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Business Studies Notes 3
rd.
Year
Undergraduate / Graduate Level
SUBJECT: The various
roles and
responsibilities of
shareholders and
directors
Authors: (Original Study Notes and Lecture Notes prepared by Mr. K.P. Saluja (M.B.A. from Indian Institute of Management Ahmedabad), and by Mr. K. K. Prasad (M.B.A from IGNOU Delhi) These notes are intended to be used by undergraduate students, completing Year 3 Business Degree Courses. These notes will help undergraduates and graduates complete case studies, coursework assignments and pass exams in Business Studies and Economics.
TABLE OF CONTENTS
(1) The rights and duties of a shareholder (2) Importance of shareholders (3) Shareholders’ Roles and Rights (4) Liabilities of a shareholder (5) Duties of shareholders (6) Types of shareholders (7) Importance of shareholders in a company (8) Responsibilities and role of a company director (9) Steps to become a Company director (10)Important skills for a company director
The rights and duties of a shareholder
A shareholder can be a person, company, or organization that holds stock(s) in a given company. A shareholder must own a minimum of one share in a company’s stock or mutual fund to make them a partial owner. Shareholders typically receive declared dividends if the company does well and succeeds. Also called a stockholder, they have the right to vote on certain matters with regard to the company and to be elected to a seat on the board of directors. If the company is getting liquidated and its assets are sold, the shareholder may receive a portion of that money, provided that the creditors have already been paid. When such a situation arises, the advantage of being a stockholder lies in the fact that they are not obliged to shoulder the debts and financial
1. Company operations These shareholders directly influence company operations by appointing senior management personnel. For instance, investors choose to invest in stocks that can meet their expected earnings, thus keeping companies under regular force to meet their sales and profit estimations. 2. Financing a company Companies receive financing from shareholders in lieu of ownership rights. Start-ups and private businesses can also rise funding by way of private placements or share issues to select funding institutions and individuals. 3. Governing a company Board members of public companies are required to maintain transparency with the list of shareholders regarding its business condition and operations. In fact, senior leaders of such companies spend time, discussing matters pertaining to the company’s governance with market analysts, shareholders and such entities. 4. Control over a company Shareholders can utilise their powers over opting to choose the personals to control a company’s operations. For example, shareholders can effectively prevent takeover attempts, if they don't agree upon the sufficient price. Thus, with control over the majority of aspects of a company’s operations, shareholders play a significant role in its overall performance and profits.
Shareholders’ Roles and Rights
1. Appointment of directors
Shareholders play a direct role in the appointment of directors, with passing of an ordinary resolution. Apart from this, shareholders can also appoint various types of directors. They are: An additional director who will hold the office until the next general body meeting; An alternate director who will act as an alternate director for a period of 3 months; A nominee director; Director appointed in the case of a casual vacancy in the office of any director appointed in a general meeting in a public company. Apart from this shareholder also can challenge any resolution passed for the appointment of a director in the general body meeting.
2. Legal action against directors Shareholders also can bring legal action against the director by the rules laid down in the Companies Act 2013. They are: Any act done by the director in any manner which is prejudicial against the affairs of the company. Any act done which is beyond the law or against the constitution. Fraud When the assets of the company are being transferred at an undervalued rate. When there is a diversion of funds of the company. Any act done in a mala fide manner. Appointment of company auditors 3. Right to appoint the company auditors. Under Companies Act 2013, the first auditor of the company is to be appointed by the board of directors. Furthermore, the shareholders at the annual general body meet at the recommendation of directors and audit committee. The
As shareholders are the main stakeholders in a company, they have the right to inspect the accounts register and also the books of the firm and can ask questions about the same if they feel so.
7. Right to get copies of financial statements Shareholders have the right to get copies of financial statements. It is the duty of the company to send the financial statements of the company to all its shareholders either in a quarterly or annual statement. 8. Winding up of the company Before the company is wound up the company has to inform all the shareholders about the same and also all the credit has to be given to all the shareholders.
Liabilities of a shareholder
There are not few risks and dangers with turning into an investor in an organization. The hidden justification for this is that an organization is a separate legal entity. It is likewise significant that you might take on a lot more extensive scope of liabilities than a typical investor assuming you are additionally an overseer of the organization. This might happen assuming you have abilities that are commonly held for chiefs. Directors are answerable for the administration of the organization and its everyday issues. Under the law, director’s obligations put a heavier weight on directors than on shareholders.
