4 corporate governance

8/2/2019 4 Corporate Governance

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4-Corporate Governance.

The Board Committees And

CEO Succession And Selection.


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The Board Committees. A Board of Directors normally does its work through a well

organized Committee Structure, that Partitions the Work of the

Board. There are several Benefits to this approach. It allows a few Directors to concentrate on Specific Issues in

much more detail than the entire Board could Manage, and italso takes advantage of the Individual Expertise of theDirectors.

The Committee Structure thus provides for the efficient use ofthe Time and Expertise.

Committee Work can be done in one of the Two Ways:

The Board can delegate Certain Decisions to the RelevantCommittees, or it can ask the Committee to study the Issuesand Report back to the Board with Recommendations.

Each Committee should have a clear Charge stating itsResponsibilities, which are usually contained in its Charter.

Each Committee should also record Minutes of its Meetingsand regularly Report its Findings and Actions to the Board.


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The Board Committees (Contd). Most Boards have the following Standing Committees in

some form:

1) Executive Committee.2) Committee Of Outside Directors.

3) Compensation Committee.

4) Audit Committee.

5) Nominating Committee.

6) Investors Grievance Committee.

7) Investment Committee.

Boards may have other Standing Committees that reflecttheir particular circumstances.

They may also appoint Adhoc or Special Committees, whichgenerally are used for very specific, important, andTemporary Tasks such as Studying Merger Opportunities orInvestigating a specific Managerial Issue.

Each of the Standing Committees is described briefly later,

following a short Discussion of Principles applying to allCommittees of a Board.


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Guiding Principles For Committees. Each Committee of a Board should: Have Members who are Intellectually Independent, Qualified and

Diligent.

Have a Written Charter approved by the Board that describes itsMission, Organization, Roles and Responsibilities, Policies andPractices.

Be properly informed by and have Open and CandidCommunications with Management.

Meet regularly and deal Promptly and Decisively with Issues,keeping the full Board informed about its Decisions and Actions.

1) The Executive Committee: The Executive Committee can be used in at least the following

Three Ways: a) It may provide a back up mechanism that acts for the Boards

when Time or Circumstances make it difficult to bring a Quorum ofthe Full Board together

Members are chosen, among other Criteria, for their ability to beavailable on short notice. When Executive Committee acts in this capacity, it should notify

other Members of the Board in advance, if possible, to get theirviews, and should present a Full Report on its Action to the Board.

b) It may be Composed of the Chairs of other Standing Committees,and it may be the means for Coordinating their activities.


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The Executive Committee (Contd). c) It may be Senior Board to which all Issues are presented before

going to the Whole Board. This is usually found, when there is a very large Board that does not

meet as frequently as the situation requires. One disadvantage of this arrangement is that it may create an In

Group and an out Group, in appearance, if not in fact.

2) The Committee Of Outside Directors: This Committee iscomposed of the Outside or Independent Directors. The Chair Personof this Committee is elected by other Independent Directors andcommonly serves as the Lead Director, if the CEO also serves as a

Chairman. If the Board has a Non Employee Chairman, he or she typically Chairs

the Meeting. The Committee of Outside Directors normally meets at the end of each

Board Meeting without the CEO or any other Inside Members of theBoard to discuss any Issues that it deems Appropriate.

These Issues usually involve the CEOs Performance, or

Disagreements among the Directors with the CEOs Position orCompanys Operating Results.

The Purpose of the Discussions is to Explore and Articulate anIndependent View. The Lead Director follows up, acting as theIntermediary with the CEO unless the Committee asks the CEO toreturn to the Meeting to discuss an Issue.

The Companys General Counsel often advises this Committee,

particularly when the Committee must address Issues that have LegalImplications.


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The Compensation Committee. The Compensation Committee should be composed of

Independent Directors. It is charged with Designing and Administering Compensation

and Benefit Plans of the Key Executives and usually addresses

Performance Appraisals.

Because Fringe Benefits are normally part of the Compensation

Package, the Management of Retirement Plans frequently fallsunder this Committee.

Retirement Plans, however, often have a large quantity ofAssets, requiring Effective Investment Management.

As a result, the Responsibility of Managing Retirement Benefits

can be Delegated to a Sub-Committee, or Separate StandingCommittee of the Board.

Staff Assistance for Compensation Committee is normallyprovided by the Senior Human Resources Officer, andfrequently the Committee employs outside Compensation

Consultants, particularly to Design Plans intended to establishEternal Parit .


