Cg lecture 5
- 3. Last Lecture Review ◦ A BoDs is a body of elected or appointed members who jointly oversee the activities of a company. ◦ BoDs are appointment at the public Annual General Meeting of shareholders. ◦ Types of board are depending upon company status as well as the territory where the company prevails. ◦ Normally, we can see One-Tier board in common law based societies (like US and UK) and Two-Tier board in civil law based societies (like Germany etc).
- 4. BoDs functions involve to hire, evaluate or even fire the top management, to vote in support or against of major proposals as well as financial decisions. In short, BoDs main primary function is to safeguard the shareholder’s interest. But the most important factor is to think a lot before selecting your board.
- 5. Lecture Outlines ◦ Overview of the Board Board legal duties May not be the federal law requirement but the state wants BoDs. Firms profitability and increase in share value Loyal and fair Take care of the rule of ethics Employment practices Human rights Environment regulations Corruptions Moral obligations
- 6. Board Committees ◦ An Executive Committee ◦ A Finance Committee ◦ A Public Relation Committee Board Sub Committees ◦ Audit Committee ◦ Compensation Committee ◦ Nomination Committee
- 7. Overview of the Board The Board Legal Duties ◦ No federal law explicitly dictates that public corporation must have a BODs. ◦ State laws vary from one state to the others. ◦ Fortunately every state requires that a corporation having a BODs.
- 8. ◦ Directors are supposed to enhance the firm’s profitability and share value. ◦ Directors also have a duty of loyalty and fair dealing. ◦ They must put the interest of shareholders before the their own individual interest. ◦ Must perform the duty of care, means being informed and making rational decision.
- 9. ◦ Must perform the duty of Supervision to establish the rules of ethics by holding regularly meetings to review the firm’s performance, operations and management. Business ethics are Employment Practices, Human Rights, Environment Regulations, Corruption, Moral Obligation of MNCs. ◦ They must ensure that the accurate financial reporting and objective auditing are taking place.
- 10. Board Committees Some board include; ◦ An executive committee Group of directors appointed to act on behalf of, and within the powers granted to them by, the board of directors. Typically it consists of a chairperson, vice- chairperson, secretary, and treasurer.
- 11. Or ◦ Senior-level management committee empowered to make and implement major organizational decisions. An executive committee often acts as an overseer of organizational activities and has the authority to request justification of certain matters as well as to plan activities.
- 12. ◦ A finance committee The main duty of the Finance Committee is to maintain a continuing review of the financial affairs of the Institute. Using this information, it is the committee’s duty to make appropriate recommendations to the Board or the Executive Committee regarding financial matters.
- 13. A community relations committee The Community Relations Committee (CRC) facilitates dialogues and activities between different stakeholders.
- 14. The most common board sub committees are; ◦ Audit Committee ◦ Compensation Committee ◦ Nomination Committee “A great deal of important board work occurs at the subcommittee level and subsequently goes to the full board for approval.”
- 15. Audit Committee ◦ an audit committee is an operating committee of the BOD charged with oversight of financial reporting and disclosure. ◦ Committee members are drawn from members of the company's board of directors, with a Chairperson selected from among the committee members.
- 16. ◦ A qualifying audit committee is required for a U.S. publicly-traded company to be listed on a stock exchange. ◦ To qualify, the committee must be composed of independent outside directors with at least one qualifying as a financial expert.
- 17. Responsibilities of an Audit Committee ◦ Overseeing the financial reporting and disclosure process ◦ Monitoring choice of accounting policies and principles. ◦ Overseeing hiring, performance and independence of the external auditors.
- 18. ◦ Oversight of regulatory compliance, ethics, and whistleblower hotlines. ◦ Monitoring the internal control process. ◦ Overseeing the performance of the internal audit function. ◦ Discussing risk management policies and practices with management.
- 19. Compensation Committee The main purpose of the Compensation Committee is; To assist the BODs in discharging its responsibility to the shareholders with respect to the company’s compensation programmes To review the annual compensation discussion and analysis in the annual report.
