakeholder value.

To design a strategy that can be productively implemented is a tricky task. However, there are a few questions which the Board / the organization collectively can ask before developing a strategy.

  • Does our organization have a social media policy and what does it cover?
  • Do we think about social media from a perspective of both risk and opportunity?
  • Is there a designated position in our organization to manage social media
  • Does our organization monitor social media and, if so, for what?
  • Do we monitor social media internally, or is the function outsourced?
  • Does our organization monitor social media, traditional media, and other sources to determine the public perception of our organization and the public acceptability of our business strategies?
  • Do we monitor the public’s opinion on our competitors and our industry?

Above are vital concerns from the perspective of the Company/ Organization and the Board.

6.Role of Company Secretary- A Governance Professional:

Being a Governance Professional, a Company Secretary must be conscious  of the strategies the Boards shall devise for planning, implementing and monitoring the Social Media Governance Model . Times have changed and the Company Secretaries are getting transitioned into Governance Professional. Since Governance or the lack of it has assumed a centre stage, the professionals in our field need to be dynamic and zealous enough to guide the Board in not only in the matters of Law but also in recommending the Board good practices to carry out smooth functioning of the Board.

Below are few guidelines which we as professionals shall recommend to the Board and which shall also be supportive to the Board in shaping strategies for Social Media Governance:

1) Demystify social Media during a Board Meeting. To ask the Company to deploy staff/employees who can look after the following:

  1. company’s specific target market who uses social media
  2. a comparative analysis of what competitors are doing
  3. research on reach and future trends in social media; criteria to use research on reach and future trends in social media; criteria to use
  4. the difference between inbound and outbound social media

2) Advise the Board in determining the material matters relating to the Social Media Disclosures and taking up those material matters for approval in the Board meeting and /or committees thereof in order to avoid the circumstances of Insider Trading claims and risk of confidential information getting leaked. Social Media Risk should be part of Risk Management Policy of the Company.

3)  Advise the Board in maintaining a reasonable approach while divulging information on the Social Media. As a Governance Professional to the Organization, care must be taken to guide the client on the information to be placed on the social media since social media tools can be used during a crisis to federate the protestors in gathering the information that can be used in litigation, putting Board Members in a liability suit situation.

A very talked about example shall demonstrate on why it should be ensured that social media should be on a Board’s Agenda. A few years ago, Nestlé was the target of a Greenpeace social media campaign for using palm oil that they claimed was harvested unsustainably, endangering several animal species in Indonesia. The group posted videos on YouTube and other channels that went viral before the company was able to get them removed. The removal then prompted further outcry: tweets and Facebook posts multiplied, and damage that in the past would have taken months of on-street petitions and letter campaigns accrued in mere days, with hundreds of thousands of conversations happening outside the company’s reach and influence.

4) Enlighten the Board regarding various provisions of Cyber Laws in order to be meticulous with the disclosures. There are several Intellectual Property Rights concerns for which the Company / the Organization needs the expert guidance of Professional experienced in dealing with the Proprietary aspects of the Company.

5) Advise whether the Company should have a whistle blowing mechanism through social media or not depending upon the size of the stakeholders and nature of business the Company is in.

However, be that as may, there are opportunities as well which are seldom unexploited by the Board since social media tends to make the Board of Directors perturbed.

Further, the Board can also carry on  developing frameworks with regards to stakeholder value that address the key challenges of social media governance for the workforce, including

1) Listening to what is being said:

Listening to what the stakeholders feel about the Company is an essential thing which most of the Companies fail to notice. Most of the activities happen on the website of the Company on advent of a new move of the Company and in order to propagate what the Company or the Board of Directors feel about the same. With the social media coming into the picture, the stakeholders of the company would be able to voice their opinions for a particular move and thereby the Board and the Company shall be able to reasonable inference regarding success or failure of the same.

2) Employees Perspective:

Social media provides an opportunity for senior management and boards to understand employees’ opinions and perspectives as well. An internal Social Media Platform should be created so that the employees can express their opinions and voices in a decent and constructive manner. The Board of the Company in this regard shall always keep in mind that the employees of the Organization are the first advocates of the Organization. Every employee talks about his/her workspace with his/her peers. The Board / the management of the company has to take care that the organization is valued in the eyes of the people who work for it. After all, no review is better than the review from the person who is working for the organization. The Board should take steps to harness this very fact.

3) A Channel of Communication with the Public:

Companies that understand what stakeholders are saying, and where to find the conversations, are better able to integrate their social media strategy into the broader corporate communications strategy. Companies that are willing to engage themselves onto a Social Media conversational platform tend to make a larger customer base since the doubts queries and concerns are responded to infect immediately.

