Week 9 Board Structure & Directors - PowerPoint Presentation

1. Week 9Board Structure & Directors

2. Ownership structures and their impact on governance practicesThe prominent role of family owned firms in many countries, and the evolution of governance in family firmsRecap

3. Distinction between unitary & dual boardsRoles & duties of the board of directorsCEO-chairman dualityTypes of directorsBoard sub-committees and their functionsOverview

4. Board of DirectorsBOARD OF DIRECTORSA body of elected or appointed members Board members jointly oversee the activities of a companyTypically the board chooses one of its members to be the chairman/president MANAGERSE.g., Chief Executive Officer (CEO), Chief Financial Officer (CFO),Chief Information Office (CIO), Chief Lawyer (CL),Chief Operations Officer (COO), and Other managers.Chairman/PresidentCEO

5. Role of the Board of Directors5

6. Determining the broad objectivesDetermining the strategies, plans and policies to achieve those objectives; Monitoring progress in the achievement of those objectives.Selecting, appointing, supervising, supporting, and reviewing the performance of the CEO and other senior managersEnsuring the availability of adequate financial resourcesApproving annual budgetsAccounting to stakeholdersBOARD OF DIRECTORS Leads & controls a company

7. Directors should make decisions in an objective way and in the company’s best interests (Combined Code (2006)Do you think that a company can be successful, especially in the long term, with a weak and dependent board? Roles of the Board of Directors

8. Different corporate governance theories emphasize different roles of the board: Agency theory: the key function of the board isto monitor management, andto keep self-serving managers in check.Stewardship theory: directors’ role is to empower the managers.  Stakeholder theory: directors’ role is to ensure that the interests of ALL stakeholders, not only shareholders, are also taken into consideration(Marshall et al. 2007)Roles of the Board of Directors

9. Types of Board Structure9

10. Unitary/one-tier board (US, UK, AUS, and Singapore,…)Dual/two-tier board (Germany, the Netherlands, Denmark, Taiwan, Indonesia, China, and Vietnam…)Types of Board Structure

11. Types of Board StructureUS, UK, AUS, and Singapore,…Germany, Denmark, Taiwan, Indonesia, and China,…

12. Composed of both executive (inside) directors, and non-executive (outside) directorsShareholders elect the boardMain responsibilities:Seclects the CEO and other senior managersOversees the CEO, senior managers, and corporation’s activities  Corporate governance codes usually require a strong & independent board. Why?Unitary Board

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15. Advantages:Non-executive directors have more contact with the company. Save time for decision making.Decisions are taken by a single body, and exchanging information is quicker and simpler. Less administrative burden.Only a single body needs to hold meetings and only a single set of minutes has to be drawn up.Disadvantage: Non-executive directors are less independent from the management.Close contact with the management. Unitary board

16. Dual BoardStructure: Monitoring supervisory boardComposed of non-executive directorsOversees the direction of the business and the management boardMakes or approves decisions of fundamental importance.Management boardComposed entirely of executive directors;Running the day-to-day operation of the companyShareholders usually elect the supervisory board.Supervisory board appoints & removes members of the management board – real power. Management board selects other managers.Outside directors (& worker representatives - Germany) ExecutiveDirectors

17. Complete separation of the managing role & monitoring role; More clearly defined directors’ responsibilities in each board; Separated roles of CEO and Chairman (Hampel, 1998)Allows for more stakeholders to be involved.Dual Board: Advantages 

18. The upper-tier directors may lose touch with the company, while the lower-tier directors become distanced from outsiders;Power imbalance: The upper board is generally more powerful (Hampel, 1998).If one board is clearly senior to the other - potential conflicts.Slower decisions: Senior managers are now 2 steps away from a final decision.Decisions are taken by two separate bodiesEmployee representation in the upper boar – may delay decisions that are best for the company, but not for workers.Dual Board: Disadvantages

19. The Roles of the Chairman and CEO19

20. The Roles of the Chairman & CEO Board of DirectorsManagers Chairman CEO Chairman’s roles:run the board, ensure that the board fulfills its roles, particularly oversight of management.CEO’s roles - run the day-today business of the company. In the US, the two roles are commonly combined and carried out by the same personi.e. role duality.

