Management and Functions of Chief Executives of a Company

After reading this article you will learn about the management of companies.

Nowadays the Board is reduced to a mere legal formality, although it continues, in the eyes of law, as the only organ of the enterprise with all the overriding powers. With professionalization of management, the functions of the Board in actual administration are eroded perceptibly.

Drucker observes: “In reality, the Board as conceived by the law-maker is at best a tired fiction—it has become a shadow king. It has in effect been deposed and its place taken by executive management.”

There are however some significant functions coming within the strict purview of the Board which should be scrupulously exercised to sustain the interests of shareholders and vindicate their confidence. The Chief Executives now enjoy wider range of powers in policy-making and in controlling the organisation. The Board of Directors can still tend to be dynamic by asserting its intrinsic powers.

The more important functions of the Board nowadays are summarised as under:

(i) Final approval of plans and policies prepared by experts and chief executive officer.

(ii) Keeping a watch over the spirit of the organisation and ensure that all the management processes work to strengthen the organisation and to achieve swiftly its goals.

(iii) It should be “an organ of review, appraisal and appeal.”

(iv) Making major changes in the policy.

(v) Selection of top executives.

In order to regulate the to powers passed on the Chief Executive Officer and other Sectional Officers and experts, it is necessary to constitute Subcommittees of Directors, Chief Executives and specialists or experts in the respective fields, such as Finance Committee, Product Planning Committee, Research and Development Committee, etc.

Chief Executives:

It is now evident that actual management of companies has centered in the hands of the professional managers or executives who are salaried employee officers of the company. It is the professional managers or executives who are employed “to develop and expand the assets and profits for the shareholders.”

Board of Directors appoints one among them or an outsider as the prime coordinating authority armed with adequate powers of direction, review and control of operations at the various levels of the organisation.

Chief Executive is a managerial term applied to officer or officers to whom administrative authority is delegated by the Board of Directors. In India, as noted earlier, Managing Director (one of the directors) or Manager can be appointed as Chief Executive.

Chief Executive is expected to administer the affairs of a company efficiently according to the pre-set objectives, and policies approved by the Board. He plans, organises, regulates, co-ordinates the business activities on behalf of the Board and conveys the suggestions, grievances, claims etc. of the operating personnel to the Board for the needful decision and action.

“Chief Executive concerns himself,” says Allen, “with initiation and final decision of matters of planning, organisation, motivation, coordination and control.”

Functions of the Chief Executive:

The functions of the Chief Executive may be summarised as under:

(1) He develops objectives in all major aspects of the company’s business for the approval of the Board.

(2) He evaluates the needs of the company and advises about expansion, acquisition or alteration, adjustment necessary for stability and growth of the company.

(3) He makes the basic decisions to reach the objectives and policies decided upon by the Board.

(4) He issues instructions to the different departments to secure performance of jobs.

(5) He devises an organisational structure and defines the authority and responsibility of each departmental executive for implementing the Board’s policies.

(6) He co-ordinates the business activities of different departments and ensures cogent integrated functioning of all departments.

(7) He keeps control by review of key sectors of growth in the company through reports from and personal contact with subordinates.

(8) He keeps up the morale of the staff by suitable incentives and seeks to develop teams spirit among the employees.

In short, “he thinks through the business that the company is in.”

The Indian Companies Act has provided for suitable regulations relating to the appointment, remuneration, qualifications etc. of Chief Executives like Managing Director or Manager so that the company can be run efficiently by the Executive with proper business background, ability and integrity.

The Companies (Amendment) Bill, 1972:

A new bill to amend the Companies Act of 1956 was introduced in Lok Sabha on 11 August. 1972 in order to remedy many of the glaring defects observed in the working of the corporate sector. Tightening of grip over monopoly houses, eliminating obstructive practices resorted to by companies with dubious intentions and regulating in general the corporate sector to realise the aims of socialism were the prime considerations behind this new legislation.

The basic objective of the Bill is stated to be “Prevention of abuses and distortion of the company system which have assumed serious proportion.”

Defects in the Functioning of the Companies:

Following are the glaring distortions found in the operation of companies:

(i) Concentration of economic power within few companies in different deceptive form escaping control under Monopolies and Restrictive Trade Practices Act.