4) Social Media is like a market research group which is never commissioned:

There are all sorts of communications about the Company when the Company is on social media. Social Media is so far one of the best ways to figure whether the Companies activities are niche to a market or not.

5) Influencing Decision making:

Once the management of the Company is done with the phase of propagating and exchange of ideas and receiving of the feedbacks, the Board/top management of the Company by then becomes well equipped with the relevant information and/or report regarding the market sentiment and the level of stakeholder satisfaction on any particular move of the Company. In this manner the Board or the top management may rather be able to make a better informed decision. The Probability of the Board / the top management going wrong in their decisions is significantly reduced through the adoption of social media mechanism.

6) Mitigating Social Media Impact:

The Board should develop speedy approval processes to enable rapid responses to Social Media Chatter and authorized designated officer for such speedy responses. Board should constitute “Digital Acceleration Team” to respond speedily to the problems as they surfaced.

Conclusion:

The advantages of using various social media effectively can be considerable in terms of insight, competitive advantage, cost savings and efficiencies. Good Social Media Governance ensures that the outlays associated with social media blunders can be minimized. This is vital. A happy customer’s view can be beneficial to business but the viral nature of social media means that organizations can be at risk, not just externally but internally. We as professionals along with board can play a key role in social media governance by not only growing organization wide awareness and developing a social media strategy but also ensuring compliances and addressing key issues to ensure that social media is compliant and ensuring Social Media is on the Board agenda.

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(References: Online resources including following links:
http://www.rmmagazine.com/2013/10/02/effectively-managing-social-media- risks/,

http://www.pwc.co.uk/governance-risk-compliance/insights/do-you-think-policy-is-the-only-way-to-manage-social-media-risk1.html

,https://erm.ncsu.edu/library/article/social-media-risks,

http://www.instituteforpr.org/social-media-and-financial-services-rules-regulations-and-risk/,

http://www.socialmediatoday.com/content/what-social-media-governance-and-5-key-elements-successful-model,

http://socialmediavoice.com/2012/01/10-social-media-law-governance.html,

http://www.kunocreative.com/blog/bid/69119/9-Steps-for-Creating-Corporate-Social-Media-Governance

 

Article on “WOMEN COMPANY SECRETARIES- EMBARK ON A JOURNEY TO BOARD SEAT!!

Around the Globe, Companies Act 2013, company secretaries, Corporate Governance, The Companies Act, , , , , , , , ,

Read my Article published in ICSI e-nitor on  “WOMEN COMPANY SECRETARIES- EMBARK ON A JOURNEY TO BOARD SEAT!! https://www.icsi.edu/Webmodules/EJournel/1st%20october%202014%20e-csnitor.pdf

The Companies Bill, 2012: A Pragmatic view

Companies Bill,2012, ,

Part 1

law

The Historic Companies Bill, 2012 was passed by Upper house “Rajyasabha” on Thursday i.e 8th August, 2013, replacing the nearly 60-year-old Indian Companies Act, 1956. The Bill was already approved by Lower House “Loksabha’ in December, 2012. Now once it receives presidential approval, draft rules for nearly 377 provisions of the Bill will be made public and new Companies Act, 2013 will come into existence and effect with MCA Notification.

When Companies Act, 1956 was legislated nearly 60 years ago, the economy of India was controlled economy but after that there is a paradigm shift in economic landscape of India resulting in more foreign investments, collaborations and joint ventures, so new and better corporate legislation was needed to fulfil the global expectations. The Companies Act, 1956 was though amended 25 times but it is not in harmony with today’s global economy and corporate segment. In last 100 years, it is the 2nd time new companies bill is legislated. All credit goes to Minister of State for Corporate Affairs, Mr. Sachin Pilot.

The new Companies Bill aims for:

  1. Better and Effective Corporate Governance Practices and Compliances
  2. Enhanced Transparency and Disclosures
  3. Enhanced Accountability of Corporate, its Directors, Professionals and Legal Advisors
  4. Effective Protection of Stakeholders
  5. More Shareholder’s Democracy
  6. Corporate Social Responsibility
  7. Stricter Regulations and Implementation of Laws
  8. Effective Insolvency Norms.
  9. Self Regulation.
  10. Gender Diversity

 The role of company secretaries will increase manifold along with other professionals like chartered accountants.  They will be recognized as key managerial personnel in a company along with the Managing Director/Whole time Director/CEO/CFO/COO and will be termed as “Chief Governance Officer” of the company. They will play major role in the areas of secretarial audit, corporate restructuring, insolvency matters, valuation, etc.

