The Role of the Board<?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />

By Markus Petteri Laine 1/2005 in <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />Prague Czech Republic

 

 

ABSTRACT

 

This working paper is a brief overview to the Corporate Governance and the role of the board in its centre. It will take a look at the function of boards, their composition, tasks and what the resent academic study has to say about the Corporate Governances role within the Company and the community that has an impact with it. At the end of the essay we'll take a look into the increasingly important society wide effects of the Corporate Governance as it is the role of the board to build long lasting strategies to create wealth. 

 

THE ROLE OF THE BOARD

 

According to Derek Higgs in his Review of the Role and Effectiveness of Non-executive directors:

 

The role of the board is to promote the success of the company by directing and supervising the company's affairs and to provide entrepreneurial leadership within a framework of effective controls which enable risk to be managed. The board sets the company's strategic aims and ensures that the necessary financial and human resources are working. The board should review management performance and to set the company's values and standards, and ensure that its obligations to its shareholders and others are understood and met.[1]

 

Higgs' definition of the role of the board seems to be widely accepted in the business world and among the academics. It is not written into stone though how to achieve the best governance results. To interpret Mr. Higgs bluntly; the board's role is to make sure, by using all the possible tools it has at its disposal, that companies make profit. Making profit has been thought to be a cruder mechanism than the most resent experience has shown to us.

 

SHAREHOLDERS AND STAKEHOLDERS

 

The board duties are towards the Shareholders and the Stakeholders. Shareholders are the providers of capital. Often the corporate objective is expressed in terms of maximizing the shareholder value. Stakeholders include employees, providers of credit, customers, suppliers, local communities, government, environmental and social groups. In fact any group that has any impact on the company's activities. [2]

 

Most corporate governance codes and guidelines recognize that the prima facie objective of the company is the maximization of shareholder wealth. However, there is also the understanding that the achievement of this objective should have regard to the interests of various stakeholder groups.[3] 

 

Stakeholders can make their views known to the company and in some countries may have representation on the company's decision-making bodies (such as the supervisory board in Germany). However, in the UK and many other countries, it is the shareholders who can hold the board of directors accountable for their actions.[4]

 

Companies operate in a wider society not within a defined corporate vacuum. Therefore companies should take account of the views of various stakeholders in addition to those of shareholders. Whilst the corporate objective is generally to maintain or enhance shareholder value, the impact of the company's activities on its other stakeholders must be taken into account when deciding the strategy to be developed for achieving the corporate objective. By taking account of the views and interests of its stakeholders, the company should be able to achieve its objectives with integrity and help to achieve sustainability of its long-term operations.

 

COMPOSITION

 

The term Corporate Governance is used of the work of the board. There are cultural differences in the composition of the board but the main tasks are recommended widely in every culture and business size. The board consists of Directors whom are assumed to set the companies long and short term targets and to foster business relationships with employees, suppliers and customers, and to govern the company's relations with communities and the environment.

 

An effective board should not be too big, but it should be of sufficient size that the balance of skills and experience is appropriate for the requirement of the business. Changes in the board's composition should be able to be managed without undue disruption.[5]

 

In the Unitary board structure (most common in Europe), executive and non-executive directors share responsibility for both the direction and control of the company. The benefit of the unitary board, strongly supported in consultation responses, is the value of executive knowledge within the board, alongside non-executive directors who can bring wider experience. In the US, the Unitary board is composed largely of non-executive ("outside") directors with only a few executives.[6] US companies also combine the roles of the Chief Executive and the Chairman more often than European ones.

 

In contrast, the Dual Structure System of Corporate Governance typically separates legal responsibility for running the company between a management and a supervisory board. [7] In the Dual Structure Board the supervisory board's task is to asses the function of the executive board. It is in contact with the shareholders as the executive body deals with the management and has the initiative in running the company.

 

THE ROLE OF THE CHAIRMAN

 

According to Derek Higgs the Chairman should assume the leadership of the board, ensuring its effectiveness on all aspects of its role and setting its agenda; oversee the provision of accurate, timely and clear information to directors; taking care of 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.[8]

 

The Chairman's role will be ultimately shaped by the nature of the company's business. Around 90 per cent of listed UK companies split the roles of Chairman and the Chief Executive. This is one of the strengths of the UK corporate governance regime. Higgs proposes that the roles of Chairman and Chief Executive should be always separated. It avoids concentration of authority and power in one individual and differentiates leadership of the board from running of the business but this applies realistically mainly to the bigger companies. [9]

 

A strong relationship between the Chairman and the Chief Executive lies at the heart of an effective board. As set out in the research conducted for the Review of the Role and Effectiveness of Non-executive Directors by Derek Higgs, the relationship works best where there is a valuable mix of different skills and experiences which complement each other. Higgs points out that the Chairman should not seek executive responsibility and should let the Chief Executive take credit for their achievements.[10]

 

