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    RAZEE CHAPTER 4

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    RAZEE CHAPTER 4

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    © All Rights Reserved
    Download as PDF or read online from Scribd
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    Download as pdf
    10 views28 pages

    107-134 Compressed

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    Febriati Rusyda
    RAZEE CHAPTER 4

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    © All Rights Reserved
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    Chapter 4 Board of Directors’ Roles and Responsibilities INTRODUCTION ROLE OF THE BOARD OF DIRECTORS FIDUCIARY DUTIES OF THE BOARD OF DIRECTORS BOARD COMMITTE BOARD MODELS BOARD CHARACTERISTICS BOARD SELECTION DIRECTOR EDUCATION AND EVALUATION BOARD ACCOUNTABILITY EFFECTIVE CORPORATE BOARDS DIRECTOR LIABILITY SUMMARY KEY TERMS REVIEW QUESTIONS DISCUSSION QUESTIONS NOTES INTRODUCTION Boards of directors are elected by shareholders to oversee the managerial function, The- oretically, boards of directors exist to resolve the agency problems associated with the separation of a company’s ownership controls from decision controls, Intuitively, although directors are elected to align management's interests with those of shareholders, their close association with the company’s senior executives can create conflicts of interest within the boardroom. Senior executives, particularly CEOs, are motivated to take over the board by influencing the election of directors and controlling their compensation, whereas directors, 89 90 Chapter 4 Board of Directors’ Roles and Responsibilities have the fiduciary duty to maintain their independence, monitor the CEO, and discipline the CEO for poor performance. This chapter discusses the roles and responsibilities of the board of directors in advising management on its strategic decisions without micromanaging and overseeing its actions and performan Primary Objectives ‘The primary objectives of this chapter are to + Identify the difference between decision management and decision control. + Understand the role of the board of directors with regard to decision control and fiduciary duties. ‘+ Understand that the board of directors is ul its affairs, imately responsible for the business and + Provide an overview of what the oversight function entails. + Identify and explain the fiduciary duties of the board of directors. + Gain awareness of the variety of board models recommended in global corporate governance reforms. + Idemtify the board attributes that affect the quality of monitoring and oversight func- tions performed by the company's board, + Illustrate the importance of an independent board of directors. ‘+ Become familiar with the best practices of determining directors’ compensation. + Idemtify and describe the determinants of an effective board of directors. + Become familiar with board accountability, evaluation, and the legal obligations and liabilities fa ing outside directors of public companies. ROLE OF THE BOARD OF DIRECTORS Separation of ownership and control in public companies and resulting agency problems ead to the division of decision management and decision control. Decision management, which consists of initiation and implementation of strategies, is viewed as the manage- ‘ment’s responsibility, whereas decision control, which entails the ratification and monitor- ing of strategies, is viewed as the board of directors’ fiduciary duty performed on behalf Of the shareholders. In performing their oversight function, boards of directors should not involve themselves in managerial and operational decisions through micromanaging. They should oversee managerial strategies but not implement them. In today's ever-changing and challenging business environment, the traditional model of the board of directors in just overseeing financial activities and reporting may not be adequate as directors get involved more in corporate governance functions of ensuring their company is prepared to meet, future challenges ‘The board of directors is ultimately responsible for the company’s business affairs and governance on, the bylaws, and shareholder agreements, Many state laws require corporations to form a board stated in its governing documents, including the articles of incorporat Role of the Board of Directors. 91 of directors to represent shareholders and make decisions on their behalf. The Delaware General Corporation Law Code states The business and affairs of every corporation organized under this chapter shall be managed by or under the direction of a board of ditectors, except as may be otherwise provided in this chapter or in its certificate of incorporation. (Emphasis added.) Almost all states have a similar statute authorizing and empowering the board of directors to direct, oversee, and control a company’s business affairs, and to govern its activities. Shareholders have statutory rights to elect directors, to replace them, and in many states to approve major decisions or transactions such as mergers and acquisitions, the sale of major assets, or dissolution of the company. A vigilant board of directors proactively participates in strategic decisions; asks management tough questions; oversees management's plan: decisions, and actions; and monitors management's ethical conduct, financial reporting, and legal compliance. The primary oversight function of the board is the appointment of the CEO and concurrence with the CEO's selection of other