 Though the new Companies Act will be in harmony with global corporate governance practices but lot of vagueness is there which needs clarity. During the debate on Companies Bill, 2012 in Rajyasabha on Thursday, some MP’s placed some important suggestions on various provisions of the Bill.

 I am of the view that following provisions in the Companies Bill, 2012 really needs more attention and clarity. Ambiguity on applicability of these provisions can generate pragmatic challenges on the road ahead.

 1. There are nearly 337 provisions in the new Companies Bill, 2012 for which rules are to be decided i.e subordinate legislation will come out. Rules are more difficult to understand by layman which may make new Companies Act more complicated. So rules should be drafted in very simplified and realistic manner which can be implemented in smooth manner.

2. As per clause 2(52), “listed company” means a company which has any of its securities listed on any recognized stock exchange. Clarity is needed on definition of “securities” as it has wider meaning and includes financial and investment instruments bought and sold in financial markets such as bonds, debentures, notes, options, shares and warrants.

 3. Clause 131 of bill specifies that if it appears to the directors of a company that—(a) the financial statement of the company; or (b) the report of the Board, do not comply with the provisions of section 129 or section 134 they may prepare revised financial statement or a revised report in respect of any of the three preceding financial years after obtaining approval of the Tribunal on an application made by the company in such form and manner as may be prescribed and a copy of the order passed by the Tribunal shall be filed with the Registrar: Provided that the Tribunal shall give notice to the Central Government and the Income tax authorities and shall take into consideration the representations, if any, made by that Government or the authorities before passing any order under this section. This clause requires attention as it may happen that some fraudulent companies in order conceal their fraud in annual account of past years obtains order from tribunal for revision of their annual accounts. The revision of annual accounts should not be allowed or if needed, order should be passed in rarest cases.

 4. As per clause 135(5) of the Bill, the Board of every prescribed company shall ensure that the company spends, in every financial year, at least two per cent. of the average net profits of the company made during the three immediately preceding financial years towards Corporate Social Responsibility (CSR) in pursuance of its Corporate Social Responsibility Policy and if the company fails to spend such amount, the Board shall, in its report made under clause (o) of sub-section (3) of section 134, specify the reasons for not spending the amount. No punishment or penal provisions is provided in the Bill if the board of company does not spend on CSR activities which is again matter of concern. It just has to specify the reasons in its board report for not spending the prescribed amount. Stricter view should be taken by the regulators on non compliance of this clause by companies and may prescribe that if any company is not able to spend amount on CSR activities in any particular year; it shall transfer certain percentage of net profits of specified fund. This clause needs revision for better implementation.

 5. Clause 141 of the Bill says that a person shall be eligible for appointment as an auditor of a company only if he is a chartered accountant: Provided that a firm whereof majority of partners practicing in India are qualified for appointment as aforesaid may be appointed by its firm name to be auditor of a company and  where a firm including a limited liability partnership is appointed as an auditor of a company, only the partners who are chartered accountants shall be authorized to act and sign on behalf of the firm. This provision will encourage the back door entry of foreign audit firms. Further, word “majority of partners” needs clarity as to whether it refers to no. of partners or directors or shareholders. Further, even LLP’s in which members are not chartered accountants can be appointed as auditor firm of the Company which is again opening doors for entry of foreign firms and will increase competition for chartered accountant firms in India. This needs revision.

 6.Statutory Auditors of the company are restricted to give certain services to its clients. More clarity is needed on restricted services.

 7.Clause 152 (6) says that unless the articles provide for the retirement of all directors at every annual general meeting, not less than two-thirds of the total number of directors of a public company be persons whose period of office is liable to determination by retirement of directors by rotation. It further gives the explanation that the “total number of directors” shall not include independent directors, whether appointed under this Act or any other law for the time being in force, on the Board of a company. Now at present, even independent directors are included in total no of directors taken into account for calculating the no. of directors liable to retire by rotation. So clarity is needed on the status of directors including independent directors who was liable to retire by rotation and being eligible was reappointed before the date of implementation of this bill and whether the effect of new provisions regarding retirement of rotation shall be given prospective or retrospective.

 8.Clause 149(1) of the Bill mandates appointment of one woman director on the board of prescribed companies. Clarity is needed on qualification and independence criteria of woman director proposed to be appointed on board. It will happen that wife, sister, mother or other relatives of the promoters will be appointed as woman director on the board for just complying with the provision and in fact they will act as rubber stamp limiting the intention of this provision.