- 20. Appointment and Removal ◦ The members of the Compensation Committee shall be designated by the Board. ◦ Any member of the Compensation Committee may be removed from the committee with or without cause
- 21. Nomination Committee The Board of Directors shall appoint a Nominating Committee of at least two members, consisting entirely of "independent" directors of the Board Each member shall serve on the committee at the pleasure of the Board of Directors and may be removed by the Board at any time with or without cause.
- 22. Purpose of Nominating Committee (i) to identify individuals qualified to become Board members, (ii) to recommend to the Board director candidates for each annual meeting of stockholders or as necessary to fill vacancies and newly created directorships and (iii) to perform a leadership role in shaping the Company's corporate governance policies, including developing and recommending to the Board a set of corporate governance principles.
- 23. Duties and Responsibilities Some of the duties and responsibilities are ; ◦ Recommend criteria for Board membership. ◦ Identify and recruit candidates for the Board. ◦ Conduct the appropriate and necessary inquiries into the backgrounds and qualifications of possible candidates for Board membership.
- 24. ◦ Recommend to the Board candidates to fill new or vacant positions on the Board. ◦ Recommend to the Board candidates for the election of directors at each annual meeting of stockholders. ◦ Oversee the Company's corporate governance matters and policies, including the development of a set of corporate governance principles, and periodically review such principles and recommend changes to the Board as necessary.
- 25. ◦ Oversee the evaluation and assessment of the Board and Board committees. ◦ Evaluate annually the performance of the Nominating Committee . ◦ Perform such other duties and responsibilities as are consistent with the purpose of the Nominating or as may be assigned from time to time by the Board of Directors.
- 26. Board Committees ◦ An Executive Committee ◦ A Finance Committee ◦ A Public Relation Committee Board Sub Committees ◦ Audit Committee ◦ Compensation Committee ◦ Nomination Committee
- 27. Lecture Outlines ◦ More attention on Directors ◦ What is a “Good Board”? Experienced members Having different back ground i.e. technical as well as non technical Independent board-having fraction of non-insider directors (difficult to find unambiguously independent directors) Small board
- 28. Good for Goose, good for Gander ◦ One form of board may be/may not be good for others. ◦ Small board may be/may not be good for others firms and vice versa. ◦ Can good board lead to better firm performance? No positive correlation between the board quality and firm performances. Normally board are reactive, not proactive Sometimes inside directors are good for board (e.g. infant or new firms or when the firm has to make any huge financial/investment decision) and some times outside directors (e.g. when audit as well as compensation matters are required)
- 29. Some potential problems with today's board ◦ Outside Directors relationship with the top management (e.g. CEO) ◦ Outside directors full motivation is still a question mark for firm’s board. ◦ Inexperienced as well as busy outside directors are fruitless for the board
- 30. More Attention on Directors Prior to the mid-1980s, the public paid little heed to directors. Now the situation has changed. Increased pressure on BODs has resulted in better corporate governance. The increased takeover market and the new regulatory environment push the directors to do their jobs.
- 31. What is a “GOOD” Board? Experienced members Technical firms must have technical experts and vice versa. Its entirely the firms decision. A board with members having different background can also be beneficial for the firms.
- 32. Independent Boards There must be a high fraction of non-insiders (directors) for a good board ◦ E.g. One of the board primary responsibilities is to evaluate, compensate and possibly fire the CEO. What if the board consists of the following people; A friend of a CEO A relative of a CEO A business collaborator of a CEO
- 33. Its very difficult to find people who are entirely and unambiguously independent of the firm’s management. Because they all know each other. Either friends or relatives
- 34. Small Board A board with fewer members might be a better board. Too many cooks spoil the broth. Most of the researchers are thinking in the same way i.e. Small boards are more effective than large boards.
- 35. In small boards, every individual will think extra responsibility on his/her shoulder and vice versa. With larger boards, its very difficult to reach consensus and to get anything meaningful done.
