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The vexed issue of appointment of directors
September, 14th 2006
The debate on the need or otherwise for a director to have an adequate stake in the company remains inconclusive -------------------------------------------------------------------------------- The wisdom, the capability and the propriety of the law itself prescribing any particular factor as an important, much less, decisive test of eligibility for appointment to the post of a director in a company is open to doubt. -------------------------------------------------------------------------------- It is not easy to define law because it has different aspects. It is commonly understood as that which is "laid down, ordained or established" and also as "that which must be obeyed and followed by citizens subject to sanctions or legal consequences." (Black's Law Dictionary 5th edition.) As for its origin, it has been pointed out that it may be "derived either from judicial precedents, or from legislation or from custom". The law on different subjects may vary from place to place and also from time to time. Variations in social needs, perceptions and customs account for changes in the law in force in different countries; and even in the same country, in different periods any law may become vexatious when it is far behind or much ahead of the times, as also when it is too academic or too realistic. A company is, however, as good as its promoters, who can make or mar it irrespective of the laws in force. The law is no more than a tool in their hands, no matter how it had originated or what its objective might be. Stakes in company as energisers Indeed, the company law provides a good illustration of the difficulties inherent in legislating for business (including industry), which is almost infinite in its variety and which is susceptible to constant improvement with technological developments. Despite more than a century of experience, the company form of doing business is yet to become foolproof. The numbers of amendments it has frequently suffered during the last decade and also the fact that an entire Amendment Bill has had to be laid to rest after pendency for a long time, bear evidence to the chronic maladies for which there can be no standardised remedies. There has been an inconclusive public debate on `independent directors', the need or otherwise for a director to have an adequate stake in the company (conducive to greater dedication and zeal), an audit committee which will not stifle or destroy initiative and so on. One of the reasons why it is impossible to have a consensus on any of these issues is that, in the final analysis, the success or otherwise of any enterprise depends on the qualities of leadership, entrepreneurship, ingenuity and resourcefulness of the individual running it, the nature and extent of his stake in it, his experience, aptitudes, qualifications, etc., or all of them. To assume that one or other of these may alone be a sure recipe for success may be a mistake, as in the story of the seven blind men who took parts of an elephant's body for the elephant itself as a whole. In any case, the wisdom, the capability and the propriety of the law itself prescribing any particular factor as an important, much less, decisive test of eligibility for appointment to the post of a director in a company is open to doubt. The validity of a limit to the number of posts of managing director or even part-time director that one can competently hold under Section 316 of the Companies Act is not free from controversy, especially after the Madras High Court struck down the ceiling on the number of audits that a chartered accountant can be permitted to do under the Chartered Accountants Act, 1949. There is nothing to prevent a company having a byelaw seeking to impose any such discipline on itself or its directors based on its members' assessment of their resources and physical capacity. But why should the Companies Act presume to know what is good for a company, public or private, as long as nothing is done or not done by the company that may be detrimental to public interest? The promoters/controllers of a company may have to conform to all requirements which are not in conflict with the other provisions in the Act and which may subserve the company's interests. If a government servant can, with distinction and devotion, discharge whatever duty is assigned to him and a public sector employee also fills the bill to perfection without any proprietary interest in a government company, why should ownership of the shares of a private company be taken to be indispensable for the managing director of that company? Apart from mere hunch or pragmatism, is there any logical ground for dissuading him from appointing others also, whether or not they have any shares in the company of which he is the managing director, if he considers them suitable for advising him, as whole-time or part-time directors, in the conduct of his business? It is for the shareholders of a company in general meeting to decide whether their chief executive or even any other director should have any minimum share ownership as a condition for his election or appointment. When the courts have repeatedly pointed out that the merger of the company with another company (as `transferor' or transferee') rests basically on the collective wisdom of the shareholders, which deserves to be respected/accepted by the courts, it will be odd if we insist on any director holding any shares in the company notwithstanding the view of the shareholders to the contrary as reflected either in a general meeting or in the byelaws framed/approved by them. Unwarranted intervention It can rightly be construed as unwarranted intervention in the business carried on by the company. It is, undoubtedly, not for the Government to dictate to the company how it should run its business. Where the Government does not have to pay the piper why should the law vest it with the authority to call the tunes? It can reasonably be argued that it is to the Government's advantage in the exercise of its regulatory responsibilities if all large-scale businesses/industries are organised in accordance with the Companies Act in the uniform company mode/format. It will, however, hardly be fair to impose the Government's notions of what is good for them on the shareholders of companies, in pursuance of text book principles or lobby pressures and contrary to the Government's own experience in the public sector undertakings. Is it not true that senior officers who superannuate from government service or employment in the public sector are immediately absorbed with alacrity in the private sector as directors? What purpose do we expect to be served by requiring them to hold any shares of the company, either as nominees of the promoters or even as real owners? They are mere birds of passage. They are retained only as long as they are useful. While their contacts and the possibility of their being influential for at least some time after their retirement may have mattered in exceptional cases, it is their experience that has usually weighed in the utilisation of their services in the private sector. It is only the chairman and managing director whose authority has to be backed up with a controlling interest in the company's voting power. What uninhibited and untrammelled exercise of power in self-interest may lead to is demonstrated in most of the cases covered by the Sick Industrial Companies (Special Provisions) Act, 1985. Abuse of power and lack of a sense of financial propriety have driven most of these companies to straits from which it has not so far been possible to save many of them. They are not certainly prepossessing models to advance the cause of promoters and controllers of large public companies, or support the case for those who press for the stipulation of possession of a substantial interest in a company, for appointment of any one as a director, whole-time or part-time in that company. K. Srinivasan (By arrangement with Corporate Law Adviser, New Delhi.)
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