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The Audit Committee. In Todays Climate, the Audit Committee has even assumed

greater Importance than in the past.

The Primary Purpose of the Audit Committee is Overseeingthe Accounting and Financial Reporting Processes of theCompany and Audits of the Financial Statements.

The Audit Committee should:

1) Encourage a strong operating Culture that Espouses Basic

Values of Integrity, Legal Compliance, Forthright FinancialReporting, and Strong Financial Controls.

2) Have Direct, Independent Communications with bothExternal and Internal Auditors.

3) Make it unequivocally clear that the Ultimate Accountabilityof both Internal and External Auditors is to the AuditCommittee and the full Board.

4) Guarantee Compliance with Generally Accepted AccountingPrinciples( GAAP) and ensure Full, Accurate, and TimelyDisclosure of all relevant information to the Public.


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The Audit Committee (Contd). In the past, the Audit Committees Emphasis in most

Companies was on Accurate Financial Reporting.

Over years, the Audit Committees Function has expanded

into overseeing of Financial Controls, often using an InternalAudit Staff.

Most recently, these Responsibilities have tended to Expandto Overseeing the Process that Monitors Compliance withLaws, Regulations, and the Corporate Code of Conduct, andto conduct Special Investigations.

Internal Control is a Process implemented by the Board ofDirectors, Management, and other Personnel, designed toprovide reasonable assurance regarding Achievement ofObjectives in the following three areas:

1) Effectiveness and Efficiency of Operations.2) Reliability of Financial Reporting.

3) Compliance with Laws and Regulations. It should be noted that Internal Control goes beyond the

Financial Function of the Business to include the muchbroader areas of Operation and Legal Compliance.

The Internal Control Function should include Managing theControl Environment, Risk Assessment, Control Activities,

Information, and Communications , and the MonitoringEfforts.


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The Audit Committee (Contd). Given the Crucial Role of Overseeing the Processes related to the

Reporting and Auditing of Financial Results, Audit Committees aredependent on Members Abilities to ask Tough Questions and Pursueany line of Enquiry until they fully understand and are satisfied withanswers.

Audit Committee Members must be Good Judges of the Character ofthe Managers with whom they deal, and they must create a Culturethat minimizes the Risk of Strong and Deceitful Personalities cuttingcorners or not providing full disclosure.

The Audit Committee should consist Solely of IndependentDirectors of the Company and shall be comprised of a Minimum ofThree Directors, each of whom is Financially Literate or shall becomeFinancially Literate within a Reasonable Period of time after his or herAppointment.

They should be Diligent, Knowledgeable, Dedicated, Interested in theJob and Willing to Devote Substantial amount of Time and Energy to

the Responsibilities of the Committee, in addition to the Board ofDirectors Responsibilities. At least one of the Members shall have Accounting, or related

Financial Management Expertise, preferably a Chartered Accountant.The Members of the Committee shall be elected by the Board ofDirectors and shall continue until their Successors are duly elected.

One of the Members shall be elected as the Chairman either by the Full

Board or by the Members themselves.


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e om na ng r overnanceCommittee.

The Nominating Committee, sometimes known as the GovernanceCommittee, identifies and Recruits New Members of the Board, whenopenings occur.

In many Companies, this Committee has also begun to Manage theProcess of Evaluating the Performance of the Board as a Whole aswell as Individual Members.

Based on these Evaluations, Directors are or are not Re-Nominated fora New Term.

The Evaluation Results should also be used to find Ideas for everImproving the Boards Interactions and Performance.

This Committee also may be Responsible for Administering DirectorsCompensation, and if it also Serves as Governance Committee- forOverseeing the Governance Process and Practices, and Maintainingand Ensuring Compliance with By Laws.

Investors Grievance Committee: The Investors Grievance Committeewill be headed by an Independent Director and will have Four OtherExecutive Directors. This Committee has the Mandate to Review andRedress Shareholders and to attend Share Transfers.

Investment Committee: The Investment Committee consistsexclusively of Executive Directors, headed by the Chairman. TheCommittee has the Mandate to Approve Investments in various

Corporate Bodies within Statutory Limits and the Powers Delegated bythe Board.


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The Board-CEO Relationship. Among the Most Important Responsibilities of a Board Of Directors

is the Selection of the Chief Executive Officer (CEO).

This Duty has a Profound Impact on the Success of a Corporationand is the Exclusive Duty of the Board.

The Results for the Company and the Shareholders can beExceptional when Board makes a Good Choice. A Poor Choice, onthe other hand, can produce an Expensive Disaster. Further more,even a Mediocre Choice can lead to a Large Cost of UnrealizedOpportunities.

