GGSR-WEEK4-NEW-1

The Board of Directors

Definition

• The Board of Directors (BOD) is a group of elected or appointed members overseeing the activities of a company.

Governance Structure

• Shareholders own the company but do not run it, whereas management runs the company without ownership.

• The Board acts as a bridge between shareholders and management.

• Board members are elected by shareholders and are responsible for hiring management.

Role of the Board in Corporate Governance

Principal Functions

• Provide Entrepreneurial Leadership

  • Set strategic long-term objectives and plan implementation.

  • Arrange resources required for strategic plans.

  • Monitor management performance.

• Establish Company Values and Standards

  • Define mission, vision, values, and codes of conduct for management and employees.

Ineffective Boards

Characteristics

• Boards that lack awareness of their responsibilities are termed ineffective.

Types of Ineffective Boards

1. Rubber Stamp Board (Yes Men Board)

   • Approves all proposals from executive directors without scrutiny.

2. Good Old Boys Board (Country Club Board)

   • Composed of friends of the chairman; lacks business engagement.

3. Paper Board

   • Exists only on paper; does not actively partake in company affairs.

4. Trophy Board

   • Consists of prominent individuals lacking business acumen.

Power of the Board

Sources of Power

1. Company Constitution

   • Articles and Memorandum of Association define powers.

2. Law

   • Governed by the Companies Act in Pakistan, which provides a standard Articles in its Table A.

3. Resolutions Passed by Shareholders

   • Special resolutions can grant additional powers.

Delegation of Power by the Board

• The board can delegate its powers to individuals or committees, which may not necessarily be board members.

• Proper majority resolutions are required to delegate powers.

  • Example: Authorizing the Finance Director to negotiate loan terms and sign necessary documents.

• Delegation should be done with care to avoid misuse of power.

Functions of the Board

Main Functions

1. Oversight

   • Approve and monitor strategic plans, annual budgets, and internal audit engagements.

2. Directional

   • Set mission/vision, appoint executives, and plan succession.

3. Advisory

   • Provide guidance and specialized help to management.

Tools Available to a Board

1. Composition of the Board

   • Competent directors ensure effective governance.

2. Independence of the Board

   • The board must be free from undue influence.

3. Committees

   • Committees can focus on specific issues and report back.

4. External Help

   • Engagement of experts for informed decision-making.

5. Government Intervention

   • Occasionally necessary, avoiding undue influence.

Responsibility and Accountability

Definitions

• Responsibilities: Duties that must be performed, e.g., presenting reports to shareholders.

• Accountability: Requirement to explain actions to shareholders.

Types of Responsibilities

1. Collective Responsibility

   • Acting in the company’s best interest, accountability to owners, statutory duties, fiduciary duties.

Collective Responsibility Types

1. Acting in Best Interest

   • Directors must prioritize collective stakeholder interests.

2. Accountability to Owners

   • Directors issue periodic reports and answer shareholder inquiries.

3. Statutory Duties

   • Maintain proper meeting minutes and ensure compliance with regulations.

4. Fiduciary Duties

   • Trusteeship of company resources for the benefit of shareholders.

Board Meetings

Conduct and Frequency

• Meetings should occur at least once per quarter, with proper notice provided.

• Significant issues to be discussed include annual plans, internal audit findings, joint venture agreements, and regulations.

Good Board Room Practices

• Directors should contribute to decision-making and compliance with procedures.

• Senior management should provide sufficient information to facilitate proper deliberation.

Roles of Key Officials

Chairman of the Board

• Runs the board, chairs meetings, sets agendas, and acts as a liaison with shareholders.

Chief Executive Officer (CEO)

• Manages company operations and is accountable to the board.

Dualities of Officer Roles

• Many companies allow one person to hold both Chairman and CEO roles.

• Benefits include faster decision-making and reduced costs.