21. CEO/Chairman Role DualityROLE DUALITY: Chairman of the board = CEOCEO/Chairman is able to operate free from delay or restraintCEO controls him/herself abuse;CEO is more powerful more serious agency problems; Chairman’s mentoring and consulting roles are surrendered AdvantagesDisadvantages

22. Separation widely recommended (Cadbury 1992; Monks and Minow 1996; Combined Code, 2006)Chairman & CEO have different roles - One person cannot fulfil both roles without conflict (Pension Investment Association of Canada 2001, p.3) The ASX’s Corporate Governance Principles and Recommendations, 2007 stipulates that:“The chair of the board of a listed entity should be an independent director and, in particular, should not be the same person as the CEO of the entity” (Principle 2.3).CEO & Chairman:Separation or Combination?

23. Directors23

24. Type of DirectorsIndependent Non-executive directors(No relationship with top managers or shareholders)Non-independent Non- executive directors(e.g. retired CEO, bank rep., shareholder rep.,…)Executive directors(Employees of the Company too)

25. Full-time employees of the companyRoles and duties:Involve in the day-to-day operation and decision-making process Evaluate the performance of the management team and the CEOStrengths and weaknesses: Strong industry and business knowledge; Strong knowledge, information, and experience about the firm; Lack of independence.Executive directors (EDs)

26. INEDs are not full-time employees & have no relationships with top managers & shareholders INEDs are not in circumstances that could affect the judgement, e.g., are not a former CEO of the company, do not have a material business relationship with the companyare not a majority shareholder (holding 5% or more of the company’s shares)Independent Non-executive directors (INEDs)

27. Play the most important role in a board:Monitor management activities - effectively => reduce managers’ opportunistic behaviour => better financial performanceBring an independent & outside perspective into the board meetingsDirectly provide independent impartial adviceOverall = strengthening the leadership qualities of the board. But lack in-depth knowledge of company’s operation; May be busy with multiple directorships; May not be truly independent.Independent Non-executive directors (INEDs)

28. NINEDS are not full-time employees of the company, Maintain some form of personal or professional relationship with the firm (former executive, creditor, family connection, majority shareholder)Strengths and weaknesses: Control, or counterweight to, executive directorsContribute to the overall leadership and development of the companyNot independentNon-independent Non-executive directors (NINEDs)

29. Board and Sub Committees29

30. Board CompositionThe all executive boardThe majority non-executive boardThe all non-executive boardThe majority executive board

31. Board should be independent from managers, particularly the CEO.Why? To better fulfil the control and supervisory roles (Johnson, Daily & Ellstrand 1996)What is an independent board ? A board in which more than a half of the board members are independent directors.(Byrd & Hickman 1992)Board Independence

32. Having an independent board is widely recommended by various corporate governance codes/guidelines. For example, it has been recommended that A majority of the board members should be independent (Principle 2.4, ASX’s Corporate Governance Principles and Recommendations, 2007; NYSE: Corporate Governance Guide, 2003; Tokyo Stock Exchange (TSE): Corporate Governance Code”, 1994)Board Independence

33. Half of the board members should be independent (Combined Code, 2006; Higgs 2003)At least one-third of the board members should be independent (China Securities Regulatory Commission (CSRC), 2001; Singapore’s Corporate Governance Committee (CGC), 2001; Securities and Exchange Board of India (SEBI), 2000)Board Independence

34. Boards should have a mix of competencies, knowledge and experience… to understand and deal with the specific problems facing the company and to monitor and challenge management. (AICD 2008).Board Diversity

35. Board Sub-committeesBOARD OF DIRECTORSAudit committeeRemuneration committeeNomination committeeCorporate Governance committee

36. A board may delegate various activities to sub-committeesImportant sub-committees include:Audit committeeRemuneration committeeNomination committeeCorporate Governance committeeEnhance the monitoring role of the boardBoard Sub-committees

37. Principle 2.2 of the ASX’s Corporate Governance Principles and Recommendations (2007) stipulates that“The board of a listed entity should […] have a nomination committee which (1) has at least three members, a majority of whom are independent directors; and (2) is chaired by an independent director…”Board Sub-committees

38. The most important sub-committeeThe audit committee is not the auditor - does not audit the company, but ensures that the auditing is done properly by…Reviewing the scope and outcome of the auditEnsuring that the objectivity of auditors is maintainedReviewing audit fees, fees paid for any non-audit work (commission); and the independence of auditors.Providing a bridge between internal and external auditorsReviewing concerns from whistle-blowersManaging financial and non-financial risks of companyAudit Committee

39. Benefits: Avoid the domination of senior executives (e.g., CEO and CFO) over the auditors. Comprehensive and detailed review of the audit matters, Enables the non-executive directors to contribute independent judgements in an area where they are particularly fitted for, Offers the auditors a direct link with the non-executive directors (Cadbury Report (1992)). Members: Independent Non-executive directors are recommended. Audit Committee

