corporate governance lectures 4

Welcome to part 4

Balance of power on Board

The board

• It is a collection of individuals , each with his or her own views, interests and concerns. However, the chairman and the CEO carry more power.

Leadership

• The essence of corporate governance is to prevent the emergence of autocratic leadership in the board. Autocracy allows one person to dominate the board.

Board suitability

• The concept of suitability refers to soundness of character, breadth of experience, skills ,and psychological wellbeing.

Board qualities

• Individual directors should possess personal qualities admired by investors. Such qualities include, honesty, inegrity,emphathy,probity accountability.

Role of the board

• To promote the success of the company by directing and supervising its affairs.• To promote

entrepreneurial leadership.

Role of the board(cont).

• To set the strategic aims of the company and to ensure that enough resources are made available.• To review management

performance.

Role of the board (cont).

• To set the company’s standards and values.• To ensure that the company’s

obligations to the shareholders are understood and met.

BOARDROOM PRACTICES

• The guidelines for good boardroom practice are provided by ICSA. The code for directors and company secretaries includes the following provisions:

Boardroom practices(cont).

• There should be a written procedure for the conduct of board business.• Each director on appointment

should be given sufficient information on boardroom

Boardroom practice

•All directors should be given the same information and should be given sufficient time to consider it.

Boardroom practice(cont).

•All material contracts should be referred to the board for approval before the company is legally committed to them.

Boardroom practice(cont).

•Decisions about the agenda for a board meeting should be taken by the company chairman, and company secretary.

Boardroom practice(cont).

• The board should give its prior approval for the membership, terms of reference, and powers of any committee of the board that is established.

Boardroom practice(cont).

• The company secretary should be present at and prepare minutes for board meetings, board committee meetings and general meetings of the company.

Boardroom practice(cont).

•Minutes of board committees of the board should be circulated to all board members before the next meeting.

Role of Chairman

• The chairman of the company is responsible for the function of the board of directors. He or she calls for board meetings, sets the agenda and leads the meeting.

Role of Chairman

• The chairman also leads general meetings of the company and is the most prominent “face” of the company in its dealings with shareholders and investment institutions.

Specific roles

•Provide leadership to the board, supplying vision and imagination, working closely with the chief executive.

ROLE OF BOARD(CONT).

• determines the composition and structure of the board, assesses the size of the board, balance between executive and non-executive directors, interaction, harmony and effectiveness of the directors.

Role of board (cont).

• Sets the board’s agenda and plans board meeting.•Chair all board meetings,

direct debate towards consensus.

Chairman• Ensure the board receives

appropriate, accurate, timely and clear information.

Role of Board (cont).

• Facilitate effective contribution from non-executive directors

Role of the board(cont)’

•Hold meetings with the non-executive directors, without the executive directors present.

Role of the board(cont).

•Chair the AGM and other stakeholders’ meetings, using these to provide effective dialogue with shareholders.

The CEO

• The Chief Executive Officer (CEO) is responsible for the executive management of the company’s operations.

The CEO(CONT).

•He or she is the senior executive in charge of the management team and to whom all other executive managers’ report.

The CEO(cont).

• Other executive managers might also be directors of the company , but the CEO is answerable to the board for the way the business is run and its performance.

Specific roles of CEO

•Specific responsibilities of the chief executive, inter alia are to:

Specific roles of CEO

•Develop and implement policies to execute the strategy established by the board.

Specific roles of CEO

•Controls performance of the company.•Assume full accountability

to the board for all aspects of company operations.

Specific roles of CEO

•Manage financial and physical resources•Build and maintain an

effective management team.

Specific role of CEO

•Put adequate operational, financial, planning, risk and internal control systems in place.

Specific role of CEO

•Closely monitor operations and financial results in accordance with plans and budgets

Specific role of CEO

• Interface between board and employees•Assists in selection and

evaluation of board members

Specific role of CEO

•Represent the company to major suppliers, customers, professional associates etc

Specific role of CEO

•Develop codes of conduct•Develops mission, vision

etc

Board appointments.

