Corporate Governance – Role of Board of Directors

CORPORATE GOVERNANCE billet OF BOARD OF DIRECTORS People often principal whether corporeal jump ons matter because their day-today imp passage is difficult to ob take care. But, when things go wrong, they dejection become the center of attention. Certainly this was true of the Enron, Worldcom, and Parmalat scandals. The directors of Enron and Worldcom, in particular, were held liable for the fraud that occurred Enron directors had to pay $168 million to investor plaintiffs, of which $13 million was fall out of pocket (not covered by insurance) and Worldcom directors had to pay $36 million, of which $18 million was out of pocket.As a consequence of these scandals and ongoing concerns about corporate governance, control lineups have been at the center of the policy debate concerning governance reform and the focus of considerable academic research. Because of this renewed take in boardsmuch of the research on boards ultimately touches on the question what is the fibre of the board? Possible answers range from boards being simply profound necessities, nearlything akin to the wearing of wigs in English courts, to their playing an play conductive part in the overall caution and control of the corporation.No doubt the truth lies virtuallywhere between these extremes indeed, there are probably multiple truths when this question is asked of different firms, in different countries, or in different periods. So what is a Board of theater director (BoD) and what do Directors actually do? A Board of Directors is a body of elected or prescribed members who jointly oversee the activities of a lodge or organization. Other names include board of governors, board of managers, board of regents, board of trustees, and board of visitors.It is often simply referred to as the board . A boards activities are ascertain(p) by the powers, duties, and responsibilities delegated to it or conferred on it by an authority outside itself. These matters are typically detail ed in the countrys company law, organizations bylaws and/or the Article of Association (AoA). The bylaws commonly also specify the shape of members of the board, how they are to be chosen, and when they are to meet. To better understand corporate boards, hotshot should begin with the question of what do directors do? Over the years there has been several indepth studies conducted and research literature published by some of the most brilliant academics only to answer this very question e. g. Mace, 1971, Whisler, 1984, Lorsch and MacIver, 1989, Demb and Neubauer, 1992, and Bowen, 1994 and their conclusions are presented breifly The principal conclusions of Mace were that directors serve as a source of advice and counsel, serve as some sort of discipline, and act in crisis situations.The nature of their advice and counsel is unclear but Mace suggests that a board serves largely as a looking board for the CEO and exonerate management, occasionally providing expertise when a firm f aces an issue about which one or more board members are expert. Yet Demb and Neubauers survey results find that approximately two-thirds of directors agree that setting the strategic direction of the company was one of the jobs they did. 80% of the directors also agreed that they were involved in setting strategy for the company. 5% of respondents to another of Demb and Neubauers questionnaires report that they set strategy, corporate policies, overall direction, mission, vision. Indeed far more respondents agreed with that description of their job than agreed with the statements that their job entailed overseeing, monitoring surpass management, CEO (45%) masteryion, hiring/firing CEO and top management (26%) or serving as a watchdog for shareholders, dividends (23%). According to Epstein and Roy (2006), a high performance board must achieve three core objectives in other words Epstein and Roy nail the core responsibilities of the board . Provide superior strategic guidance to c urb the companys growth and prosperity by Setting of Strategy 2. master accountability of the company to its stakeholders, including shareholders, employees, customers, suppliers, regulators and community 3. Ensure that a highly qualified executive team is managing the company by The Hiring, Firing and Assessment of Management. isolated from what has been stated above one very significant and active role played by the board is in basis of the hiring, firing, and assessment of management.This is one role that is typically ascribed to directors is control of the process by which top executives are hired, promoted, assessed, and, if necessary, dismissed. Assessment can be seen as having two components, one is monitoring of what top management does and the other is determining the intrinsic ability of top management. The monitoring of managerial actions can, in part, be seen as part of a boards obligation to be vigilant against managerial malfeasance. It is inwrought that the role, duties and responsibilities of directors are clearly defined.The Combined Code (2006) states that the boards role is to provide entrepreneurial lead of the company within a framework of prudent and effective controls which enables risk to be assessed and managed. According to UK Law, the directors should act in good faith in the affaire of the company, and exercise care and skill in carrying out their duties. The guild Law Reform Bill (2005) defines, in section 154-161, the directors duties as follows a duty to act within powers, that is, to act in accordance with the companys constitution and only exercise powers for the character for which they are conferred a duty to promote the success of the company, so a director must act in the way he considers, in good faith, would be most likely to promote success of the company for the benefit of its members as a whole a duty to exercise independent pattern a duty to exercise reasonable care, skill and diligence a duty to avoid co nflicts of interest a duty not to accept benefits from third party a duty to declare an interest on proposed transactions or arrangements. But that does not quite answer our cardinal question as to how the role the board plays is related to the overall corporate governance of the organization.Nevertheless one thing is certain thus far is that the BoD lead and control a company and hence an effective board is rudimentary to the success of the company. The board is the link between managers and the investors, and is essential to good corporate governance and investor relations. Since corporate governance represents the value framework, the ethical framework and the moral framework under which business decisions are interpreted it thence calls for three factors 1. Transparency in decision-making 2. Accountability which follows from transparency because responsibilities could be fixed easily for actions interpreted or not taken, and . The accountability is for the safeguarding the i nterests of the stakeholders and the investors in the organization. Decisions relating to board composition and structure depart be of fundamental importance in determining whether, and to what extent, the board is effective and successful in achieving these objectives. A board will typically be composed of a Chairman, Chief Executive Officer, Executive Directors, Non- Executive Director, Independent Director, Company Secretary and then there are committees made from among the board for specific purposes with a view to increase corporate governance and hence accountability.It is important that the board has a balanced composition both in terms of executive and non executive directors and also in terms of experience, qualities and skills that one-on-ones bring to the table. The Institute of Directors (IoD) has published some useful guidance in this area in 2006 which is shared below Consider the ratio and tot up of executive and non executive directors. Consider the energy, expe rience, knowledge, skill and personal attributes of current and prospective directors in relation to the forthcoming needs of the board as a whole, and develop specifications and processes for new appointments, as necessary. Consider the cohesion, dynamic tautness and diversity of the board and its leadership by the chairman. Make and review succession plans for directors and the company secretary. Where necessary, remove left-handed or unsuitable directors of the company secretary, taking relevant legal, contractual, ethical and commercial matter into account. Agree comely procedures for electing a chairman and appointing the managing director and other directors. Identify dominance candidates of the board, make selection and agree terms of appointment and remuneration.New appointments should be agreed by every board member. Provide new board members with a comprehensive induction to board process, and policies, inclusion to the company and to their new role. Monitor and appraise each individuals performance, behavior, knowledge, effectiveness and values rigorously and regularly. Identify development needs and training opportunities for existing and potential directors and the company secretary. Roles of the board members 1. Chief Executive Officer and ChairmanThe CEO has the executive responsibility for running of the companys business on the other hand, the Chairman has responsibility for the running of the board. The two roles should not therefore be combined and carried out by one person Conclusions Corporate governance, and in particular the role of boards of directors, has been the topic of much attention lately. Although this attention is particularly topical due to well-publicized governance failures and subsequent regulative changes, corporate governance is an area of longstanding interest in economics (dating back to at least Adam Smith, 1776).Because of corporations enormous share of economic activity in modern economies, the extent to which corporations deviate from value-maximization is extremely important. Consequently, corporate governance and the role of boards of directors is an issue of fundamental importance in economics. Understanding the role of boards is brisk both for our understanding of corporate behavior and with respect to setting policy to regulate corporate activities.