40. Remuneration - hot topic – attracts a lot of attention from investors & press. Roles: Helps the board ensure that remuneration packages for managers and directors are appropriately designed (e.g., not too much & not too little). Particularly, the remuneration committeemakes recommendations to the board regarding the remuneration for managers, executive directors (including the CEO), and non-executive directors.revises the remuneration package of each individual director in accordance with his/her performance (Greenbury (1995))Remuneration Committee

41. Note: The remuneration committee does not have any authority to make decision. The committee only has power to make recommendations to the board on an appropriate level and structure of remuneration. The entire board then collectively considers and makes decision. Members: Independent Non-executive directors are recommendedRemuneration Committee

42. In the pastDirectors may be appointed on the basis of personal connections Such appointments normally did not provide the company the appropriate and independent directors.Thus, the board was often a cosy club of like-minded persons.Nomination Committee

43. Nowadays, many public companies have a nomination committee.The nomination committee ensures that the right directors and senior managers are appointed. Roles: select & nominate the right candidates to fill board vacancies, evaluate directors’ performance, review the overall board structure and make recommendations (Higgs (2003)) ensure the balance of skills, knowledge, and experience on the boarddevelop list of nominees for consideration by shareholdersMembers: Independent Non-executive directors are recommended.Nomination Committee

44. Less common, but gaining more importanceIn some companies, the governance committee is responsible for strategy, corporate vision, mission, values and relationships with stakeholders.In other companies, the committee is more focused on legal complianceCorporate Governance Committee

45. Sub-committees are common in unitary boards.They are not common in a dual board because the supervisory board handles the relevant issues by itself. However, there is an increase of the influence of board sub-committees in dual boards recently.Notes

46. The two types of board structure = unitary & dual boards. Advantage of one = disadvantage of the other and vice versa.CEO and chairman separation is widely recommended.Three types of directors, each has its merits and limitations :Executive directors, Independent Non-executive directors, andNon-independent Non-executive directors Conclusions

47. Three common board subcommittees = nomination, audit and remuneration. Independent Non-executive directors are recommended for all these three committeesConclusions

48. Byrd, J and Hickman, K 1992, ‘Do outside directors monitor managers?’, Journal of Financial Economics, vol. 32, no. 2, pp. 195-221.Cadbury, A 1992, Report of the Committee on the Financial Aspects of Corporate Governance, Gee, London. http://www.ecgi.org/codes/documents/cadbury.pdfGreenbury, R 1995, Directors’ Remuneration, Gee, London. http://www.ecgi.org/codes/documents/greenbury.pdfHampel, R 1998, Committee on Corporate Governance – Final Report, Gee, London. http://www.ecgi.org/codes/documents/hampel.pdfHiggs, D 2003, Review of the Role and Effectiveness of Non-Executive Directors, Stationery Office, London. www.ecgi.org/codes/documents/higgs.pdfHoffmann, L 1999, ‘Duties of company directors’, European Business Law Review, vol. 10, pp. 78-84.International Corporate Governance Network 2004, Best Practices for Executive and Director Remuneration, London, ICGN.Johnson, JL, Daily, CM & Ellstrand, AE 1996, ‘Research on boards of directors’, Journal of Management, v. 22, pp. 409-38.Korn/Ferry 2002, 29th Annual Board of Directors Study, Korn/Ferry. www.kornferry.com.br/site/pt/pdf/mediapublications_m343.pdfKPMG 2002, Corporate Governance in Europe, London KPMG.References

49. Marshall, S et al. 2007, Company Directors’ Views Regarding Stakeholders, Faculty of Law, University of Melbourne. http://cclsr.law.unimelb.edu.au/download.cfm?DownloadFile=CABCB832-1422-207C-BA1ED9A697C1889AMonks, RAG & Minow, N 1996, Watching the Watchers: Corporate Governance in the 21st Century, Blackwell, New York, NY.OECD 2004, OECD Principles of Corporate Governance, 2nd ed., OECD, Paris. http://www.ecgi.org/codes/documents/principles_en.pdfOwen, N 2003, Report of the HIH Royal Commission, Dept of Treasury, Canberra. http://www.hihroyalcom.gov.au/finalreport/index.htmPension Investment Association of Canada 2001, Corporate Governance Principles and Guidelines, 2nd revision, Toronto, PIAC.Sykes, R 2002, ‘Overcoming poor value executive remuneration’, Corporate Governance, vol. 10, no. 4, pp. 256-60.References