Ideally an effective Chairman upholds the highest standards of integrity and probity. He sets the agenda, style and tone of board discussions to promote effective decision-making and constructive debate. The Chairman promotes effective relationships and open communication, both inside and outside the boardroom, between non-executive directors and the executive team; builds an effective and complementary board, initiating change and planning succession in board appointments, subject to board and shareholders' approval. The Chairman ensures a clear structure and the effective running of board committees; over sees effective implementation of board decisions; Establishes a close relationship of trust with the Chief Executive by providing support and advice while respecting executive responsibility; and provides coherent leadership of the company, including representing the company and understanding the views of shareholders.[11]

 

THE NON-EXECUTIVE DIRECTOR (NED)

 

The Non-Executive Director is a member of the Board, but not part of the Company and therefore not involved in daily affairs of the business and independent from the Chief Executive. The Non-Executive Directors' task has been seen to bring objectivity to decision-making in the interest of the company and to evoke new ideas and perspectives. They have the same legal duties to the company as the Executive Directors.

 

According to Derek Higgs' Review of the Role and Effectiveness of Non-executive Directors the

Non-executive directors should constructively challenge and contribute to the development of strategy. They should scrutinise the performance of management in meeting agreed goals and objectives and monitor the reporting of performance. Non-executive directors should satisfy themselves that financial information is accurate and that financial controls and systems of risk management are robust and defensible. 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.[12]

 

THE SENIOR NON-EXECUTIVE DIRECTOR

 

The Senior Independent Director is a Non-Executive Director who performs as a spokesman for the major shareholders at the Board, when they have concerns which could not be solved through the Chairman or the Chief Executive. The Senior Independent Director is leading the meeting of the NEDs when the Chairman is not present.

 

COMMITTEES

 

The board may delegate various activities to the board sub-committees, the most common being the audit committee; which ensures that the interest of the shareholders are properly protected in relation to financial reporting and internal control; the remuneration committee prevents the executive directors from setting their own remuneration levels; and the nomination committee should advocate a formal, rigorous, and transparent procedure for the appointment of new directors. The non-executive directors make a key contribution through their membership of the board sub-committees.[13]

 

MEMBERS OF THE BOARD

 

In a study of the changing role of boards, Taylor, Stiles, and Tampoe (2001) identified three major challenges facing company boards over the fourth coming  five-year period. These challenges were to build more diverse boards of directors, to pay more attention to making their boards more effective, and to be able to react appropriately to any changes in Corporate Governance culture.[14]

 

Traditionally board members all around the world have been selected through informal "buddy networks", but the change is towards more formal director nomination. As Taylor, Stiles, and Tampoe suggest the diversity of skills needed by the company boards are being reassessed.

 

FT's survey was asking chief executives which figures from history they would have on their boards? It produced a wildly divergent list.[15]

 

Many wish-lists included strong, intelligent leaders who thrive amid heavy pressures.     

Jack Welsh bumps up against Winston Churchill. Nelson Mandela swaps management tips with Leonardo Da Vinci. Michael Dell exchanges supply chain snarl-up stories with Napoleon Bonaparte. Mahatma Gandhi talks corporate social responsibility with Bill Gates.

 

FT's exercise in fantasy management put Mr. Welch at the top of the chief executives' wish list, followed by Bill Gates, Winston Churchill, Carlos Ghosn and Jesus Christ. Others in the list ranged from Thomas Edison and Walt Disney to Richard Branson and Tony Blair, and from Warren Buffet and am Walton to Martin Luther King and Alexander the Great. The exercise helped chief executives ponder a different question: If you could get away from the humdrum directors that are actually available to you, what sorts of people would you really like to help you run your company? Who could provide the skills and insights that your existing directors do not have?

 

TABLE # 1 Individual chosen from history or today to join company board[16]

 

Rank 2004	NAME	COMPANY	POSITION
1	Jack Welch	General Electric	Former Chairman
2	Bill Gates	Microsoft	Chairman
3	Winston Churchill		Former British Prime Minister
4	Carlos Ghosn	Nissan	CEO
5	Jesus Christ		King of Kings
6	Napoleon Bonaparte		Former French Emperor
7	Henry Ford	Ford	Founder
8	Michael Dell	Dell	CEO
9	Hiroshi Okuda	Toyota	CEO
10	Thomas Edison		Inventor of the Light bulb

 

 

CURRENT DISCUSSION

 

There has been much activity to strengthen corporate governance and company law standards across Europe and in the Northern America.[17] The early millennium corporate scandals; the bursting of the dot com bubble, Enron's collapse in the US and Parmalat bankrupts in Europe, have raised the Corporate Governance issues upfront and under discussion all around in the global markets. Shareholders and stakeholders alike have acknowledged the deep impact of Corporate Governance to the sustainable revenue and social development. This latest development seems to be working for the benefit of the society as a whole; both in creating wealth as well as setting ethical issues into daily Corporate Governance agendas.

 

GOOD THINGS WALK HAND IN HAND

 

According to the Financial Times' and PriceWaterhouseCoopers' annual report about the World's Most Respected Companies the most successful ones have adopted good corporate governance culture in all studied sectors. The global study interviewed more than 1000 Chief Executive Officers in 25 different countries to find out about the World's Most Respected Companies.

 

TABLE # 2 Worlds Most Respected Companies[18]

 

Rank 2003