Navigating Complexity – The Board’s Legal Environment

As board members face increasing scrutiny and accountability, the legal landscape in which they operate has become significantly more intricate. In a session of Egon Zehnder’s Directors Development Program, Sharad Abhyankar, Senior Partner at Khaitan & Co. and an experienced independent director, offered a comprehensive and candid deep dive into the legal environment of the boardroom. With over two decades of experience in corporate law and board governance, Sharad combined legal knowledge with practical boardroom insight to help directors understand how to operate with confidence and caution in equal measure.

The session began with an important clarification: the difference between governance and compliance. According to Sharad, many organizations and regulators erroneously conflate the two. “Compliance is binary. Either you are compliant or you are not. It is a zero or one. There is nothing in between. You cannot say that the company’s policy is to be compliant to the extent permissible and possible, which means you have decided not to be compliant.”

While directors are not expected to manage every license or regulatory detail, they are expected to ensure that robust systems are in place. In sectors such as banking, where companies are answerable to multiple regulators, including the Ministry of Corporate Affairs, SEBI, and the RBI, directors must navigate overlapping but distinct expectations. “Every regulator adds his own layer of governance expectation and these are expectations only unfortunately from the board and not necessarily from the rest of the organisation.”

Sharad posed a provocative question to the group: where does the real power reside, within the board or with the shareholders? The legal framework, he explained, provides a clear answer grounded in principle. “It is the board of directors who is entirely competent to do everything that the company itself can do, which means you are the company.”

This legal foundation, enshrined in Section 179 of the Companies Act, underscores the collective authority of the board. However, that authority is not limitless. It must be exercised within the bounds of the company’s Memorandum and Articles of Association, and subject to shareholder approval in specific cases, such as borrowing beyond net worth or selling business undertakings. “So if you want to dispose of any undertaking of the company, we need to take a shareholders approval before we can conclude the transaction.”

He added that this distinction – between undertaking and asset – is often misunderstood, and that directors must grasp the implications of decisions involving economic entities that function as standalone models. As regulatory scrutiny has increased, so too has the expectation that directors avoid (and transparently manage) conflicts of interest. “Conflict of interest is not a taboo. It is not a bar. It does not invalidate anything. What the law expects... disclose. If you have a conflict, disclose it. So, there are only two basic principles that apply to conflict of interest. Disclosure and staying away from a decision where that conflict of interest will be involved.”

In related-party transactions, particularly in listed companies, the law is explicit: only independent directors on the audit committee are empowered to approve or disapprove such deals. “You can imagine that if there are promoter related transactions, how responsibility multiplies to a very large extent.”

This concentration of responsibility makes it imperative that directors perform adequate due diligence and ask tough questions. As Sharad noted, even silence can become evidence. “Your silence is no answer. It is no protection. In fact, silence is a deemed acceptance of what's going on.”

Section 166 of the Companies Act codifies the essential duties of a director, including acting in good faith, exercising due care, and promoting the interests of all stakeholders, not just shareholders. Sharad drew attention to how this represents a significant philosophical shift from earlier eras of corporate law. “What was thought to be a social responsibility over and above your business has become now your primary duty to think of all the stakeholders collectively.”

Sharad warned that directors can’t rely on management alone to ensure good faith. “Directors behavioral pattern cannot be proved in a court of law. Nobody can point a finger at you. But you can use some of the things in the real corporate world that can demonstrate that you functioned as a proper director.” 

He cited historical cases, like the Ford Motor Company ruling in 1915 and the Ford Pinto case, to illustrate how courts interpret “stakeholder duty” in the real world. In more recent contexts, this means directors must critically assess whether their decisions truly reflect sound judgment, rather than simply aligning with majority consensus or outdated data. “The data that was being presented to that board was two years old. Everybody looked at the promoter’s face, promoter said, yes, yes, I am very convinced. Everybody nodded, and the resolution got passed.”

And he went on to highlight how timely and reliable information is central to a director’s ability to act in good faith: “We know in today's world anything beyond three months is obsolete data. How could the board rely on a data which was two years old? What is the foundation of your good faith? Information. You need information. You need data, you need clarification.”

The law recognizes that independent directors may require expert guidance. Boards are entitled to seek third-party validation when they believe it necessary: “We want to be advised independently and we want to look at that independent counsel only for us… they will advise directors or they will advise independent directors at the cost of the company.”

This empowers directors to question management assumptions, valuations, or the fairness of transactions, without bearing personal cost for such diligence. Sharad encouraged directors to use this right actively, especially in high-stakes matters involving mergers, related-party transactions, or strategic investments.

One of the most practical parts of the session was Sharad’s guidance on six documents every director must master:

• Memorandum and Articles of Association: “Regardless of what you are, whether you are a board member… before you join the board, you must master it.”
• Company Website: “If it is found to be misleading, who is going to be held responsible? You. You are the company.”
• Agenda Notes: Directors must understand not only the information provided but also whether the agenda calls for a decision or merely noting.
• Minutes of Meetings: “What was the deliberation, who participated, what was the subject matter of that discussion?”

He advocated for detailed, even long-form minutes that clearly document director comments.

• Policies: “Policies have a great magic in them. They institutionalise your decision making science.”
• Whistleblower Complaints: “There may be frivolous complaints. Have you taken them through a logical process to assess the validity?”

All of these documents serve as proof of a director’s active and informed participation – and, in cases of inquiry, may be the only protection available.

Perhaps the most sobering moment of the session was when Sharad referred to the legally mandated Director’s Responsibility Statement. “This is what we always tell all the directors that you sign this in your blood, right.”

He read aloud from the statement, which includes assurances on accounting, fraud prevention, and legal compliance. These declarations are not symbolic, they have legal weight. And yet, he asked the room pointedly: “How many of you have even read the statement that came, and you have signed this year after year?”

The implication was clear: directors must not treat these statements as routine. They represent binding declarations of accountability.

In closing, Sharad emphasized practical governance, not just legal formality. Tools like D&O insurance provide protection, but only if directors can demonstrate good faith and due diligence. “This is not a license to be non-compliant, but it is a protection for financial cost if you are compliant. The insurance company will disclaim paying that cost if you are found to be guilty.”

He left the group with a clear message: speak up, stay informed, question data, document decisions, and never allow silence to become complicity: “Please be careful about what you sign up.  You are all lenders.  What is the diligence that you undertake?  Be very careful.”