 9.There seems to be confusion or drafting error in clause 164 of the bill which deals with the provisions of the person not eligible for appointment as director and clause 167 which deals with provisions of vacation of office of director of the company. In clause 164 of the bill, that person shall not be qualified to be appointed as director if an order disqualifying him for appointment as a director has been passed by a court or Tribunal and the order is in force provided that this  disqualifications shall not take effect where an appeal or petition is preferred within thirty days as aforesaid against the conviction resulting in sentence or order, until expiry of seven days from the date on which such appeal or petition is disposed off and in clause 167, it is mentioned that director will vacate his office if  he is convicted by a court of any offence, whether involving moral turpitude or otherwise and sentenced in respect thereof to imprisonment for not less than six months: Provided that the office shall be vacated by the director even if he has filed an appeal against the order of such court.

So as per my understanding, person can be appointed as new director even if court has passed order for disqualifying him, convicting him of any offence but if he has filed appeal and regarding vacation of office of director, he has to vacate office of his directorship if court has convicted him of any offence and he has even made appeal. It needs clarity.

 10.Clause 166 of the Bill defines the duties of directors. It should be more elaborative and specify the list of activities in detail which will amount to breach of duties.

 11.Clause 188 of the Bill deals with related party transactions which also cover non financial transactions. Clarity is needed on nature of non financial transactions. It also says that nothing in this sub-section shall apply to any transactions entered into by the company in its ordinary course of business other than transactions which are not on an “arm’s length basis.” Detail clarity is needed on definition of  “Arm’s length”.

 12.Clause 245 deals with Class action suits and specifies that member or members, depositor or depositors or any class of them can make application to Tribunal to claim damages or compensation or demand any other suitable action from or against the auditors, auditors firm, any expert, advisor, consultant or any other person for any incorrect or misleading statement made to the company. It may happen that some notorious members for sake of their personal interest files suits against auditors or consultants associated with the company which will create huge harassment for professionals and the issue of no of qualified reports by professionals will increase thereby increasing complex work burden of companies and government regulators. Further, if frivolous applications are filed by members against professionals, provision should be there for levying heavy fines on such members by the tribunals.

 13.Harsh penalties are prescribed for auditors and their firms who are found guilty of professional misconduct. It needs revision. Whole audit firm should not be penalised for the misconduct of one partner.

 14.More clarity on concept and working of “One Person Company” is needed.

 15.Chairman plays an important role on board. Clause 104 of the Bill just specifies the provision of chairman of the meetings. For better corporate governance practices, more elaborate provisions regarding duties of chairman should be provided with a clause that chairman should be non executive without any substantial shareholding in the company to ensure his independence. Chairman who has substantial shareholding in the company may try to decide agenda of the board meeting in his personal interest and there will be always conflict of interest resulting in massive failure of corporate governance framework of the company.

 16.Bill aims for enhanced shareholder’s democracy. All major transactions i.e intercorporate investments, guarantees, securities, related party transactions needs approval of shareholders. It may happen that some notorious shareholders will harass the companies in giving consent on important matters and play mischiefs for satisfying their personal interest. So more detail clarity is needed on this provision for curbing this issue.

 17.Listed companies will have two regulators now i.e Ministry of Corporate Affairs and SEBI, which will create conflicts. For eg. There is a deviation in the provision regarding independent directors’ appointment in New Companies Bill and Listing Agreement. Further, there is also a deviation between New Companies Bill and Sebi Consultative Paper on Review of Corporate Governance Norms in India regarding implementation of Corporate Governance Practices. Alignment is needed between both authorities in framing Rules and Regulations.

 18.Clause 149(8) of the Bill specifies that the company and independent directors shall abide by the provisions specified in Schedule IV. Now Schedule IV of the Bill describes code for independent directors. It specifies that the Code is a guide to professional conduct for independent directors. So clarity is needed whether it is mandatory for Independent directors to follow this code or it is just guide. If this code is mandatory, then many independent directors will resign from the board of many companies after implementation of the new act as responsibilities cast on Independent directors by this code is enormous. Further, Bill has put restrictions that Independent directors shall not get any ESOPs. So if any person will not be remunerated properly then why he will take such high risk, devote his valuable time and energy while performing duties of independent director? Schedule IV should be either revised or removed as it will create lots of problems for Independent Directors and no capable and skilled person will be ready easily to take post of independent director in any company.

