Director and Manager : A Difference

Introduction

The role of Director and Manager is an integral part of any organization. Many companies nominate a single person to fulfil both the roles. However, it is preferable to have different persons fulfilling the role or it leads to a conflict of interest. This paper analyses the role of a manager and director and how they differ from each other. It also analyses the importance of the distinction between the two roles.

Directors and Related Provisions

A director is an individual who provides direction and governance to a company and is elected by the shareholders of the company.

The Director requirements for various kinds of companies is as follows-

A company can increase the maximum number of directors by passing a special resolution.

There is a limit on the number of directorships a person can partake in as per Section 165 of the Companies Act, 2013, i.e. maximum 20 companies, out of which only 10 can be public companies.

Types of Directors

The following are the types of directors in a company-

1. First Director- The persons who are named in the Articles of Association are the first directors. If no person is named, then the individual subscribers of the Articles of Association are the first directors.
2. Managing director- As per Section 2(54) of the Companies Act, 2013, a managing director is an individual who is a part of the board of directors and has substantial control over the affairs of the company.
3. Additional Director- An additional director can be appointed by the Board of Directors, given that the Articles of Association allow for the same and such person is not otherwise disqualified to be a director. Such an additional director only holds office until the next AGM or when the next AGM is due.
4. Alternate Director- An alternate director may be appointed by the Board, where a director is leaving India for more than three months. Such person has the same powers as the original director and holds the office until the return of the original director.
5. Casual Vacancy Director- If a director dies or resigns, then the Board of Directors can fill the position by hiring a casual vacancy director. His tenure is equivalent to the unexpired tenure of the original director.
6. Independent Director- These directors are not related to the company in any way and have to comply the provisions under Section 149(6) of the Companies Act, 2013. There should be at least one independent director in every listed company. There should be at least 2 independent directors in every public company whose paid up capital in Rupees 10 Crores or more; or whole turnover is equal to Rupees 100 Crores or more; or whose deposits, outstanding loans, debentures in total exceed Rupees 50 Crores.
7. Executive Director- They are those directors (including managing director and whole time directors) who partake in day-to-day management of the company and are deeply involved in the company.
8. Non-executive director- They are those directors which are not employed nor deeply involved in the company and therefore are unbiased towards the company. For example, professional directors, nominee directors, etc.
9. Nominee Director- Those directors which are appointed by financial institutions, banks or government.
10. Small Shareholder Director- They are those directors who are appointed by either on the application from 1000 small shareholders or 1/10th of the total small shareholders or on its own. In their appointment, only small shareholders can vote and notice has to be given at least 14 days before the meeting. Such directors have a maximum tenure of 3 years and cannot retire by rotation.
11. Resident Director- Every company must have a director which is a member or person who has stayed in India for 182 days in the previous financial year.
12. Woman Director- A woman director is mandatorily required for every listed company and any other public company with paid up capital more than or equal to Rupees 100 Crores or turnover of Rupees 300 Crores or more.

Appointment of Directors

Section 160 of the Companies Act, 2013 states the manner of appointment for a director other than a retiring director in an annual general meeting (AGM). The procedure is enumerated below-

1. The applicant has to apply for the position of directorship at least 14 days before AGM via sending a notice and also making a deposit of Rupees One Lakh to the company.
2. The Applicant can be any person nominating himself or any member nominating himself or any other person (not having artificial legal personality).
3. The condition for deposit is not applicable to independent directors and directors nominated by the Nomination Remuneration Committee or Board of Directors. The deposit is refunded if the applicant gets at least 25% votes.
4. The company thereafter issues individual notices to all the members or publish a newspaper advertisement at least 7 days before the AGM.

Disqualifications for a director

Section 164 of the Companies Act, 2013 provides for the disqualifications of a director as-

1. A person of Unsound mind as declared by the courts;
2. An undischarged solvent or an insolvent whose application is pending;
3. Has been penalized by the court for an offence with imprisonment of more than 6 months, but less than 7 years, then disqualified for 5 years. If penalized by the court for an offence for more than 7 years, then permanent disqualification;
4. An order of the Court or tribunal disqualifying such person;
5. A person who has not paid calls or 6 months have elapsed from the last date;
6. Violation of Section 188 (approval for transactions)- a disqualification of 5 years;
7. A person who does not has a DIN or Director Identification Number; or
8. A person who is a director of a company whose company has defaulted in filing or payment. Such failure of payment leads to the disqualification of a person for 5 years.

Duties of Directors

Section 166 of the Companies Act, 2013 prescribes the duties of a director as-

1. To act as per the Articles of Association of the company;
2. To act in good faith;
3. To work for the benefit of the company;
4. To not make any undue gains or benefits;
5. To not assign the office to another person as per his own wishes.

Retirement, Resignation and Removal of Director

Section 152 of the Companies Act, 2013 provides that at every AGM, a handful of directors have to be removed. The purpose of this provision is to weed out the inefficient directors. It states that a maximum of one-third directors can be non-rotational, others are rotational directors. Of these rotational directors, one-third must retire at every AGM. For this purpose, those who are appointed first are retired first. The independent and nominee directors are not included under this provision. However, under Section 162, a director may be re-appointed.

