Business / The Board, The Executive And Good Corporate Governance

The Board, The Executive And Good Corporate Governance

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Autor:  anton  26 January 2011
Tags:  Executive,  Corporate,  Governance
Words: 2190   |   Pages: 9
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THE BOARD, THE EXECUTIVE & GOOD GOVERNANCE

Ladies and Gentlemen, this paper attempts to look at the board and individual directors in context to organisational development. To achieve this, the key roles and duties of the board and its directors will be fully reviewed in light of current corporate governance concerns. This paper relies heavily on Review of The Role and Effectiveness of Non-executive Directors – Higgs Review – (2003) and the Combined Code on Corporate Governance (2006) for referencing.

The Combined Code on Corporate Governance, 2006 states that “every company should be headed by an effective board, which is collectively responsible for the success of the company.” On the issue of an effective board, Holland and Jackson (1998) identified six dimensions of board competency that seemed to capture the elements essential to effective governance:

i. Contextual: the board understands and takes into account the culture, values, mission, and norms of the organization it governs.

ii. Educational: the board takes the necessary steps to ensure that members are well informed about the organization, the professions working there, and the board’s own roles, responsibilities, and performance.

iii. Interpersonal: the board nurtures the development of its members as a group, attends to the board’s collective welfare, and fosters a sense of cohesiveness and teamwork.

iv. Analytical: the board recognizes complexities and subtleties in the issues it faces, and it draws upon multiple perspectives to dissect complex problems and to synthesize appropriate responses.

v. Political: the board accepts that one of its primary responsibilities is to develop and maintain healthy two-way communications and positive relationships with key constituencies.

vi. Strategic: the board helps envision and shape institutional direction and helps ensure a strategic approach to the organization’s future.

Holland and Jackson concluded by saying “The most effective boards in our demonstration projects learned to attend to how board members worked together as well as to what work the board did. Their members began taking responsibility for considering the ways the board carried out its work and for seeking new ways to improve performance. Rather than treating board development as something separate from regular board responsibilities, these boards came to see how well they did their work as a part of their ongoing responsibilities”. In other words, if every director is aware of what his or her duties are, both as individuals and collectively as a group, discharging those duties to the benefit of the organisation will not be a difficult thing to achieve.

ROLE OF THE BOARD

The primary role of the board is to monitor management on behalf of the shareholders. This is further stressed in a publication by the Institute of Directors (IoD), Standards for the Board, which states that the board's key purpose "is to ensure the company's prosperity by collectively directing the company's affairs, while meeting the appropriate interests of its shareholders and relevant stakeholders".

Stiles and Bernard in their book, Boards At Work, gave a another description of the role of the board as follows: “Boards, by general agreement, have three key roles: strategy – responsibility for monitoring and influencing strategy; control – maintaining control over the management of the company; and service – providing advice and counsel to executives, and providing an institutional face for the organisation.”

An overview of the board and indicators of good practice is as follows (IoD Factsheet):

Establish Vision, Mission and Values

 determine the company's vision and mission to guide and set the pace for its current operations and future development.

 determine the values to be promoted throughout the company.

 determine and review company goals.

 determine company policies.

Set Strategy and Structure

 review and evaluate present and future opportunities, threats and risks in the external environment; and current and future strengths, weaknesses and risks relating to the company.

 determine strategic options, select those to be pursued, and decide the means to implement and support them.

 determine the business strategies and plans that underpin the corporate strategy.

 ensure that the company's organisational structure and capability are appropriate for implementing the chosen strategies.

Delegate to Management

 delegate authority to management, and monitor and evaluate the implementation of policies, strategies and business plans.

 determine monitoring criteria to be used by the board.

 ensure that internal controls are effective.

 communicate with senior management.

Exercise Accountability to Shareholders and Be Responsible to Relevant Stakeholders

 ensure that communications both to and from shareholders and relevant stakeholders are effective.

 understand and take into account the interests of shareholders and relevant stakeholders.

 monitor relations with shareholders and relevant stakeholders by the gathering and evaluation of appropriate information.

 promote the goodwill and support of shareholders and relevant stakeholders.