The Strength and Effectiveness of a Leader can and should have a

marked Impact on the Operating Results of a Business. CEO Succession and Selection:

Except in Start Up Situations, a Board faced with Hiring a CEOalways faces the Task of Selecting a Successor to an Existing CEO.

The Circumstances under which the Board must make this Selectionvary Tremendously, with Major Variables encompassing the

following:1) Reasons for the Change Of Leadership

2) The Time Interval during which the Board has notice of theImpending Change.

3) The Current Condition of the Business and the Trend or Trajectory ofits Results.

The Table in the Next Slide shows various Permutations of theseIm ortant Variables involved in the Re lacement of a CEO..


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CEO Succession And Selection (Contd).

Reasons For

Change.

Notice Timing. Business Situation

Condition.

Business Situation

Trajectory.

1)

2)

3)

4)

Normal Retirement..

Death or Disability.

Resignation.

Termination.

1) Long TermAnticipation.

2) Short-TermAnticipation.

3) Unexpected.

1) Strong.

2) Stable

3) Weak.

4) Crisis.

1) PositiveResults.

2) Stableresults.

3) NegativeResults.


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CEO Succession And Selection (Contd). We will examine three possible Scenarios derived from certain

common combination of the variables. The Scenarios are:

1) Scenario- 1. An ordinary Transition. The Ideal Scenario under whicha Board must select a Successor CEO occurs when a successful

CEO retires normally, allowing ample time to Plan and Prepare forTransition, in a Business enjoying a Strong Condition withimproving Results.

2) Scenario-2. An unexpected Situation. The Unexpected Departure ofa Strong CEO from a Business in a Weak Condition with DecliningResults is the Worst Scenario for Boards.

3) Scenario-3. A Termination. Another Stressful Scenario is one inwhich the Board must Select a Successor CEO after havingTerminated an Under Performing CEO. Business in thisCircumstances can have widely varying Performance Results andTrends.

We will examine each of these Scenarios in Turn.

Scenario-1. This will serve as the initial case to which the other twowill be compared.

Orderly Transition. Because selecting a CEO is a Board Decision,the Board must decide how it will organize itself to perform theTask.

The Board usually assigns this Responsibility to the Nominating

Committee or forms a Special Committee to address the Task. TheCommittee must then decide on the Process it will follow.


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Succession Planning For a CEO.

The Timing of when to Create a Succession Plan is a delicate issue.

The First Step in Succession Planning is Selecting a Target Succession

Date, an Act Sitting CEOs are often reluctant to do. The CEOs truly may not know when they will want to Retire, or they might

fear operating as a Lame Duck once they identify their Plans for Retirement.

A Proposed Time Line for High-Level Succession Planning is Outlinedbelow:

1) Step-1. Two to Five years in advance of an approximate change over date.During this period, the Board considers the Condition and Trajectory of the

Firm and develops a desired Profile of the New CEO. Then the Board has to decide whether there are inside candidates for the

position. If so, the Board should quietly get to know the candidates and givethem Assignments that would test and prepare for the Job of CEO.

2) Step-2. The actual Succession Process, including the Selection of theSuccessor. Approximately One Year in advance of his or her Retirement, theCEO should announce his or her Retirement (although some CEOs will

prefer to give much shorter notice.) If a Succession Plan is in place, shorter notice should not create a problem.

If a Succession Plan is not in place, however, the Situation might betroublesome for the Board.

3) Step-3. The Transition Phase during which the Baton is Passed on to theSuccessor CEO. The length of this Phase will vary from Firm to Firm.


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Considerations In Succession Planning. The Board must make a number of Potentially Crucial

Decisions in the Succession Planning Process.

The Decisions will certainly be influenced by the

Circumstances of the Organization at the time andIndividuals involved:

1) The Role Of Sitting CEO: A Successful CEO who is Retiringmight be looked upon to for a Great Deal of Input. CEOshould be seen only as an Advisor to the Board , never the

Person making the Decision. After years of concurrent service with his or her Potential

Successors, most CEOs would find it difficult to remainImpartial. For this reason alone, a Retiring CEO should not bepermitted to Pick his or her Successor.

2) Inside Candidates;

3) Outside Candidates.

4) Communications: An important part of the Selection Processis Communicating Progress both inside the Firm and to thePublic.

The Communication starts usually when Retirement Date of

Current CEO is announced, which normally takes place 6/12months in advance.

