SOURCE OF DIRECTORS' AUTHORITY

(i) Statutory Authority

As a general rule, the corporation statutes right from the very beginning of corporate life, under the general incorporation laws down to the present times have, in the United States, required corporations organized under them to be managed by a few representative officers elected annually or periodically by the stockholders and designated usually as directors or sometimes as trustees. The very first general incorporation law of real importance, passed as early as 1811 in New York, required the concerns incorporated there under to be managed by annually elected officers called trustees. This Act is generally believed to be the first general incorporation law relating to Business Corporation only. Other early American general incorporation acts for business purposes also provided to the same effect. For instance, a Pennsylvania act of 1836 required the affairs of the corporation to be managed by directors to be chosen annually by the shareholders from among themselves, provided for the compulsory election of trustees not exceeding nine in number to conduct and manage the stock, property and concerns of the company created under the same.

Turning to the modern statutes, we find that most of the American jurisdictions have a statutory mandate, simple in form but of wide and significant ramifications, to the effect that the business and affairs of the corporation shall be managed by a board of directors. The states of Hawaii and Maine, while providing for compulsory constitution of a board of directors, do not lay down express verb is that the board shall manage the corporation, while the other two states of Arizona and Mississippi have no statutory provisions requiring compulsory constitution of any board of directors and a fortiori as to the vesting of management in such elected officers.

(ii) Authority from shareholders

By contrast, in England and India, shareholders have been regarded as the source of directors' authority and the mode of company management has, on the whole, been left to the enlightened self-interest of the stockholders themselves. Unlike the American corporation statutes under which the constitution of corporation-has been designed on the model of the statutory or chartered corporation, the English as well as the Indian companies acts have in general prescribed the form of organization for the registered companies along the lines of their forerunners, the unincorporated large partnership. As has been stated by Professor Gower:

The modern English business corporation has evolved from the unincorporated partnership, based on mutual agreement, rather than from the corporation, based on a grant from the state.

The Anglo-Indian corporate law, in fact, owes more to partnership and contractual principles than does the American corporation law, the draftsmen of which had in mind the statutory or chartered corporation rather than the unincorporated company or partnership.

As such, while in the United States statutory mandate that ‘directors shall manage’ renders the vesting of management powers in the board of directors as obligatory, in England and India this has been left in the main to the shareholders to be determined and provided for usually in the articles or by-laws of the company, except that in India under the recent companies act a few powers are specifically required to be exercised by the board of directors. Not only managerial powers have been generally not vested statutorily in the directors but even the constitution of a board of directors, in both England and India, was not by law required for a long time.

In India, throughout the nineteenth and the beginning of the twentieth century the old traditional English policy of laissez faire was followed in corporate management as in other commercial and industrial matters and the companies acts have primarily been modelled on the preceding English acts and like them based on contractual or partnership principles. But with regard to the directors' appointment and authority certain statutory provisions were made in India at an earlier stage than in England, apparently, because such a course was warranted there with a view to checking the growing abuses of the unfettered powers enjoyed by the managing agents. Thus the first breach in the pursuit of the laissez faire policy in this respect in India was made in 1914 inasmuch as the Indian Companies (Amendment) Act of that year, departing from the English predecessor, the Companies (Consolidation) Act, 1908, made it compulsory for every public company and a private company subsidiary of a public company to have at least two directors. Further an advance over the corresponding English law was made in 1936 in so far as the Indian law then came to require every company to adopt compulsorily an article (by-law) providing in effect that the directors shall manage company's business and exercise all such powers of the company as are not by the Act, by the articles or otherwise required to be exercised by the company in general meeting.