(ii) Abuse of the privileges by Private Limited Companies.

(iii) Failure to enlist the shares with the Stock Exchanges mentioned in the prospectus.

(iv) Beaming holding of shares.

(v) Misuse of Reserve Funds, Unclaimed Dividends etc. by management.

(vi) Revival of dominance of firms which worked as Managing Agents before the abolition of the Managing Agency System under new arrangements.

(vii) Monopolization of audit work by the same auditors for a number of years.

The amending Bill seeks to correct these distortions and stream-line the corporate sector so that it can become a well-moulded tool of public interest and social justice.

The main provisions of the Bill may be summarised as under:

(1) The following private companies shall be deemed public limited companies:

(a) Companies whose 10 percent of the paid -up share capital is held by another public or private limited company or which holds 10 percent of the paid-up share capital of any other companies.

(b) Companies having paid-up capital of Rs. 25 lakh and annual turnover of Rs. 50 lakh.

This is meant to bring under wider control the private companies where public interest is involved to a large measure.

(2) The Bill also seeks to regulate takeover of well-established companies by individuals or group or combines. Such takeovers are detrimental to the interests of non-controlling shareholders. It is now provided that Government’s approval is essential for any deal in one transaction or series of transactions in the aggregate of 25 percent by a group or combine having the intention of acquiring control over the company concerned. This restriction applies to companies having total paid-up capital of not less than Rs. 25 lakh and private companies which are subsidiaries of such public companies.

(3) The concept of the “companies under the same management” has been widened in order to avoid control by groups in different forms or by different methods calculated to cause injury to public interest. Cases where directors of one company are accustomed to act in accordance with the directions of one or more of the directors of the other company, or if the directors of both the bodies corporate are accustomed to act in accordance with the directions or instruction of any individual, whether belonging to a group or not, or cases where a group exercises control over a body corporate that body corporate and every other body corporate which is a constituent of or controlled by the group shall be deemed to be under the same management.

(4) After the abolition of Managing Agency, there has been a tendency to enter into service agreements with the companies and continue to control their affairs as before. The Bill therefore lays down that all agreements between the erstwhile managing agents etc. or their associates entered into within five years of their ceasing to be managing agents shall require the approval of the Central Government and shall be subject to variations necessary for the interest of the company.

(5) In its new Section 209-A it is sought to widen the powers of inspectors appointed by the Government to investigate into cases of mismanagement. Inspectors would be invested with the powers of civil court in the matter of producing documents, summoning of witnesses, examining them on oath etc. This new Section, it is claimed, would enable the Government to know about the mismanagement of the business with a view to defraud the creditors, shareholders or otherwise with unlawful intentions and take effective remedial measures before the company goes into liquidation and prevent distress to employees etc.

(6) Under the existing provision the Government is empowered to appoint two directors for a period of two years to prevent oppressive management of the company. But the new Bill empowers the Government to nominate any number of directors.

(7) Under the existing law managing directors can be appointed for a period of five years and approval of the Central Government is required only at the time of the first appointment.

The amending Bill requires the Central Government’s approval to be taken every five years. This is meant to exercise control over continuance of Managing Directors by taking into account any irregularities perpetrated by them during their previous tenure.

(8) Under the amended Bill an auditor shall not be reappointed without prior approval of the Central Government if he has been auditor of the company for three consecutive financial years.

This is meant to break audit monopoly of a few firms and to diffuse the audit work among large number of qualified auditors.

(9) Sole selling agreements shall require prior approval of the Central Government. No individual, firm, or body corporate having substantial interest in a company shall be appointed as a sole selling agent of that company except with the prior approval of the Government.

(10) Other provisions include:

(a) Prevention of misuse of Reserve Fund by way of dividends.

(b) Restrictions on the use of unclaimed dividends by management.

(c) Beaming holding of shares.

(d) Central Government has the power to fix the remuneration of Managing Directors.

(e) Approval of the Central Government is necessary for contracts between companies and directors or relatives of concerns where they are interested, for the sale, purchase or supply of goods materials or services.