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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.