Board structures & international boards Flashcards
What are the 4 functions of a board?
- To formulate strategy
- To oversee performance
- To monitor executives
- To keep the company accountable
What does the board advise and monitor on?
Strategy:
- Within the firm: offerings, restructuring
- Outside the firm: M&A, takeovers
What are the duties of board members? (6)
- Duty of care
- Duty of loyalty
- Duty of disclosure
- Duty of confidentiality
- Business judgement
- Duty of risk management and legal compliance
What is understood by duty of care?
Responsibility to make informed decisions through:
- Commitment: of time and overseeing effort
- Being informed: reviewing and questioning information provided by the managers, requesting further information
What is understood by duty of loyalty?
Responsibility to act in good faith, in the interest of the firm
- Independance
- Not using their power for personal gain
- Corporate opportunities must be reviewed by board to ensure they are being pursued for firm’s benefit
What is understood by duty of disclosure?
Responsibility to provide shareholders with relevant, timely, known information that could benefit their voting decision
What is understood by business judgement?
Requirement for the board members to posses relevant knowledge and take responsibility for being informed
What is understood by confidentiality?
Keeping confidential all information that is not part of duty to disclosure, particularly information that could influence the market behaviour
What is understood by risk and oversight compliance?
Responsibility to ensure that the firm complies with the regulation, reports with due dilligence and implements risk management, particularly with shareholder funds
What factors may (but do not guarantee) improve the board quality?
- Independence
- Diversity of expertise
- Appropriate size, with significant number of NEDs
- Connections to govern under network governance (however, risk violation of independance)
What are the key differences between the unitary and dual boards?
Combinations of executive and non-executive directors
- Single board consisting of executive directors (CFO etc.) and NEDs
- Separate executive board (chaired by the CEO) and supervisory board (containing NEDs)
- In dual system, managerial board = operations and supervisory board = strategy and monitoring
Dual: employees can appoint a representative
What are the differences in appointment of directors in unitary and dual boards?
Appointment strategies
- In single board: directors are appointed by shareholders at AGM (executive and NEDs)
- In dual board: executive board is appointed by supervisory board who is appointed by shareholders
What are the requirements of independance?
- Not representing a shareholder
- Not recently employed by the firm
- Not hired as an advisor to the company
- Not a contractor to the firm
- Not a supplier or client
What has Cadbury’s Report (1992) recommended regarding CEO and boards?
- The position of CEO and Chairman should be separated
- At least a senior NED should be appointed for other NEDs to raise their concerns to
- Minimum 3 NEDs
Why is it important for board members to be independent?
- Independent NEDs provide objectivity
- Agency theory: independent NEDs ensure effective monitoring