 19.Companies Bill has given immunity to independent directors against the consequences for violation of provisions of new Companies Act if the said violation /omission are done by the company without their knowledge and consent and not through proper board process. Clarity is needed on extent of their liability if company has violated provisions of other Acts i.e Income Tax Act, PF, Negotiable Instruments, Labour laws, etc.

 I have tried to compile the issues which may become major challenges in future during implementation of the new Companies Act.

To be continued…

Your valuable views are solicited!

                                                                                           ********************************************

(References: The Companies Bill,2o12 and online bulletins, articles)

COMPANY DIRECTORS-LEGAL STATUS

Corporate Governance

A company is an artificial person created by law. It functions through human agents who are collectively called Board of Directors. They are termed as Trustees of the assets of the company who sees that company business is carried on in accordance with the Memorandum and Articles of Association of the company. They decides policies of the company keeping in view the main objects for which the company was formed.

 Only an Individual is eligible for appointment as a Director of the company. There are various types of directors:

 1.Executive Directors i.e Managing Director, Whole time director or Executive Director

2. Non Executive Director

  •        Nominee Director
  •        Institutional Nominee 
  •        Promotional Institutional Nominee
  •         Lending Institutional Nominee
  •         Holding company nominee
  •         Collaborator Nominee
  •         Government Nominee u/s. 48B
  •          Debenture holder Nominee
  •          Independent Director
  •           Others

   The individual cannot be a director for more than 15 public limited companies.

   The Directors of the company are custodians of the interest of the stakeholders which includes:

 (i)            Employees

(ii)          Shareholders

(iii)         Creditors

(iv)         Customers

(v)          Society

 The directors must exercise their powers for the benefits of the company as they are in a fiduciary relationship position vis-à-vis the company. Even courts have been very zealous in seeing that fiduciary relationship of the directors with the company are not abused. The position has further changed  in the era of corporate governance to the extent that the directors have to protect the interests of not only shareholders but also stakeholders. Directors are required to exercise ordinary care and skill, loyalty and obedience for managing affairs of the company.

 Now, important issue is what are the job requirements in terms of knowledge and skill for a director?

        1.  Wide range of management skills

        2. Earlier training and executive experience

        3. Ability and capacity to learn and apply new skills in his higher scale

        4. Attention to principles

        5.  Decisiveness

        6. Proven record of effective  board membership in other companies

This would clearly define the accountabilities of directors such as to contribute impartially to the deliberations of the board, to acquire adequate knowledge of the company’s business to provide positive support in developing company’s policies, objectives and to do planning for performing board assignments and supporting company long term plans.

The Board of directors have general powers as well as specific powers. Some of the powers are conferred by the Articles of Association of the company and certain powers could be exercised only by passing unanimous resolutions or only with consent of the company in general body meeting of shareholders. Section 291,292,293,293B and 294 of The Companies Act,1956 deal with power of Board of Directors.

If directors exceeded the powers of the company as enshrined in the Memorandum and Articles, or directors were not authorized by the Articles to act on behalf of the company or an individual director may have acted within the powers conferred on the board but without any authority to do so having been delegated to him by board in such circumstances, the action taken is ultra vires the company, it is altogether void even if consented by all the shareholders.

Just as it is important for a director to be aware of his duties, responsibilities, it is also necessary for him to recognize the legal position regarding his liabilities for breach of law concerning company. The best part is that there is no personal liability for any director, unless he has voluntary accepted personal liability in relation to any matter affecting the company.

The directors are liable under various statutory acts viz:

  1. The Companies Act,1956
  2. Air(Prevention and control of Pollution Act)1981
  3. Apprentice Act,1961
  4. Consumer Protection Act,1986
  5. Contract Labour (Regulation & Abolition) Act,1970
  6. Customs Act,1962
  7. Depositories Act,1996
  8. Employees Provident Funds & Miscellaneous Provision Act,1952
  9. Employees State Insurance Act,1948
  10. Environment Protection Act,1986
  11. Equal Remuneration Act,1976
  12. Essential Commodities Act,1976
  13. Essential Commodities (Spl. Provisions) Act,1981
  14. Central Excise Act,1944
  15. Foreign Exchange Management Act,2000
  16. Industrial Dispute Act,1947
  17. Industrial Employment (Standing Order) Act,1946
  18. Industrial (Development & Regulation) Act,1957
  19. Minimum Wages Act,1948
  20. Negotiable Instrument Act,1881
  21. Payment of Bonus Act,1965
  22. Payment of Gratuity Act,1972
  23. Payment of Wages Act,1936
  24. Securities Contracts( Regulation) Act,1956
  25. Securities Exchange and Board of India,1992
  26. Indian Stamp Act,1899
  27. Trade and Merchandise Marks Act,1958
  28. Urban Land (ceiling and regulation) Act,1976
  29. Water (Prevention and Control of Pollution) Act,1974

 Under The Companies Act,1956, director is termed as “officer in default” and are principally liable for various statutory offences. Under other statutory acts, penalties ranges from Rs. 1000 to Rs. 2 lacs and imprisonment varies from 3 months to 3 years depending upon the intensity of offence committed.