BOARD COMPOSITION

Directors are traditionally divided into executive directors and non-executive (or outside) directors. Executive directors are persons who are dedicated full-time to their role in relation to the management of the company while non-executive directors tend to be “outsiders” brought in for their expertise, and to lend a more impartial view in relation to strategic decisions (Wikipedia).

Prior to the introduction of the UK Combined Code on Corporate Governance, the composition of board was around two-thirds executive directors and one-third outside directors. However, with the Code on Corporate Governance, the ratio has now moved to a position where outside directors are in the majority. Provision A.3 of the Combined Code states that “The board should include a balance of executive and non-executive directors (and in particular independent non-executive directors) such that no individual or small group of individuals can dominate the board’s decision taking.” It continued further in provision A.3.2 that “except for smaller companies, at least half the board, excluding the chairman, should comprise non-executive directors determined by the board to be independent. A smaller company should have at least two independent non-executive directors.”

The question on the appropriate board size is also pertinent. While the Code did not specify the exact number of directors, Lipton and Lorsch (1992) in their work, A Modest Proposal for Improving Corporate Governance, they recommended a maximum board size of 10 and favoured 8 or 9.

THE CHAIRMAN’S ROLE

According to the Cardbury Report (1992), “The chairman’s role in securing good corporate governance is crucial. Chairmen are primarily responsible for:

• the working of the board

• its balance of membership subject to board and shareholders’ approval

• ensuring that all relevant issues are on the agenda, and

• ensuring that all directors, executive and non-executive alike, are enabled and encouraged to play their full part in its activities.

Chairmen should be able to stand sufficiently back from the day-to-day running of the business to ensure that their boards are in full control of the company’s affairs and alert to their obligations to their shareholders.” This implies that the chairman is primarily responsible for the effectiveness of the board.

Paragraph 5 of the Higgs Review (2003) gave the roles of the chairman as follows:

 leadership of the board, ensuring its effectiveness on all aspects of its role and setting its agenda;

 ensuring the provision of accurate, timely and clear information to directors;

 ensuring effective communication with shareholders;

 arranging the regular evaluation of the performance of the board, its committees and individual directors; and

 facilitating the effective contribution of non-executive directors and ensuring constructive relations between executive and non-executive directors.

The Combined Code clearly stipulates that “The roles of chairman and chief executive should not be exercised by the same individual. The division of responsibilities between the chairman and chief executive should be clearly established, set out in writing and agreed by the board.” (provision A.2.1).

ROLE OF NON-EXECUTIVE (OUTSIDE) DIRECTORS

The key role for every non-executive director is to bring an independent, objective and external perspective to the board. Other roles according to paragraph 6 Higgs Review are:

 Strategy: Non-executive directors should constructively challenge and contribute

to the development of strategy.

 Performance: Non-executive directors should scrutinise the performance of management in meeting agreed goals and objectives and monitor the reporting of performance.

 Risk: Non-executive directors should satisfy themselves that financial information is accurate and that financial controls and systems of risk management are robust and defensible.

 People: Non-executive directors are responsible for determining appropriate levels of remuneration of executive directors and have a prime role in appointing, and where necessary removing, senior management and in succession planning.

According to a Leedsmet MSc Corporate Governance lecture material, the role of the non-executive director can also be classified as the 11 Cs:

 Contributor

 Challenger of executives’ proposals

 Contact provider

 Confidant

 Conciliator

 Checker of board processes

 Crisis manager

 Coach/mentor to executive directors

 Consultant

 Compensation

 Conscience of the company

For a non-executive director to performance his roles creditably well, he must be independent. According to the Combined Code, a non-executive director is independent if he:

 has not been an employee of the company or group within the last five years;

 has not, or has not had within the last three years, a material business relationship with the company either directly, or as a partner, shareholder, director or senior employee of a body that has such a relationship with the company;

 has not received or receives additional remuneration from the company apart from a director’s fee, participates in the company’s share option or a performance-related pay scheme, or is a member of the company’s pension scheme;

 has no close family ties with any of the company’s advisers, directors or senior employees;

 holds no cross-directorships or has significant links with other directors through involvement in other companies or bodies;

 does not represent a significant shareholder; or

 has not served on the board for more than nine years from the date of his first election.