•Recruitment onto the boards of listed companies involves:

Board appointments

•Search,selection,nomination,appointments•Election processes

Board appointments

• The recruitment process may be initiated and completed by:

Board appointments

•Chairman, CEO ,Members of the board, Significant shareholder, Nomination committee,Executive search firms.

Board appointments

• James Tanous and Michael Sonlon (2003:31) confirm that board members may be; insiders, friends or associates of other sitting directors.

Board appointments

• Problem:• This led to a lack of

proactive involvement and missing skills in the industry.

Baord appointments

•However Daum and Neff (2004:14) advises that a generic director search should involve the following basic skills:

Board appointments

•Designing or selection process,•Assessing the skills

requirements

Board appointments(cont).

•Developing a specification for the director to be recruited with particular focus on skills required to fill the gap.

Board appointments(cont).

•Deciding whether or not to outsource the search to an executive search firm.

Board appointments(cont).

•Creating a long list of board prospects from a wide range of inputs.

Board appointments(cont).

•Reviewing the long list for any kind of potential conflict.•Narrowing the long list to

a short list.

Board appointments(cont).

•Contracting referees of the prospects on the short list.

Board appointment

•Design and conduct a thorough interview process and recommending the best candidate to the company

Board appointments(cont).

•Extend an offer.

Board appointments

• The Indian Companies Act (1957) allows the following to appoint board members:• Shareholders• The board

Board appointments

•The central government, and external parties ,such as ,Lending financial institutions

Board appointments(cont).

•Foreign collaborators•Holding companies.

Board appointments(cont).

• In Zimbabwe, the situation is different. Selection and appointment of persons to boards of listed companies rides on the principle of both:

Board appointment(cont).

•Who you know•What you know

Board appointment(cont).

•Thus the following instruments are used:•Nomination committee•Significant shareholders

Board appointment(cont).

•CEO•Chairperson

Board composition

•King (2006:37) recommends a good mix of inside and outside directors.

Board composition(cont).

• Naresh Chandra Report (2002) in Sigh, 2005 recommends that 50% of the board should be independent or 30% of all corporate directors should be independent in character.

Board appointments(cont).

•Cadbury Report (1992); Coyle, (2004) argue that 2/3 should be NEDs, most of whom are independent.

Board structures

• Two types of board structures do exist. These are, Unitary and Two tier board structures.

The Unitary system

• It is a single board consisting of executive directors and NEDs

Advantages of the Unitary

•NEDs can bring in ,independent scrutiny ,experience, and expertise.

Advantages of Unitary

•Board accountability is enhanced.•Reduces power of executive directors.

Advantages of Unitary

•Strategies are critically evaluated.•Board has capacity to provide checks and balances.

Disadvantages of Unitary

• It cannot supervise itself.

Two tier system

• It is made up of two sets of boards, the management board and the supervisory board.

Advantages of two tier

•The system reduces autocracy. It is hard for the chairperson or CEO to assume unchecked powers.

Disadvantages of two tier

• It may not be possible to accommodate each individual’s concerns.

Disadvantages of two tier

•Much time may be spend on unnecessary debates.•May not be suitable for

crisis management.

Board succession

•Key positions in the board are the chairman and the CEO.

Board succession

• These positions need to be replaced . The CEO and the chairperson will retire or resign one day.

Succession planning

•The solution to board succession is succession planning.

The CPD for directors

•The CPD come from the Combined Code and apply equally to executive and non-executive directors:

CPD

• Existing directors should continually update their knowledge of:

CPD

• Soft skills should also be updated regularly through the continuous professional development programme and should cover areas such as:

CPD

• Effective behaviours of boards, Influencing and Negotiating skills ,Conflict resolution skills, Chairing skills ,Board dynamics.

CPD

• Strategy, Financial Management ,Audit, Remuneration, Risk, management, Legal, regulatory and other obligations.

CPD•Any matters that directly

impact on the company or its operations, and organisational culture

Board committees

• 1. The audit committee.• 2.The remuneration

committee.• 3.The nomination committee.• 4.The risk management

committee.

Question 1

• Identify one committee in corporate governance and explain its terms of reference.

Question 2•Draw up a programme of

CPD outlined by the Combined code and explain the essence of each component of the programme.