Role_of_board_of_directors_in_corporate.pdf

Name: Imad H. Kais ID: 0996055 Course: FIN5311-70 Corporate Governance and Ethics Professor: James Owens Paper: Role of Board of Directors in Corporate Governance

Executive Summary Corporate governance in the marketplace is an extremely important source of comfort and confidence among investors and organizations. A key player in setting a corporate governance framework is the “Board of Directors” and subsequently its corresponding committees. The board may include executive and non-executive directors and can be in the form of a unitary or two-tier board. However, many ethical issues poses a real threat to the board and its sound operations and therefore stems the need for corporate governance acts. Several roles and activities have been taken by the board of directors in relation to setting a governance framework in the business environment. A small summary of such acts would include communication with executives on shareholders’ interests on a regular basis, setting business strategies in line with shareholders’ interests, ensuring compliance with best practices, risk identification and acts promoted to address such risk factors and finally maintaining integrity in relationships with the supply chain and customers’ base. In addition to the direct roles of the board of directors, the subsequent board committees also have a role in the framework setting of corporate governance. Such roles would include developing and recommending to the board corporate governance principals, annual evaluation of CEO performance, evaluating and approve programs that are relevant to corporate governance best practices, overseeing processes of disclosure and their compliance with international and local regulations and finally insuring the integrity of the listed company’s financials.

Role of Board of Directors in Corporate Governance Agency theory, which arises due to conflict of interest between management and corresponding corporate shareholders, was the basic stimulus that gave way to the development of new checks and balances commonly known as corporate governance acts. Such acts would include a wide array of regulations and laws, commonly in areas such as monitoring and incentives, directed towards the alignment of management and shareholders’ interests. The basic player in such corporate governance acts in any corporation is its board of directors and hence its corresponding committees. None the less, the board of directors face a lot of ethical issues in its operations, and therefore its imperative role in combating them with a comprehensive corporate governance strategy is inevitable and essential. Nearly all corporations are run by a board of directors which is elected by the shareholders to act on their behalf in the corporation. As such, the board of directors is commonly known to be the proxy of shareholders and hence to act in the way best to optimize shareholders’ interests. According to the article “Corporate governance: the board of directors and standing committees”, the board of directors segments directors into two different types, executive directors who are full time employees of the firm and are involved in the day to day business and operations, and nonexecutive directors who are not defined as full time employees of the firm they have interests in, but employees of other firms. Moreover, a board of directors can be defined as unitary or two-tier. The same article defines a unitary board, such as the ones adopted in USA, UK South Africa and Australia, to have a set of executive and non-executive directors serving together on one board; on the contrary, a two-tier board separates directors’ responsibilities between operations and supervision where generally the supervising board oversees the operating one. A board of directors, whether unitary or two-tier, holds many duties and responsibilities to be implemented. A brief summary of a board of directors’ general responsibilities include, but not limited to: evaluating financial reports and annual budgets, planning with management on short and long term needs, establishing compensation structures, giving authorization to executives, appointing specific committees for better execution of rules and laws and finally disclosing conflict of interests (Russel, 2015).

The Ethical Threats to Board of Directors As it appears to be the board of directors is generally faced by a bundle of ethical issues in its day to day activities and on a general operations basis. Such activities hinder the ability of a sound board of directors to act in the most efficient way and hence combating them with a thorough corporate governance policy is a must. Maybe the most prominent ethical concern of all issues is conflict of interest between management and shareholders represented by the board. The famous Wells Fargo case of releasing bank statements to shareholders with management willingly participating in actions that are not ethically sound to its customers to meet sales targets and increase their compensation packages is a perfect example of such a conflict of interest case (Gandel, 2016). Another ethical issue faced by the board, mainly the compensation committee, is the executive compensation packages given to higher management and how it is going to explain such highly remunerated individuals to junior employees and more importantly to the shareholders (Nash, 2013). Finally, according to the article “The Top Five Governance Issues Facing Nonprofits Today” the risk of losing ethical accountability plays a very important role in determining how corporations will encompass rules and regulations targeted at customers, funders and shareholders’ confidence. It is important to note that there are other issues that the board of directors is currently facing which may include the risk of data privacy or more commonly known as cyber security, social media risks, industry specific rules and regulations and bribery/corruption. In the face of globalization and technological advancement, the political uncertainty and dynamic economies pose as well strategic risk factors for the board of directors.