ROLE OF EXECUTIVE DIRECTORS

Using the words of Adrian Cardbury, “The duties of executive directors are the same as those of outside directors. They are as responsible for the monitoring task of the board as the outside directors, who in turn are as responsible for the strategy and leadership of the company as the executives.”

ROLE OF THE COMPANY SECRETARY

Borrowing extensively from the Leedsmet lecture material again, the duties of the company secretary usually involve:

пѓ? The convening of board and company meetings

пѓ? Taking the minutes of meetings

� Writing up the company’s statutory books

пѓ? Filing returns with the registrar of companies

пѓ? Communicating with shareholders

пѓ? Dealing with share transfers and monitoring share movements

пѓ? Responsibility for compliance and regulations

пѓ? Alterations to memorandum or articles

CONCLUSION

Having looked at the various duties expected of all directors and members of the board, the pertinent question is how can the board be made more effective? In making the board effective is the way in which all board members combine their roles.

Jeffrey A. Sonnenfeld (2002) gave hints on building an effective board:

пѓ? Create a climate of trust and candour

Important information should be shared with directors in time for them to read and digest. Board members should be rotated through small groups and committees so they spend time together meeting key company personnel and inspecting company sites. Work to eliminate polarizing factions.

пѓ? Foster a culture of open dissent

The CEO should not punish mavericks or dissenters, even if they are sometime pains in the neck. Dissent is not the same thing as disloyalty. Use your own resistance as an opportunity to learn. Probe silent board members for their opinions, and ask them to justify their positions. If you are asked to join a board, say no if you detect pressure to conform to the majority. Leave a board if the CEO expects obedience. Otherwise, you put your wealth and reputation – as well as the assets and reputation of the company – at risk.

пѓ? Utilize a fluid portfolio of roles

Do not allow directors to get trapped in rigid, typecast positions. Ask them to develop alternative scenarios to evaluate strategic decisions, and push them to challenge their own roles and assumptions. Do the same thing yourself.

пѓ? Ensure individual accountability

Give directors tasks that require them to inform the rest of the board about strategic and operational issues the company faces. This may involve collecting external data, meeting with customers, anonymous visiting plants and stores in the field, and cultivating links to outside parties critical to the company.

� Evaluate the board’s performance

Examine directors’ confidence in the integrity of the enterprise, the quality of the discussions at the board meetings, the credibility of reports, the use of constructive professional conflict, the level of interpersonal cohesion, and the degree of knowledge. In evaluating individuals, go beyond reputations, resumes, and skills to look at the initiative, roles and participations in discussions, and energy levels.

Adrian Cardbury (2006) also gave the following advice on making the board more effective:

пѓ? Ensure the board concentrates on those issues for which it alone is responsible , such as corporate purpose and values, strategy, executive selection, and succession.

пѓ? Elect a chairman who is not chief executive, and who will put in place effective measures of board performance.

пѓ? Keep the board preferably to a maximum of ten members, with a majority of external, non-executive directors.

пѓ? Ensure that non-executive directors are independent of management and free from connections that may affect their judgement.

пѓ? Offer executive directors training on joining the board and encourage them to accept a non-executive post in another company.

References and Bibliography

Cardbury, A. Boardroom Roles. Business: The Ultimate Resource. London: A&C Black Publishers Ltd, 2006.

Financial Reporting Council, 2006. The Combined Code on Corporate Governance

Higgs Review, 2003

Holland, T.P. & Jackson, D.K., 1998. Strengthening Board Performance: Findings and LessonsFrom Demonstration Projects. Nonprofit Management & Leadership, Vol. 9, No.2, 121-134

Lipton, M. & Lorsch, J.W., 1992. A Modest Proposal for Improving Corporate Governance. The Business Lawyer, Vol. 48, 59-77

Murphy, R., 2006. Powers & Duties of the Non-executive Director. Accountancy Ireland, Vol. 33, No. 6, 35-37

Sonnenfeld, J.A., 2002. What Makes Great Boards Great. Havard Business Review, 106-113

Stiles, P. & Bernard, T. Boards At Work. Oxford: Oxford University Press. 2001

The Committee on The Financial Aspects of Corporate Governance, 1993. (Cardbury Report)



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