Duties of shareholders
The fundamental obligation of investors is to pass resolutions at comprehensive meetings by casting a ballot in their investor limit. This obligation is especially significant as it permits the investors to practice their
definitive command over the organization and the way things are made due. Investors can cast a ballot in one of two ways: on a rising of hands or through a survey vote where each vote will be proportionate to the quantity of offers held by every shareholder. A rising of hands is typically the favoured strategy for casting a ballot that happens at general meetings. There are two resolutions that can be decided on at an investors meeting: an ordinary resolution, and a special resolution.
1. Ordinary resolution An ordinary resolution is passed by the shareholders if a simple majority of shareholders present at the meeting vote in favour of the proposal. Therefore, more than 50% of the votes cast must be in favour, usually displayed through a show of hands. 2. Special resolution A special resolution is sometimes required by the Companies Act in certain cases; for instance, to change the Articles of Association, or for other important or sensitive matters. The Articles can also require a special resolution. For a special resolution to be passed, a 75% majority must vote in favour. If there is no specific mention of what type of resolution is required, the presumption is that there will be a vote on an ordinary resolution.
Types of shareholders
Most of organizations have two distinct sorts of investors and stocks, value and liked. What sort of stock an individual claims decides their shareholding type. Each type has various freedoms and honours and investors' understanding determines their privileges. Equity shareholders
While equity and preferred are the most familiar shareholder classifications, another classification is according to an entity's stock ownership. If one shareholder holds more than 50% of the company's outstanding shares, that entity is a majority shareholder. In contrast, a minority shareholder is one who owns less than 50% of the company's outstanding shares. The majority shareholders are usually the founders of the company or the founders' heirs. Since they own so much of the company, majority shareholders have more influence over operations, the board of directors and top executives. Because of this power and control, many investors prefer to avoid companies with majority shareholders.
Importance of shareholders in a company
Along with making a profit by investing in a company's stocks, these shareholders also play a significant role in various aspects of a business, including: Operating a company: Shareholders significantly influence company operations by nominating senior management personnel. For example, investors choose stocks that can meet their earnings expectations, putting companies under pressure to meet their sales and profit projections. Financing a company: Generally, shareholders fund companies in lieu of ownership rights. Start-ups and private companies can also raise capital through private placements or share issues to select investors. Regulating a company: It is important for board members of public companies to be transparent with the company's shareholders regarding their financial and operational conditions. Even senior executives of such companies discuss regulatory issues with market analysts, shareholders and other stakeholders. Control over a company: A company with many minority shareholders is vulnerable to vicious takeover attempts. Shareholders can object to such
moves if they want the current management or think the offering price is too low.
Responsibilities and role of a company director
Company directors are a critical part of an association's senior management team and they can have extraordinary managerial and leadership qualities. These people manage the organization's everyday exercises, ensuring that the staffs are working successfully toward the association's objectives. Finding out about the jobs of a company director can help you in deciding whether you have what it takes and characteristics to go after the job. Role of a company director The role of a company director is to deal with the day to day operations of the association. They settle on critical key and functional choices that guarantee the organization meets its targets. Assuming the organization has investors, the director might be responsible for them. The chief must adjust financial backers' inclinations and those of the organization and its employees. The organization's chief might have a feeling of morals and can pursue choices predictable with government regulations controlling business operations. Coming up next is a rundown of basic obligations of a company director. Create key performance indicators (KPIs) to help employees focus their efforts Coordinate community social responsibility projects with other company professionals Encourage compliance with business rules and regulations and assure conformity with the company's code of ethics Supervise the daily operations of the business Ensure that company records are secure and maintained well
being hired. An MBA can help you distinguish yourself from other applicants and increase your appeal.
