Business Ethics and Corporate Governance
Business Ethics and Corporate Governance
The Board of Directors of the company is one of the two organs of the company that is charged with running of the affairs of the company. The other organ is the General Meeting. This paper will constrict its discussion to the roles played by the Board members. Towards the end of the discussion, the paper will advance the argument that the roles played by the board members of the company are likely have changed dramatically due to the enactment of the Public Company Accounting Reform and Investor Protection Act of 2002. The paper will also discuss the numerous challenges that board members face in the execution of their mandate and suggest various ways of addressing those challenges. These challenges range from understanding their role as board members, committing themselves to the affairs of the company vis-à-vis time constraints and the challenges that arise as a result of failure of the members to understand the dichotomy of their various roles.
The roles of the board of directors range from electing the general manager or the chief executive officer to strategizing on the affairs of the company. The board plays a dual role. To start with, the board plays an advisory role. The advice of the board extends to assisting the management on the operations and decisions that should be made to in the best interest of the company. Secondly, the board plays an oversight role. This oversight role will be discussed in a short while. The board is responsible for recruiting the Chief Executive Manager of the company. It is the board's duty to advertise the position, conduct an interview in search of the best candidate for the job, train them on running the affairs of the company and occasionally supervise them as they run the company (Brian S Black, 2006).
The board drafts the vision, mission, core values and the goals the company strives to achieve. In a nutshell, it is the board that provides the direction that the company should pursue. By showing the direction, the board also plays a role in ensuring that the company lives up to its vision, carries out its mission in the best way and that it achieves the goals that it has set. The direction that the board gives the company also involves approving the strategy that the company plans to follow. This strategy approval involves laying down the model that the business is planning to pursue and also identifying the most important measures to be taken by the company in its endeavor to achieve optimum success. The board cannot lay down the business model without also identifying the risky areas that the company is not supposed to explore (Larcker, 2011).
The board members are tasked with coming up with remuneration formulae for the company employees. The remuneration packages include both executive officers and the junior officers of the company. After financial statements have been drawn, it is the duty of the board to confirm their authenticity before they approve them. This is done by the board to ensure transparency, authenticity and accuracy of all company statements drafted for financial purposes.
It is the board's responsibility to design the policies of the company that is necessary for an effective system of governance of the company. Whereas the articles of the company provide for a framework that should be followed in all the company's operations, it is the board that provides that actual policies for the company to pursue. The policies that the board formulates should be wider in scope than the articles of the company and should, in fact, give effect to the articles. Articles of association only govern the conduct of the company members and, therefore, the policies formulated by the board should be wider and more encompassing. Akin to this is the board’s task of governing the conduct of the Chief Executive Officer. It is the board that elects the CEO and must, therefore, formulate a way in which they will keep him in check. This checking system should also formulate the relationship between the CEO, the board, the shareholders, the creditors, and all the other officers of the company(Brian S Black, 2006).
Board members act as fiduciaries to take care of the company's assets and those of the shareholders. Since shareholders do not take part in the day-to-day affairs of running the company, it is the board that acts as trustees by holding the company's property in trust for the shareholders. Such assets include everything that the company owns both within the country and outside. The shareholders, therefore, trust the board to be the trustees of the company property. This tells why the board should comprise people of high integrity, skills and knowledge.
The other important duty that the board is charged with is the duty to monitor and control all the affairs of the company. The board does this by hiring and training the officers that are charged with the responsibility of taking part in various activities of the company for example auditing, offering legal advice and keeping the company’s documents. The board also does this by playing the dual roles of offering advice and oversight. This role should not, however, be confused with managing role. The directors do not manage the company; rather, they ensure that the managers (or the CEO) are doing the right thing in the managerial roles. The board can only facilitate the managerial role by acting as an oversight authority to keep the managers in check. This should be the case so that there is no conflict of roles played by the board and the managers.
In executing its roles, the board may do this in four models: the managers focus model, the proactive board, geographic representation model and the community representation model. With the managerial focus model, the CEO of the company dominates all the activities of running the affairs of the company while the board plays a mere oversight role. This may occur in situations where the CEO is very charismatic, outgoing and has a tendency to dictate all that happens in the company. However, the CEO can only do this if the board of directors plays a more passive role than a proactive role because it is the board that is vested with the powers to appoint and dismiss CEOs.
The other model is a proactive role where both the board and the managers of the company are placed on an equal footing. The board does not play a role that is to executive while the CEO also does not feel like they are the dictators of the affairs of the company. This is intended to take advantage of the emerging trends and opportunities that are necessary for the interest of the company. With the geographical representation model, the board members feel like they were elected into the board to represent a certain interest group in a certain geographical location and, therefore, all that they do is aimed at serving that interest group. This is not a good model that is aimed at representing the best interests of the company because the company is usually aimed at serving all persons. The articles and objects of the company do not specify that the company will only be serving a specific interest group.
With the community representation model, a board member feels themselves as having been elected to represent a specific group of people. A board member with such a mentality will readily abuse their position in the company office in an attempt to please the members of their community.
For a board to have the ability to execute their mandate in the most effective way, it must be independent. Independence of the board may be seen in a number of senses. Firstly, the board should be able to make its decisions and perform its tasks in the interest of the company. It should not be seen as making decisions that are biased or do not in congruence the company's vision, values and mission. In a different sense, the board should not act as servants of any other person of the group of persons. By simultaneously acting as servants of a different person as they are serving the company, there is a high chance that the board members shall show bias, poor leadership and lack of dedication. Therefore, It is vital for the board to ensure that it is independent.