 To conclude, it is inevitable to state that time has come for directors to understand their responsibilities well and to equip themselves with proper skills in better way and to discharge their duties with utmost care and caution. They should not completely rely on professionals in matters where they need to sign and should be sure about it. They should also indemnify themselves by taking professional insurance coverage  to protect themselves from unexpected professional liabilities in future. Proper training should be taken from reputed institutes to discharge their duties effectively, to regularly update themselves with legal statutory requirements , best practices in corporate governance and current business thinking.

 (References: The Companies Act,1956-Bare Act, ICSI Publication- Are you a company director)

PREVENTION OF OPPRESSION AND MISMANAGEMENT IN COMPANIES-AN OVERVIEW

Companies Act,1956

A company  is an  association of individuals working with a common aim to achieve the purpose of the formation of the company and to earn maximum profit. There are difference of interests and opinions among individuals which results in forming of majority and minority group. These groups  requires proper balancing under strict judicial securitization so that position of any of the group is not misused or abused. In today’s scenario , this topic has become a significant part of the companies law and practice.

How do companies run?, Who runs them?, Whether majority shareholders or directors run them? How majority oppress the minority? These questions needs to be answered  for understanding the concept of Oppression and Mismanagement.

Oppression:

The Oppression of small/minority shareholders take place by majority shareholders who controls the company. It is understood as an act or omission on the part of  management which implies majority, who holds or controls the management. The law, however, has not defined what is oppression but certain prominent case laws has defined the term “Oppression.”

Mismanagement:

 Similarly , mismanagement is not uncommon in companies. It means mismanagement of resources by following means:

  1. Absence of basic records of the company
  2. Drawing considerable expenses for personal purposes by directors/management of the company.
  3. Not filing documents with The Registrar of Companies relating to compliances under The Companies Act,1956
  4. Misuse of companies finances/funds
  5. Sale of assets at very low prices
  6. Violation of provisions of law and memorandum or article of association of the company.
  7. Making Secret Profits
  8. Diverting company funds for personal use of directors
  9. Continuation in office by director beyond the specified term and not holding any qualification shares.

The acts of mismanagement may not necessarily be of majority but can be by any person in the day to day management of the company.

Indian Position:

 An analysis of the 50 Top Economic Times ranked companies reveals that in India nearly 50% are still family owned and if public sector undertakings are excluded , the percentage is approx.63%.To name a few are Wipro, Reliance Industries, Satyam Computer Services, Ranbaxy Laboratories, HCL Technologies, Dr. Reddy’s Laboratories, Hero Honda Motors, Zee Telefilms, Bajaj Auto, TATA Motors, Grasim, Nirma, Dabur, Gujarat Ambuja Cements, Sun Pharmaceuticals Laboratories.

The percentage of family owned business is increased in India as entrepreneurship  in early years was highly personalized and did not get corporatised. The family owned concerns are almost dominating the business scene  and professional management rarely exists.

Oppression and Mismanagement is less seen in professionally managed companies where manager work for “Shareholders” and not for particular group of members.

This concept is more common in family owned concerns where family members owned and developed entire business over time. These concerns  are not professionally managed and system of functioning is very personal. The controlling member of the family curbs the whole family holdings by means of issuing new shares or transfers in his favor or reconstitute the board in such a manner so that other family member are alienate resulting to oppression of other family members and mismanagement of the company.

Legal Aspects:

 Oppression and Mismanagement is governed by section 397/398 of The Companies Act,1956. It plays a crucial role in prevention and remedying the oppression and mismanagement. The small and medium sized companies especially family owned are most affected as the father wants his son to takeover certain business irrespective of the other family members which leads to oppression in some form or other and most of these disputed lands for remedy before courts/company law board.