2. Get specialised training Along with the academic credentials, directors may require professional training. Professional associations such as India's Institute of Directors provide educational opportunities for aspiring directors. The practical experience gained through such programmes can significantly increase your prospects of becoming a company director. 3. Gain relevant experience For any prospective director, experience can be critical. Corporate directorships can be very competitive, and employers usually mention experience as a key distinction between candidates. Directors are responsible for supervising many projects concurrently and ensuring that they all function well. It is essential to begin managing projects to prepare for the responsibilities associated with the director's position. It is vital for company directors to be good leaders and motivators to their workforce. Volunteering on the board of a non-profit organisation can be an excellent opportunity for future directors to acquire expertise and experience. 4. Select appropriate mentors Try to build a relationship with a current company director to improve your chances of employment as a company director. Getting mentored by an experienced director can introduce you to the position's inner workings. A mentor can teach you the methods and tips necessary to improve your skills and obtain the director's position. 5. Develop relationships with investors
Frequently, investors and shareholders decide who becomes a company director. Thus, it may make sense to cultivate relationships with investors in a certain industry to secure a position as a company director. Take the time to develop your presentation before approaching investors. Investors like to appoint directors who can communicate their value. It is also a good idea to network with current directors if you are interested in joining the board of directors. Certain boards may solicit recommendations from current members for qualified individuals to fill vacant positions.
6. Make a commitment to on-going learning The corporate world is always expanding, and to be an effective company director, it may be vital for you to stay informed of new advancements. Continuing education can help you gain a better understanding of the sector and increase your employability. You can join associations that host conferences and create educational opportunities for directors and aspiring directors.
Important skills for a company director
Excellent company directors can possess strong decision-making abilities. This ability can be critical for managing the strategic decisions that can determine a company's productivity. The following are some of the most important skills that corporate directors may require: Management skills Supervising and delegating work effectively may enable you to maximise your time, resources and productivity. To allocate duties and set attainable goals, it may be vital for company directors to have a complete understanding of each employee's and department's strengths. Strong managerial skills may involve providing your organisation with the training and resources necessary to
only plan but also anticipate unforeseen obstacles that may require adjustments. Adapting rapidly to those adjustments can assist in maintaining a productive workflow. Innovation Developing a creative attitude can enhance productivity and result in organisational success. Directors who demonstrate and support creativity are continuously on the lookout for new ways to enhance and improve operations, identify future development prospects and develop innovative solutions to different problems. Also, innovative thinking can help redefine company models, resulting in significant change and giving your organisation a competitive advantage. Sensitivity Compassion, particularly in a position of leadership, can be crucial for enhancing communication, establishing stronger professional relationships and ensuring employee satisfaction. Empathy shows the ability to understand another person's experience, viewpoint and emotions, which can help employees, feel cared for and valued. Empathy can help foster a supportive workplace, and that can result in increased collaboration and productivity. By taking the time to understand your employees' needs better; you can provide them with the help and resources they may require overcoming any obstacles they may encounter. Visionary leadership Visionary leadership entails presenting objectives, establishing strategic plans for achieving those objectives and providing the resources necessary to accomplish those objectives. When company directors demonstrate visionary leadership skills, they can bring their organisations together around a common goal, which can help enhance employee engagement, productivity and even provide better results more efficiently. By providing teams with a clear sense of
direction, employers can empower individuals to make significant contributions to the organisation's success.
References
Howard Smith Ltd v. Ampol Ltd [1974] UKPC 3, [1974] AC 832, Privy Council (on appeal from NSW). Following Hogg v. Cramphorn Ltd. [1967] Ch 254 Teck Corporation v. Millar (1972) 33 DLR (3d) 288 This division was rejected in British Columbia in Teck Corporation v. Millar (1972) 33 DLR (3d) 288 Director's duties Re Smith & Fawcett Ltd [1942] Ch 304 Re W & M Roith Ltd [1967] 1 WLR 432 Accompany with 100% the same shareholder Mills v. Mills [1938] HCA 4, (1938) 60 CLR 178, High Court (Australia) at p. 164 per Latham CJ. Although as Gower points out, as well understood as the rule is, there is a paucity of authority on the point. But see Clark v. Workman [1920] 1 Ir R 107 and Dawson International plc v. Coats Paton plc 1989 SLT 655 Norman v. Theodore Goddard [1991] BCLC 1027 Aberdeen Ry v. Blaikie (1854) 1 Macq HL 461 In the United Kingdom, see section 317 of the Companies Act 1985 McNamara, Carter. "Overview of Roles and Responsibilities of Corporate Board of Directors". Free Management Library. Authenticity Consulting, LLC. Retrieved 26 January 2008. "Basic Role of the Board". Governance Basics. Institute on Governance (Canada). Archived from the original on 30 December 2007. Retrieved 27 January 2008. Robert 2011, p. 484. This section was developed from numerous definitions in USLegal.com, BusinessDictionary.com Archived 3 March 2011 at the Way back Machine, Dictionary.com, The Free Dictionary by Farlex ("inside director"; "executive