- 36. Good for a Goose, Good for a Gander? What is good for a firm must be/must not be good for others. Young growth-oriented firms would be looking for more insiders, might be the best people to serve the board. Larger and more diversified firms may need more directors, keeping in mind the scope of its operations.
- 37. So who will take the decision? The managers- they may be in the best position to pick a good board but his self- interest may get in the way. The firm’s outside shareholders – they can vote on the board members and having no power in appointing directors directly, unless they could make the majority.
- 38. Can Good Boards Lead to Better Firms Performance? It is not clear that there is a positive correlation between board quality and firm performance. Boards may be effectively reactive and may not be effectively proactive (value creator).
- 39. It depends either insider or outsider. ◦ E.g. Committee that determine CEO compensation and are responsible for the firm’s audit may best be served by outsider ◦ But committee that make firm financing and long- term investment decisions may be served best by insider.
- 40. Potential Problems With Today’s Board. One of the main functions of the board is to evaluate top management, especially the CEO. However, for many firms, the board’s chairman is also the firm’s CEO. Most of the outsiders have some personal tie to the CEO.
- 41. The directors (commonly the outsiders) do not have a significant vested interest in the firm, holding little or no stock. Are directors capable of providing the time and expertise required to fully understand the major operating and financial decision of the firm? Most directors have their own highly demanding full-time jobs. So how to cope with?
- 42. Some directors simply don’t have the expertise to be a board member. Some boards are simply large and difficult to actively involve them. Some directors might not be truly independent , they might be too busy.
- 43. Summary ◦ Overview of the Board Board legal duties May not be the federal law requirement but the state wants BoDs. Firms profitability and increase in share value Loyal and fair Take care of the rule of ethics Employment practices Human rights Environment regulations Corruptions Moral obligations
- 44. Board Committees ◦ An Executive Committee ◦ A Finance Committee ◦ A Public Relation Committee Board Sub Committees ◦ Audit Committee ◦ Compensation Committee ◦ Nomination Committee THE END
- 45. Summary ◦ A BoDs is a body of elected or appointed members who jointly oversee the activities of a company. ◦ BoDs are appointed at the public Annual General Meeting of shareholders. ◦ Types of board are depending upon company status as well as the territory where the company prevails. ◦ Normally, we can see One-Tier board in common law based societies (like US and UK) and Two-Tier board in civil law based societies (like Germany etc).
- 46. BoDs functions involve to hire, evaluate or even fire the top management, to vote in support or against of major proposals as well as financial decisions. In short, BoDs main primary function is to safeguard the shareholder’s interest. But the most important factor is to think a lot before selecting your board
- 47. ◦ Overview of the Board Board legal duties May not be the federal law requirement but the state wants BoDs. Firms profitability and increase in share value Loyal and fair Take care of the rule of ethics Employment practices Human rights Environment regulations Corruptions Moral obligations
- 48. Board Committees ◦ An Executive Committee ◦ A Finance Committee ◦ A Public Relation Committee Board Sub Committees ◦ Audit Committee ◦ Compensation Committee ◦ Nomination Committee
- 49. ◦ More attention on Directors ◦ What is a “Good Board”? Experienced members Having different back ground i.e. technical as well as non technical Independent board-having fraction of non-insider directors (difficult to find unambiguously independent directors) Small board
- 50. Good for Goose, good for Gander ◦ One form of board may be/may not be good for others. ◦ Small board may be/may not be good for others firms and vice versa. ◦ Can good board lead to better firm performance? No positive correlation between the board quality and firm performances. Normally board are reactive, not proactive Sometimes inside directors are good for board (e.g. infant or new firms or when the firm has to make any huge financial/investment decision) and some times outside directors (e.g. when audit as well as compensation matters are required)
- 51. Some potential problems with today's board ◦ Outside Directors relationship with the top management (e.g. CEO) ◦ Outside directors full motivation is still a question mark for firm’s board. ◦ Inexperienced as well as busy outside directors are fruitless for the board THE END