T i i T A N CEO


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Transition To A New CEO.1) When a Successful CEO is Retiring, it is normally useful that

he or she remains Affiliated with the Company for Six Monthsto a Year to Support the New CEO.

Obvious Benefit of this Strategy include Access to theRetiring CEOs Institutional Knowledge and SmoothIntroduction of the New CEO by the Departing CEO intoImportant Relationships, both Inside and Outside theCompany.

2) Transition After An Unexpected Departure: This is the mostdifficult Scenario for a Board. It involves the UnexpectedDeparture of a Strong CEO of a Business Competing from aWeak Situation and with Declining Results ( Scenario 2discussed earlier).

In general, this Situation entails a CEO becoming Disabled or

Dying Unexpectedly, while Company is in a Weak Position. A Primary consideration for the Board is the Urgency of

finding a Replacement for a Weak Company.

A similar Situation arises when a CEO abruptly resigns,although Resignation might involve varying degrees ofDamage to the Company, depending upon the PrecipitatingReasons.


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Transition To A New CEO (Contd). In Situations when a CEO Departs Unexpectedly, it is invaluable

to the Board to have a Contingency Plan already prepared.

To formalize this Plan, the Nominating Committee might ask theCEO to name annually to recommend a Successor in the eventof his or her Incapacitation.

The Board may also have Private, periodic discussions aboutSuccession, particularly during Executive Sessions.

In the event that the Board finds the Firms Succession Plan

acceptable, the appointed Successor would be in place to bePromoted.

If the Board determines that no Insider is appropriate, theBoard will have to Launch a Search for another Outsider asdescribed above.

The Board will usually appoint an Interim CEO to serve whilethe Search is conducted.

The Interim CEO is Customarily a member of Management orthe Board.

The Board does not have the Luxury of Pursuing a lengthyProcess to appoint a Permanent CEO under the conditions.

T i i Af T i i Of CEO


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Transition After Termination Of CEO. This is the Third Scenario discussed earlier. Here the Board

Terminates an Under Performing CEO. In Practice, suchSituations tend to be rare.

When they do occur, the Departing CEOs tend to leave fairlyquickly after the Decision is made to Terminate Employment.

Under Performing Lame Ducks are of Marginal Value to theOrganization.

In this Situation, the Board again is faced with the Insider VsOutsider Choice.

The difference in the Scenario is that there might be somestrong feelings about the Departing CEO and some MangersLoyal to him or her might Depart as well.

If the Recalcitrant Executives do not Depart, the Board mightwant to remove them to eliminate their Negative Attitudes.

Due to the Need to move quickly, the Board in this Situation( aswell as the 2nd Situation) might tend to settle for Mediocrity as asafe Course.

In the long run, this is not an effective Strategy. The Firm wouldbe better served if the Board chose to appoint someone not yet

proven, but appearing to have the Potentiality to quickly growinto the Job of CEO.


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Transition After Termination Of CEO(Contd).

The Board then would need to be prepared for the possibilityofhaving to act if the New CEO were incapable of Effectively servingin the New Position.

When the Board Terminates a CEO, special Communications arerequired.

In particular, it is important for the Board to demonstrate its Controlof the Situation by Effectively Communicating its Intentions to the

Key Managers, the Rank and File Employees. Working Relationship-The Board And The CEO.

An effective Management Model for a Board-CEO Relationshipshould involve the following:

1) Hiring an Appropriate CEO for the Firm. An Appropriate CEO is one

who shares the Values of the Board and the Organization and hasthe requisite abilities to run the Business effectively.

2) Developing Mutually Agreeable Goals, Policies, and the Standardsof Performance for the Firm with the Input of the CEO.

3) Aligning the Interests of the Board and CEO with those of theShareholders. This is done Primarily through Stock Ownership and

Incentive Plans.


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Working Relationship-The Board AndThe CEO (Contd).

4) Agreeing on the Decisions that should be brought to the

Board, those Decisions on which the Board wants to Adviseand Consent, and those that are Delegated to the CEO.

Such arrangements should serve to establish a wellunderstood line between the Responsibilities of the Boardand those of the CEO.

5) Remaining Knowledgeable about the Firms Activities andPerformance in Appropriate detail and in a timely manner andEvaluating the Results.

Failure to have the Controls and Communication in place toremain Knowledgeable indicates a Failure on the part of the

Board to Execute its Responsibilities. Reacting Appropriately to the Results by holding

Management Accountable and Rewarding or Intervening asnecessary.

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