Corporate Governance - Board of Directors

The duties of the board of directors

The board's role is to serve as an advisor (advisory role) as well as a watchdog (supervisory role). Although they have many similarities, these two roles have quite distinct objectives. A company's board of directors serves as an advisor to management on strategic and operational matters. The directors pay close attention to judgments that strike a good balance between the two extremes of risk and reward. When choosing board members, previous experience in a relevant field or job is taken into account.

In its supervision role, the board is tasked with ensuring that management is operating in the best interests of the shareholders. The board appoints and removes the CEO, examines the company's performance, evaluates management's contribution to the company's accomplishments, and allocates remuneration to the executives. Legal and regulatory compliance, including the audit process, reporting requirements for publicly listed firms, and industry-specific legislation, are also overseen by this body. The board depends on the advice of legal counsel and other hired specialists, such as external auditors, executive recruiters, compensation consultants, investment bankers, and tax advisors, to fulfill these obligations. Effective board members are those who can effectively perform both advisory and oversight functions.

It is important to note that directors' duties are unique from those of managers. Directors are required to provide strategic advice, but they are not responsible for formulating that plan themselves. They are in charge of ensuring the accuracy of the financial statements, although they do not actually prepare them. The board is not an extension of the company's management. Shareholders elect the board of directors, which serves as the company's top decision-making body.

According to the results of a recent survey, board members are aware of their responsibilities. When asked about the most important responsibilities of their position, directors most often mention strategy planning, merger prospects, and CEO succession. International growth, information technology, and human capital development are also on the agenda. Nevertheless, there is evidence that directors prefer the advisory role over the monitoring role. Strategic planning, competitiveness, and succession planning are among the most frequently mentioned topics by directors when asked what they would want to spend more time on. Executive salary, performance monitoring, and regulatory compliance, on the other hand, are areas where most executives desire to spend less time.

The independence of the board

Board members are required to demonstrate their independence in order to be successful in their advisory and oversight roles. It is a regulatory requirement that independent directors be free from any conflicts of interest that could interfere with their impartiality in the company's best interests. In order for directors to be able to adopt viewpoints in opposition to management's, they must be independent. Companies listed on the New York Stock Exchange (NYSE) are required to have a majority of independent directors in order to be eligible for trading on the exchange. It is important that the committees for audit, remuneration, nominations, and governance are all completely separate from each other.

There is a difference between regulatory standards and actual independence. Over time, long-term relationships between board members and the company's management may make it difficult for them to maintain a fully independent viewpoint. An individual board member's personal relationship with management may also have a negative impact on the board's independence. There are several instances of boards of directors that supported management choices that turned out to be catastrophic. Boards have failed to rein in management practices that were subsequently deemed illegal, as was the case with Enron. It was a similar story with the Walt Disney Company board, which agreed to management's decision to hire and fire Michael Ovitz as president, which led to heavy condemnation from shareholders.

Observations reveal that board members do not often associate actual independence with statutory independence norms. Harvard Business School professors performed informal research that indicated relevant experience is a better predictor of excellence in a director than statutory criteria. Despite this, the majority of directors are confident in their ability to keep their autonomy. 9 out of 10 directors said that they and their fellow board members were able to successfully criticize management. This was found in a poll by Corporate Board Member magazine.

The operations of the board

Directors' meetings are presided over by a chairman. Board committees report to the chairperson, who establishes agendas, schedules meetings, and coordinates their activities. This means that the chairman has significant influence over the governance process since he decides what issues are brought before the board and when.

In many American companies, the CEO has long held the position of chairman of the board of directors. It has become increasingly common in recent years for a nonexecutive director to head a company. Given the board's advisory and supervisory obligations, a dual chairman/CEO position might lead to various apparent conflicts. In particular, there is the risk of weaker supervision in areas like performance assessment, remuneration, succession planning, and recruitment of independent directors due to the merging of functions formerly assigned to management and the board. However, because the CEO is also the chairman, it may be easier for him or her to lead the company with more focus and make better decisions more quickly.

Congress contemplated, but eventually rejected, requests to require an independent director to serve as chairman in the discussion over the Sarbanes–Oxley Act of 2002 (SOX). Instead, SOX mandated that firms appoint a "lead director," who would be an independent director, to every board meeting. On a meeting-by-meeting basis, or until replaced, the lead director may be nominated to serve. A lead director is responsible for representing independent directors at CEO meetings. Companies having a dual chairman/CEO structure are expected to benefit from this arrangement.

Meetings of the board or written approval are the only ways in which board actions may be taken. Resolutions are discussed and voted on by the board of directors during board meetings. It is only when a majority of people support an activity that it is considered finished. A written resolution is distributed among the board members for their signatures when the board acts by written consent. When a majority of the directors have signed the paper, the action is complete. There isn't as much notice required for board actions that are made by written permission. This means they may happen faster than board actions that are made during meetings.

Independent directors meet in executive session at least once a year in addition to attending board sessions in which executive directors are not present. SOX requires this procedure. Despite the fact that no official decisions are made during these meetings, executive sessions allow outside directors a chance to speak openly about the performance of management, operational outcomes, internal controls, and succession planning. These meetings are chaired by the most senior independent director.

Typically, directors spend around 25 hours a month on board business. For the most part, the board meets eight times each year, either in person or over the phone, and a meeting lasts around seven hours on average, according to the National Association of Corporate Directors (NACD). The lengthening of board meetings is mostly attributable to the recent expansion of regulatory mandates. In spite of this, most directors think that the agenda is planned to maximize their time and that 20 hours a month is enough to fulfill their obligations as directors.

The board uses information supplied by management to help influence its choices. Based on the results of a survey, this information may not be of sufficient quality. According to research from the NACD, around 20 percent of directors are dissatisfied with the information they get from management and almost 30 percent are dissatisfied with information technology. These shortcomings may be addressed by nonexecutive directors by proposing that management enhance reporting on nonfinancial and nonfinancial strategic performance metrics. Directors might also gain from close engagement with management.


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