A Director can resign as per the provisions of Section 168 of the Companies Act, 2013. The Director who wishes to resign has to provide a notice to the company and another notice to the Registrar of Companies within 30 days of resignation. The Company will then also inform the Registrar of Companies within 30 days and disclose the information on the website as well as include this information in the Board’s Report. A director who resigns is only liable for those acts which were done during his or her tenure.

Section 169 provides that a director can only be removed either by the shareholders or by the tribunal. In case of removal by shareholders, an ordinary resolution is passed. In this case, a director appointed by the National Company Law Tribunal or a director appointed under proportional representation cannot be removed. In case of removal by Tribunal, any director, including non-rotational directors can be removed, if any member or creditor applies for the same before the National Company Law Tribunal.

Manager and Related Provisions

According to Section 2(53) of the Companies Act, 2013, a manager can be defined as an individual who has the role of managing the whole or the substantial whole of the affairs of the company and is under the control and superintendence of the Board of Directors. The section further states that it includes a director appointed to be the manager of the company.

The meaning of manager was described by Blackburn J. in Gibson v. Barton[1] as “a person who has the management of the whole of the affairs of the company; not an agent who is to do a particular thing, or a servant who is to obey orders, but a person who is entrusted with the power to transact the whole of the affairs of the company.”

According to Section 203 of the Companies Act, 2013, a manager is included within the list of key-managerial personnel. The following types of companies are mandated by law to appoint a managing director, a manager or a whole-time director-

1. Every listed company; or
2. Any public company which has more than 10 Crores of paid up share capital; or

Section 196 of the Companies Act, 2013 states that a managing director and a manager cannot be appointed or employed in a company at the same time. Furthermore, there cannot be more than one manager at a time in the company as a manager is entrusted with whole or substantially whole of the affairs of the company. This means that another person cannot take up such powers at the same time.

Disqualifications for a manager

Section 196(3) of the Companies Act, 2013 provides for the disqualifications of a manager as-

1. Below 25 years or above 70 years of age;
2. An undischarged solvent or at any time an insolvent;
3. Has suspended payment to creditors or made a composition with them; or
4. Has been penalized by the court for an offence with imprisonment of more than 6 months.

Manner of appointment- The manager is appointed for a period of maximum 5 years in a term by passing a board resolution and an ordinary resolution in a General Meeting. The 5 year limit is inapplicable to a private company.

Remuneration payable

The remuneration paid to directors and managers is same and is covered under Section 197 of the Companies Act, 2013. The limits are as follows-

1. In case of profits-
2. Aggregate limit for all- 11% of the net profit
3. Individual limit for Managing Director, whole time directors or managers- 5% of net profit
4. Others- 1% of net profit
5. In case of loss or inadequate profit, remuneration is paid as per effective capital and can be doubled by passage of special resolution-
6. If effective capital is up to 5 Crores, maximum remuneration payable is 60 Lacs per person per annum;
7. If effective capital is between 5 and 100 Crores, maximum remuneration payable is 84 Lacs per person per annum;
8. If effective capital is between 100 and 250 Crores, maximum remuneration payable is 120 Lacs per person per annum;
9. If effective capital is more than 250 Crores, maximum remuneration payable is 120 Lacs plus 1% of excess over 250 Crores per person per annum;

However, if a company wishes to pay a higher remuneration than the aforementioned limits, then Central Government’s approval is required.

Distinction between Board of Directors and Manager

The distinction between the Board of Directors and the Manager may differ from company to company. However, the core terms that distinguish the two are the same in every organization. The Directors, while looking towards the long-term pictures, sets the policies of the company, the manager provides for the decisions in the day-to-day implementation of those policies.

Below given is a brief distinction between the Manager and Board of Directors-

Difference between Managing Director and Manager

It is also pertinent to note that there is a difference between the managing director and the manager. While there are many similarities between the two in terms of remuneration, qualifications, term of appointment, etc. there is a stark difference between the two. The Managing Director is a part of the Board of Directors and is therefore, not subordinate to it. On the other hand, a manager is a hired executive employee and is therefore under the direction and supervision of the Board of Directors. Furthermore a managing director has substantial powers of management (approximately 70-85%) while a manager has whole or substantially the whole powers of management (95-100% approximately).

Why the roles should be distinguished?

The following advantages are there by separating the role of manager from a director-

1. There is a higher level of accountability, whether it be at the higher managerial positions or lower managerial positions.
2. It helps in ensuring that there is a focus on both protection of interests as well as the development of the company.
3. If both the power to make rules and implementation is placed in one hand, the managing and governing authority will get excessive powers, which will deteriorate the interests of the stakeholders.
4. If there is no separate body to ensure proper governance, the persons controlling the company will gain undue advantage and may cause harm to the shareholders.
5. It becomes difficult to replace the inadequate management if both the management and governance are controlled by the same person.
6. A conflict of interest is created if both the roles are given to the same person.
7. There exists autonomy and independence with the management and the board of directors.
8. The chairman or the Board of Directors can also act as an advisor to the CEO, by advising in crucial matters.

Conclusion

To conclude, the manager and the director(s) play a key role in the growth and development of the company. The distinction between the powers of the two helps in representing the interests of all the stakeholders of the company. This provides for the smooth functioning of the company if both the bodies are efficient and active. Therefore, the distinction between a manager and a director in quite necessary.

References:

[1] Gibson v. Barton, (1875) LR 10 QB 329.