corporate governance lectures 4
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corporate governanceTRANSCRIPT
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Welcome to part 4
Balance of power on Board
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The board
• It is a collection of individuals , each with his or her own views, interests and concerns. However, the chairman and the CEO carry more power.
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Leadership
• The essence of corporate governance is to prevent the emergence of autocratic leadership in the board. Autocracy allows one person to dominate the board.
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Board suitability
• The concept of suitability refers to soundness of character, breadth of experience, skills ,and psychological wellbeing.
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Board qualities
• Individual directors should possess personal qualities admired by investors. Such qualities include, honesty, inegrity,emphathy,probity accountability.
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Role of the board
• To promote the success of the company by directing and supervising its affairs.• To promote
entrepreneurial leadership.
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Role of the board(cont).
• To set the strategic aims of the company and to ensure that enough resources are made available.• To review management
performance.
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Role of the board (cont).
• To set the company’s standards and values.• To ensure that the company’s
obligations to the shareholders are understood and met.
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BOARDROOM PRACTICES
• The guidelines for good boardroom practice are provided by ICSA. The code for directors and company secretaries includes the following provisions:
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Boardroom practices(cont).
• There should be a written procedure for the conduct of board business.• Each director on appointment
should be given sufficient information on boardroom
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Boardroom practice
•All directors should be given the same information and should be given sufficient time to consider it.
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Boardroom practice(cont).
•All material contracts should be referred to the board for approval before the company is legally committed to them.
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Boardroom practice(cont).
•Decisions about the agenda for a board meeting should be taken by the company chairman, and company secretary.
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Boardroom practice(cont).
• The board should give its prior approval for the membership, terms of reference, and powers of any committee of the board that is established.
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Boardroom practice(cont).
• The company secretary should be present at and prepare minutes for board meetings, board committee meetings and general meetings of the company.
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Boardroom practice(cont).
•Minutes of board committees of the board should be circulated to all board members before the next meeting.
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Role of Chairman
• The chairman of the company is responsible for the function of the board of directors. He or she calls for board meetings, sets the agenda and leads the meeting.
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Role of Chairman
• The chairman also leads general meetings of the company and is the most prominent “face” of the company in its dealings with shareholders and investment institutions.
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Specific roles
•Provide leadership to the board, supplying vision and imagination, working closely with the chief executive.
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ROLE OF BOARD(CONT).
• determines the composition and structure of the board, assesses the size of the board, balance between executive and non-executive directors, interaction, harmony and effectiveness of the directors.
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Role of board (cont).
• Sets the board’s agenda and plans board meeting.•Chair all board meetings,
direct debate towards consensus.
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Chairman• Ensure the board receives
appropriate, accurate, timely and clear information.
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Role of Board (cont).
• Facilitate effective contribution from non-executive directors
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Role of the board(cont)’
•Hold meetings with the non-executive directors, without the executive directors present.
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Role of the board(cont).
•Chair the AGM and other stakeholders’ meetings, using these to provide effective dialogue with shareholders.
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The CEO
• The Chief Executive Officer (CEO) is responsible for the executive management of the company’s operations.
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The CEO(CONT).
•He or she is the senior executive in charge of the management team and to whom all other executive managers’ report.
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The CEO(cont).
• Other executive managers might also be directors of the company , but the CEO is answerable to the board for the way the business is run and its performance.
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Specific roles of CEO
•Specific responsibilities of the chief executive, inter alia are to:
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Specific roles of CEO
•Develop and implement policies to execute the strategy established by the board.
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Specific roles of CEO
•Controls performance of the company.•Assume full accountability
to the board for all aspects of company operations.
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Specific roles of CEO
•Manage financial and physical resources•Build and maintain an
effective management team.
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Specific role of CEO
•Put adequate operational, financial, planning, risk and internal control systems in place.
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Specific role of CEO
•Closely monitor operations and financial results in accordance with plans and budgets
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Specific role of CEO
• Interface between board and employees•Assists in selection and
evaluation of board members
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Specific role of CEO
•Represent the company to major suppliers, customers, professional associates etc
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Specific role of CEO
•Develop codes of conduct•Develops mission, vision
etc
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Board appointments.