To protect the interest of minority shareholders, the companies act,1956 defines certain rights  as enumerated below:

 The Rights of Minority Shareholders:
Section 17: Special resolution is required for changing the registered office from one state to another and for changing the objects of the company.
Section 21 & 22 Changes of name of company require a special resolution.
Section 31 Alteration of articles can be done through a special resolution.
Section 39  Members are entitled on payments of a fee to copies of memorandum and articles of association and agreement and resolution referred to in section 192.
Section 79  Issue of shares at discount should be authorized by the resolution of the general meeting.
Section79 A  Issue of sweat equity shares should be authorized by special resolution in general meeting.
Section 81  When further shares are offered to persons other than the existing shareholders a special resolution should be passed to that effect.
Section 87  An equity shareholder has a right to vote on every resolution placed before the company and his voting right on a poll is in proportion to his share of the paid up equity capital.
Section 94  Alteration of share capital requires consent of shareholders in general meeting.
Section 100  Reduction of share capital requires passing of a special resolution.
Section 106  The rights attached to one class of shareholders can be varied with the consent in writing of holders of not less than three-fourths of such holders.
Section 107  The shareholders who are against the reduction of share capital and who did not vote in favor of the resolution under section 100 can apply to the court for cancellation of reduction (not less than ten per cent shareholders).
Section 113  Share allotment letters and share certificates should be delivered to the shareholders within three months of allotment and within two months of the registration of transfers.
Section 118  Copies of trust deeds for securing debentures should be forwarded to any member (apart from the debentures-holders).
Section 144  Copies of instruments creating charges and register of charges kept at the company can be inspected by any member.
Section 149  A public company formed after the 1956 Act should not commence other objects referred to under section 13(1) (d) ( i ) unless a special resolution is passed.
Section 163  The register of member, index of registers, certificates, documents, etc. can be kept away from the registered office within the same city etc. if it is so approved by the special resolution. The index, registers, returns, etc. should be open to the inspection of any member or debenture holder or any other person and extracts can be taken there from.
Section 165  Members of public companies are entitled to statutory reports and to the right of approval thereof at the statutory meeting.
Section 166  The annual general meeting should be held in each year and the gap between two such meetings should not exceed fifteen months.
Section 172  Members are entitled to notice of every meeting of the company.
Section 179  Members can demand a poll in accordance with this section.
Section 183  A member need not use all his votes in the same way.
Section 188  A member holding at least 1/20 total voting power or not less than hundred members can direct the company to circulate resolutions.
Section 196  A member can inspect the minutes of proceedings of general meeting and he is entitled to be furnished within a week with a copy of minutes on payment of a fee.
Section 210  The balance sheet and profit and loss account should be laid before the annual general meeting.
Section 217  Board’s report should be attached to every balance sheet laid before the annual general meeting.
Section 219  A copy of every balance sheet and profit and loss account, auditor’s report, board’s report should not less than 21 days before the annual general meeting be sent to every member.
Section 224  Auditor’s (other than first and casual auditors) should be elected by members at annual general meetings.
Section 225  Special notice is required of a resolution at an annual general meeting appointing as auditor a person other than the retiring auditor.
Section 235  Members holding not less than one tenth of total voting power or not less than 200 members may appeal to the Company Law Board for investigation of the affairs of the company.
Section 255  Not less than two thirds of the total number of directors of a public company should be appointed at general meetings.
Section 258  The board of directors can be increased or reduced by an ordinary resolution.
Section 284  Special notice shall be required of any resolution to remove a director.
Section 293  The board of directors cannot, except with the consent of the general meeting:1. Sell, lease or otherwise dispose of the whole or substantially the whole of the undertaking of the company.

2. Remit or give time for the repayment of any debt due by a director.

3. Invest the amount of compensation received in respect of compulsory acquisition.

4. Borrow moneys in excess of the aggregated capital and free reserves.

5. Contribute to charitable or any other funds in excess of 50000 rupees or five per cent of the average net profits during the immediately preceding three financial years, whichever is higher.
Section 294  Appointment of sole selling agents is subject to the consent of the general meeting held after the appointment.
Section 301  The register of contracts can be inspected by members extracts taken and a copy thereof required by them on payment of a fee.
Section 302  Members are entitled to details of terms of contracts or variation in regard to the appointment of managing director/manager.
Section 304  The register of directors can be inspected by any member.
Section 307  The register of directors’ shareholding should be open to inspection of any member during business hours.
Section 309  The remuneration payable to directors including the managing and wholetime directors by public companies is subject to the approval of members.
Section 314  The appointment of a relative or partner to office of profit is subject to approval of members by way of special resolution.
Section 323  The memorandum can be altered so as to render unlimited liability of directors’ if so authorized by special resolution.
 
