DIRECTORS' STATUS AND POWERS:

(i) Status and power under statutory authority:

As a result of the statutory recognition of the need for and emphasis on unifying and centralizing the management in them, the directors, in the United States, occupy a very dominant position. The board of directors is not deemed to derive its powers from the stockholders, but is rather regarded as “the exclusive representatives of the corporation,” as the primary possessors of all the powers which the charter confers (on the corporation), and as vested with powers which are original and not delegated. The following pronouncement made as early as 1856 by the High Court of New York clearly summarizes the nature of directors' powers and the fundamental relation between them and the stockholders:

In corporate bodies, the powers of the board of directors are, in a very important sense, original and undelegated. The stockholders do not confer, nor can they revoke those powers. They are derivative only in the sense of being received from the state in the act of incorporation. The directors convened as a board are the primary possessors of all the powers which the charter confers, and like private principals they may delegate to agents of their own appointment the performance of any acts which they themselves can perform. The recognition of this principle is absolutely necessary in the affairs of every corporation whose powers are vested in a board of directors.

Although with respect to corporate dealings with third persons directors have generally been subjected to the ordinary rules of agency and have often been called agents, they are, as a rule, denied to be the ordinary agents and are rather called private principals.

The rule generally accepted in the United States is thus stated by Mr. Justice Comstock:

The board of directors of a corporation does not stand in the same relation to the corporate body which a private agent holds towards his principal. In the strict relation of principal and agent, all the authority of the latter is derived by delegation from the former.

Another direct and forceful statement which merits notice here is:

These corporations had boards of directors in whom were vested every power, faculty or function which belonged to the bodies they represented. We have then no question in the law of agency; for the agents, if that be the proper term, had all the powers of the principals. Indeed, in an important sense, they were the principals; because their authority was not received by delegation from any other principal.

Assertion may, therefore, be made that in the United States the board of directors is regarded as “the supreme and original authority in matters of regular business management” and the court decisions, as a rule, emphasize its absolutism by reason of the board's inherent rights and responsibilities to direct. Although the stockholders may circumscribe or limit the exercise by the directors of their powers and functions by a valid by-law provision, it is permitted to be done only up to a point. Any attempt to create or maintain a ‘sterlized’ board of directors is void as a substantial impingement on the statutory norm of corporate management. It matters little whether the attempt is made in the certificate of incorporation, by laws, resolutions of directors or shareholders, contracts of employment of officers, management contracts, shareholders' agreements, or otherwise.

(ii) Status and power under authority from shareholders:

There abound in England judicial opinions and comments by the text writers to the effect that directors are mere agents of the company and that the law relating to ordinary agents is generally applicable to them. However, as a result of the principles established in a series of cases beginning with Automatic Self-Cleaning Filter Syndicate Co. Ltd. v. Cuninghame, during the present century, directors have achieved a large degree of independence from the shareholders' control. It is now well-established that where a power has been vested in the board of directors under the articles the shareholders in general meeting cannot impose their will upon the directors and interfere with its exercise unless they first change the articles in accordance with law. The oft-quoted statement of Lord Justice Greer, probably, best expresses the modern English principle:

A Company is an entity distinct alike from its shareholders and its directors. Some of its powers may, according of its articles, be exercised by directors certain other powers may be reserved for the shareholders in general meeting. If powers of management are vested in the directors, they and they alone can exercise these powers. The only way in which the general body of the shareholders can control the exercise of the powers vested by the articles in the directors is by altering their articles, or, if opportunity arises under the articles, by refusing to re-elect the directors of whose actions they disapprove. They cannot themselves usurp the powers which by the articles are vested in the directors any more than the directors can usurp the powers vested by the articles in the general body of shareholders.

In India, prior to the Companies Act of 1956, directors' authority and status were in theory almost identical with those of their counterparts in England, and in practice they were rather much worse particularly because of the dominance and prevalence of the managing agency system in the country. Corporate powers used to be conferred on the managing agents by virtue of the articles or management contracts often in important respects and not infrequently even to the exclusion of the directors. Under the present companies act, however, the position has considerably changed inasmuch as certain powers are statutorily provided to be exercisable only by the board of directors and cannot even be delegated by them to any executive officers including the managing agents.