senior executives to run the com- pany. Corporationsare legally required to have a board of directors, and many not-for-profit organizations (¢.g., churches, universities) have a similar governing board. The success of the board of directors depends on the composition, structure, resources, diligence, and authority of the entire board, as well as their working relationships with other participants of corporate governance, including management, external auditors, intemal auditors, legal counsel, professional advisors, regulators, standard-setting bodies, and investors. Tradition- ally, many companies” boardrooms are viewed as “gentleman's clubs” characterized by a tendency and desire to please the CEO and rubber-stamp the CEO's decisions rather than being the place for challenge and inquiry that adds value to corporate governance. ‘The board, in overseeing management, should be able to influence the company’s vision, mis- sion, strategies, and goals as well as management's plans, decisions, and actions to achieve these goals without micromanaging. ‘The board may delegate its decision-making authority to the company’s top man- agement team, but it is still responsible and accountable for running the company. Boards of directors must realize that they not only are representing shareholders, but also all stakeholders who have direct or indirect human or physical capital interests in their corporations. ‘This does not necessarily mean that all major stakeholders (in- vestors, employers, suppliers, govemment, customers, creditors) must have representa- tive or so-called constituency directors on the boards. Instead, both inside (executive) and outside (nonexecutive) directors must represent all stakeholders and protect their interests, ‘The board of directors is the comerstone of the company’s corporate governance struc~ ture with the primary role of safeguarding interests of shareholders and other stakeholders. In summary, roles and responsibilities of boards of directors are to 1, Represent shareholders and create shareholder value, 2. Align the interests of management with those of shareholders while protecting the interests of other stakeholders (customers, creditors, suppliers). 3. Define the company’s mission and goals. 4, Establish or approve strai plans and decisions to achieve these goals. 92 Chapter4 Board of Directors’ Roles and Responsibilities 5. Appoint senior executives to manage the company in accordance with the estab- lished strategies, plans, policies, and procedures. 6. Oversee the company’s performance by setting objectives, establishing short-term ‘and Long-term strategies to achieve these objectives, and assessing the performance of senior executives in fulfilling their responsibilities without micromanaging 7. Approve major business transactions and corporate plans, decisions, and actions according to the bylaws. 8. Develop and approve executive compensation, pension, postretirement benefits plan, and other long-term benefits, including stock ownership and stock options. 9. Review financial reports, including audited annual financial statements, quarterly reviewed financial statements, and other important financial disclosures such as ‘management discussion and analysis (MD&A) eamings releases and reports filed with regulators (SEC) or disseminated to the public 10, Review management's report on the effectiveness of internal control over financial reporting, 11, Provide counsel to the company’s senior executives, especially the CEO, on ma- terial strategic decisions and risk management. 12, Ensure the company's compliance with applicable laws, rules, and regulations, 13. Approve the company's major operating, investing, and financial activities. 14, Set the tone at the top by promoting legal and ethical conduct throughout the company. 15. Evaluate the performance of the board, its committees (¢.g., audit, compensation, and nominating), and the members of each committee. 16. Hold the board, its committees, and directors accountable for the fulfillment of the assigned fiduciary duties and oversight functions. 17. Approve dividends, financing, capital changes, and other extraordinary corporate matters. 18. Oversee the sustainability of the company in ere: and protecting interests of other stakeholders, 1g long-term shareholder value ‘Table 4.1 compares roles and responsibilities of directors before and after corporate governance reforms. Boards of directors have experienced unprecedented challenges in the post-SOX era, and some still struggle to find the right balance between engaging in strategic decisions of directors advising management and monitoring its managerial deci- sions and actions. This is particularly important in light of landmark settlements by former directors of Enron and WorldCom agreeing to pay damages ($31 million) from their own pockets for their company’s failures. Corporate boards are now undet extensive scrutiny, and directors are concerned about their personal liability for questionable governance prac- tices. One way to influence directors’ ethical conduct is to hold them accountable and liable for poor performance and business misconduct. It is expected that boards of direc- tors will engage more proactively in the oversight function in facing increasing business challenges. Fiduciary Duties of the Board of Directors 93 Table 4.1 Compatiéon of Destine (Pit and Postcorpotnte Gavemanés Refit) Prerefonms Postreforms + Personal ties to company + Oversight ofthe sustainability ofthe company in management

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