•Recruitment onto the boards of listed companies involves:
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Board appointments
•Search,selection,nomination,appointments•Election processes
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Board appointments
• The recruitment process may be initiated and completed by:
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Board appointments
•Chairman, CEO ,Members of the board, Significant shareholder, Nomination committee,Executive search firms.
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Board appointments
• James Tanous and Michael Sonlon (2003:31) confirm that board members may be; insiders, friends or associates of other sitting directors.
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Board appointments
• Problem:• This led to a lack of
proactive involvement and missing skills in the industry.
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Baord appointments
•However Daum and Neff (2004:14) advises that a generic director search should involve the following basic skills:
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Board appointments
•Designing or selection process,•Assessing the skills
requirements
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Board appointments(cont).
•Developing a specification for the director to be recruited with particular focus on skills required to fill the gap.
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Board appointments(cont).
•Deciding whether or not to outsource the search to an executive search firm.
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Board appointments(cont).
•Creating a long list of board prospects from a wide range of inputs.
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Board appointments(cont).
•Reviewing the long list for any kind of potential conflict.•Narrowing the long list to
a short list.
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Board appointments(cont).
•Contracting referees of the prospects on the short list.
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Board appointment
•Design and conduct a thorough interview process and recommending the best candidate to the company
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Board appointments(cont).
•Extend an offer.
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Board appointments
• The Indian Companies Act (1957) allows the following to appoint board members:• Shareholders• The board
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Board appointments
•The central government, and external parties ,such as ,Lending financial institutions
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Board appointments(cont).
•Foreign collaborators•Holding companies.
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Board appointments(cont).
• In Zimbabwe, the situation is different. Selection and appointment of persons to boards of listed companies rides on the principle of both:
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Board appointment(cont).
•Who you know•What you know
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Board appointment(cont).
•Thus the following instruments are used:•Nomination committee•Significant shareholders
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Board appointment(cont).
•CEO•Chairperson
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Board composition
•King (2006:37) recommends a good mix of inside and outside directors.
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Board composition(cont).
• Naresh Chandra Report (2002) in Sigh, 2005 recommends that 50% of the board should be independent or 30% of all corporate directors should be independent in character.
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Board appointments(cont).
•Cadbury Report (1992); Coyle, (2004) argue that 2/3 should be NEDs, most of whom are independent.
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Board structures
• Two types of board structures do exist. These are, Unitary and Two tier board structures.
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The Unitary system
• It is a single board consisting of executive directors and NEDs
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Advantages of the Unitary
•NEDs can bring in ,independent scrutiny ,experience, and expertise.
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Advantages of Unitary
•Board accountability is enhanced.•Reduces power of executive directors.
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Advantages of Unitary
•Strategies are critically evaluated.•Board has capacity to provide checks and balances.
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Disadvantages of Unitary
• It cannot supervise itself.
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Two tier system
• It is made up of two sets of boards, the management board and the supervisory board.
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Advantages of two tier
•The system reduces autocracy. It is hard for the chairperson or CEO to assume unchecked powers.
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Disadvantages of two tier
• It may not be possible to accommodate each individual’s concerns.
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Disadvantages of two tier
•Much time may be spend on unnecessary debates.•May not be suitable for
crisis management.
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Board succession
•Key positions in the board are the chairman and the CEO.
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Board succession
• These positions need to be replaced . The CEO and the chairperson will retire or resign one day.
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Succession planning
•The solution to board succession is succession planning.
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The CPD for directors
•The CPD come from the Combined Code and apply equally to executive and non-executive directors:
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CPD
• Existing directors should continually update their knowledge of:
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CPD
• Soft skills should also be updated regularly through the continuous professional development programme and should cover areas such as:
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CPD
• Effective behaviours of boards, Influencing and Negotiating skills ,Conflict resolution skills, Chairing skills ,Board dynamics.
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CPD
• Strategy, Financial Management ,Audit, Remuneration, Risk, management, Legal, regulatory and other obligations.
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CPD•Any matters that directly
impact on the company or its operations, and organisational culture
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Board committees
• 1. The audit committee.• 2.The remuneration
committee.• 3.The nomination committee.• 4.The risk management
committee.
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Question 1
• Identify one committee in corporate governance and explain its terms of reference.
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Question 2•Draw up a programme of
CPD outlined by the Combined code and explain the essence of each component of the programme.