The activities of the board are usually presided over by a chairman who is charged with the responsibility of chairing board meetings, setting the dates for such meetings, and coordinating the activities of various committees. However, this does not mean that the chairman of the board makes all decisions on behalf of the board. Decisions are arrived at by way of majority vote. After deliberating on various issues affecting the company and which had been scheduled to be discussed at the meeting, the board carries a voting exercise to determine the way forward.
It may be impossible for all the activities of the company to be determined by a full board. Some activities are delegated to various board committees to deliberate and provide a solution. Such committees are formed depending on the task that is supposed to be undertaken. As a matter of principle, all boards of a company must have certain committees for example auditing committees, compensation committees, nominating and governance committees. The audit committee of the board oversees all financial matters of the company. It has the mandate of preparing financial reports of the company and also playing an oversight role in the company monetary functions (Larcker, 2011).
The compensation committee on the other hand is in charge of remuneration. It sets the standards for remunerating all company employees and also compensating them for any loss that any of the employees may have suffered when they were serving the company. Nominating and governance committees have the responsibility of hiring company employees and keeping track of the governance activities of the company respectively.
Duty of candor mandates the board to provide all information about the company to the company shareholders. This may be done by publishing such information on the company website, the local dailies or any other medium that is convenient. The board may also do so upon request by any shareholder.
Challenges that board members face
There has recently been a rising need for transparency, integrity, authenticity and transparency in the manner in which board members carry out the activities of the company. This rising need has necessitated members of the company board to exhibit more care, due diligence and accountability when acting as fiduciaries for the company. To start with, every board member must be able to understand their duties discussed by this paper herein above. Any person who does not understand these roles should not be a board member of the company. Board members are required to be specialists in areas of expertise because they are supposed to offer good services to the company. They are also not supposed to be board members of another company because by so doing, the time dedicated for the company in question will not be adequate. By serving as members of one board only, the board members ensure that they dedicate enough time for the service of the company. This is however not the case because most board members find themselves serving in various capacities outside the company. The company is therefore not given the adequate time it requires and this leads to reduced profits. There is the need to have members who are ready to dedicate adequate time for the service of the company.
The need to have experts serving as board members of the company cannot be overestimated. The practice in various companies over time has been that any member who has been in the corporate sector for some time may be elected as a member of the board. This leaves the company in a precarious position as it lacks the experts who are supposed to serve it in specific fields of expertise. Such experts as financial experts, accounting officers, engineers, economists and bankers are supposed to be the people to be elected as board members of a company so that such a company has a wealth of experts to serve it.
The other problem that board members experience is working with inactive and absentee board members. There are those members of the board who, after having been elected into the board, do not show up for their duties or if they show up, do not participate in the activities assigned to them by the company. The best way to deal with such board members is to have a policy that forces them to attend to company duties and responsibilities or a policy to fire them and replace them with active members(Brian S Black, 2006). This is because any continued tolerance with such people only serves as a liability and does not serve the interest of the company.
The other problem that board members have perpetually experienced is having an autocratic CEO. This kind of a CEO takes everything upon themselves and in such cases, they are the sole managers of the company. Some do not even consult the board members before taking any action that affects the company. They are dictators who manage the company as if it belonged solely to them. Autocratic CEOs only serve their own interest instead of acting in the company's best interest.
It is a mandatory requirement that all board members should commit sufficient time for the service of the company. To mitigate against the situations where some board members absent themselves from the activities of the board, there is a need for the nomination committee to come up with a work schedule for all members of the board. Such a work schedule should stipulate clearly the task for each board member, the time allocated for each task, the specific times that the member is required to be present in times of crises, and this should be disclosed to the full board (Larcker, 2011). The nomination and corporate governance committee should also clearly outline measures that should be taken against such absentee members including firing and replacing them.
All board members should be required to refresh and renew their knowledge from time to time as the nomination and governance committees may from time to time decide. Acquiring more knowledge not only makes the member more confident when serving the company but also enables the company to benefit from such knowledge about the current trends of governance. This should be the case because governance trends are changing quite often and this goes in line with current technology. A board member who served the company many years ago should either be replaced or be made to acquire more knowledge about current trends in governance (Brian S Black, 2006).
The need of service evaluation cannot be underestimated. In order to ensure that the company in the right lane of success, the board must from time to time conduct an evaluation of the performance of all committees, employees, board members, managers and the CEO. This will enable the board to account for all the activities of the company employees and also ensure that the company is on the right track.
In order to ensure that all directors conform to the company norms, there should be a provision for regular re-election process which will be determined by the board members’ continued performance. Those members who have not grasped their roles or have not been able to commit their time to the service of the company should not be re-elected. This will ensure that board members remain accountable to the company for their services (Brian S Black, 2006).
This paper has succeeded in outlining the roles and responsibilities of board members of the company, the challenges the board face in the execution of their mandate and the various ways in which those challenges may be addressed. It has done so in a way so brief yet detailed and succinct. It should be noted, however, that these suggestions only form part of the whole matrix of measures to ensure the accountability of board members of the company.
Brian S Black, B. R. (2006). Outside Director Liability. Stanford Law Review.
Larcker, P. D. (2011). Corporate Governance Research Programme. Stanford Graduate School of Business.