 The leading cases quoted by Indian Laws where minority shareholders rights was protected successfully are:

a) Meyer v. Scottish Cooperative Wholesale Society Ltd. (1954) SC 381.

b) Elder v. Elder and Watson (1952) SC 49.

c) In Re H R Harmer Ltd. (1959) IWLR 62.

d) Five Minute Car Wash Services Ltd. (1966) IWLR 715  Ch D.

e) In Re Jermyn Street Turkish Baths Ltd. (1971) WILL 1042 (CA).

f) Yenidge Tobacco Co. Ltd. (1971) I WLR 1042 (CA)

g) Loch V. John Blackwood Ltd. (1924) AC 783.

h) Clemens v. Clemens (1976).

i) Daniels v. Daniels (1978).

j) Ebrahimi v. Westbourne Galleries Ltd. (1973) AC 360. 

Legal Remedies:

 Section 397, 398 and 399 of the Companies Act 1956 covers the remedies for preventing Oppression and Mismanagement:

 Section 397:

Application to Company Law Board for relief in cases of oppression:

1. Any members of a company who complain that the affairs of the company are being conducted in a manner prejudicial to public interest or in a manner oppressive to any member or members (including any one or more of themselves) may apply to the Company Law Board for an order under this section, provided such members have a right so to apply in virtue of section 399.

2. If, on any application under sub-section (1) the Company Law Board is of opinion (a) That the company’s affairs are being conducted in a manner prejudicial top public interest or in a manner oppressive to any member or members: and

(b) That to wind up the company would unfairly prejudice such member or members, but that otherwise the facts would justify the making of a winding-up order on the ground that it was just and equitable that the company should be wound up;

the Company Law Board may with a view to bringing to an end the matters complained of make such order as it thinks fit.

 Section 398:

Application to Company Law Board for relief in cases of mismanagement:

1.Any members of company who complain-

(a) That the affairs of the company are being conducted in a manner prejudicial to public interest or in a manner prejudicial to the interests of the company, or

(b) That a material change (not being a change brought about by, or in the interests of, any creditors including debenture holders, or any class of shareholders, of the company) has taken place in the management of control of the company whether by an alteration in its Board of Directors, or managers or in the ownership of the company’s shares or if it has no share capital in its membership, or in any other manner whatsoever and that by reason of such change, it is likely that the affairs of the company will be conducted in a manner prejudicial to public interest or in a manner prejudicial to the interest of the company.

may apply to the Company Law Board for an order under this section, provided such members have a right so to apply in virtue of section 399.

2.If, on any application under sub-section (1) the Company Law Board is of opinion that the affairs of the company are being conducted as aforesaid or that by reason of any material change as aforesaid in the management or control of the company, it is likely that the affairs of the company will be conducted as aforesaid, the Company Law Board may, with a view to bringing to an end or preventing the matters complained of or apprehended, make such order as it thinks fit

 Section 399

 Right to apply under sections 397 and 398 –

 (1)The following members of a company shall have the right to apply under section 397 or 398: –

(a) in the case of a company having a share capital, not less than one hundred members of the company or not less than one-tenth of the total number of its members, whichever is less or any member or members holding not less than one-tenth of the issued share capital of the company, provided that the applicant or applicants have paid all calls and other sums due on their shares;

(b) in the case of a company not having a share capital, not less than one-fifth of the total number of its members.

(2) For the purposes of sub-section (1), where any share or shares are held by two or more persons jointly, they shall be counted only as one member.

(3) Where any members of a company are entitled to make an application in virtue of sub-section  (1), any one or more of them having obtained the consent in writing of the rest, may make the application on behalf and for the benefit of all of them.

(4) The Central Government may, if in its opinion circumstances exist which make it just and equitable so to do, authorize any member or members of the company to apply to the Company Law Board under section 397 or 398, notwithstanding that the requirements of clause (a) or clause (b), as the case may be, of sub-section (1) are not fulfilled.

(5) The Central Government may, before authorizing any member or members as aforesaid, require such member or members to give security for such amount as the Central Government may deem reasonable, for the payment of any costs which the Company Law Board dealing with the application may order such member or members to pay to any other person or persons who are parties to the application.

 Closing note:

The true  test of corporate governance is the manner in which the majority addresses minority interests. The corporate democracy is reckoned with the no. of shares one has, and not with the no. of individuals involved. Due to lack of shareholder activism in India especially of minority shareholders, oppression and mismanagement is increasing day by day reducing the importance of good corporate governance in the system. Today, a very large number of cases  dealt at Company Law Board are pertaining to oppression and mismanagement. The  Law must balance the need for effective decision making on corporate matters on basis of consensus without permitting persons in control of company.

To conclude with a famous quote of  George Washington “ It is better to be alone than in bad company.”