Role of Board of Directors in Corporate Governance As it has been introduced above, the board of directors faces a lot of ethical dilemmas in its operations, hence its active role in setting corporate governance rules and regulation to combat such ethical issues is certain. An immensely large number of acts are deployed by the board of directors in an aim of putting forth a solid foundation to corporate governance. According to Karmacharya, the role of the board in setting such a foundation includes monitoring the disclosure processes, setting business strategies in line with shareholders’ interests, ensuring a good organizational structure for implementation of decisions, communication with executives on

shareholders’ interests frequently, evaluating and monitoring the execution of organizational strategies and plans, promoting good will, selecting, monitoring and compensating executives, aligning executive remuneration with long term strategies and finally guaranteeing transparent elections. In addition to the roles mentioned, the board of directors’ responsibility in corporate governance does not stop there. The board can also engage in other acts to promote governance such as appointing honest and proficient executives, ensuring compliance with best practices, keeping shareholders up-to-date with all relevant events and occurrences and implementing an effective succession planning program for managers (Ganac, 2014). Furthermore, a boards’ responsibility in the area of governance extends to include factors such as risk identification and compliance acts to address such risk factors, code of conduct implementation and establishing board reporting policies such as hotlines (Roach, 2008). Finally, additional responsibilities a board can take upon in setting a sound governance strategy may include acting in good faith for the organization’s interests, maintaining integrity in relationships with its supply chain and customers’ base, compliance with legal/statutory requirements and total commitment to the firm (Jan & Sangmi, 2016).

The Role of Board Committees in Corporate Governance When addressing a topic such as the above, the importance of board committees in adopting governance issues as well has to be taken into consideration. The NYSE segments board committees into three, “Nominating and Corporate Governance Committee”, “Compensation Committee” and the “Audit Committee”. To start with the Nominating and Corporate Governance Committee’s role, this committee facilitates such a framework, according to the “Corporate Governance and Nominating Committee Charter” of Goldman Sachs, through evaluating the board’s performance, annual evaluation of CEO performance, developing and recommending to the board corporate governance principals and reviewing corporate code of ethics and conduct. Moreover, in addition to the roles mentioned, the NYSE specifies director and board committee nominations as one of the most important roles for this committee in the governance framework as it retains the quality and independence of the nominees. The second committee included in corporate governance framework setting is the Compensation Committee. According to the article “Compensation Committee Responsibilities and Best

Practices” a sound compensation committee’s responsibilities in setting a good governance framework includes evaluating and approving programs that are relevant to corporate governance best practices, compensation adjustments to CEO and executives and overseeing CEO succession. The NYSE mandate specifies as well this committee’s role in the framework setting as determining the long term incentive component of the CEO compensation and the right to appoint a compensation consultant to aid it in implementing its responsibilities if and when needed. Finally the third committee included in the framework setting under the board of directors is the Audit Committee. The audit committee plays a very vital role in this framework setting as most of its roles relate to governance policies. According to Al-Baidhani, the roles of an audit committee in corporate governance include preserving the independence of internal auditors, overseeing the efficiency of the organization’s internal control, nominating and selecting external auditors and requiring them to submit their audit process proposals, monitoring financial reporting, regular interaction with the CFO, appointing external specialists when major problems arise in accounting standards, overseeing processes of disclosure and their compliance with international and local regulations and finally considering with management the best procedures used to identify and deal with risks that pose a threat to the organization’s ability to reach its goals and targets. In addition to the mentioned roles, the NYSE mandate also specifies some roles and functions of the audit committee in the governance framework such as insuring the integrity of the listed company’s financials and discussing earning to be released to the public, analysts and rating agencies. The board of directors and its corresponding committees play an extremely, if not the most, vital role in setting the corporate governance framework of an organization. Such a framework would enhance better information disclosure, financial reporting, advanced business environment and a highly transparent set of rules and regulations which would not only benefit the organization internally, but would also reflect back on the economy in terms of higher local and foreign direct investments, higher confidence in the market place and better competitiveness among corporations. Corporate governance, in a personal opinion, was and will still be one of the most vital source of confidence in the market and among investors seeking interest in organizations and their operations.

Reference list

Al-Baidhani, A. (2014). The Role of Audit Committee in Corporate Governance: Descriptive Study. Retrieved from https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2487167

Ganac, C. (2014). The Role of Board of Directors in Corporate Governance and Policy Making. Retrieved from https://www.slideshare.net/Ganac/the-role-of-the-board-of-directors-incorporate-governance-and-policy-making

Gandel, S. (2016). Wells Fargo Exec Who Headed Phony Accounts Unit Collected $125 Million

Jan, S., & Sangmi, M (2016). The Role of Board of Directors in Corporate Governance. Imperial Journal of Interdisciplinary Research (IJIR), 2 (5, 2016). Retrieved from http://www.onlinejournal.in/IJIRV2I5/128.pdf

Karmacharya, B. (2013). Role of Board of Directors in Corporate Governance. Retrieved from https://www.slideshare.net/kbeejay/cg-seminar-bijay

Nash, S. (2013). The Top Five Issues Facing Boards. Retrieved from https://www.corporatesecretary.com/articles/boardrooms/12422/top-five-issues-facingboards/# Roach, D. (2008). The Board of Directors’ Role in Compliance & Ethics. What Can It Do To Prevent Mishaps? Retrieved from https://www.chausa.org/docs/default-source/healthprogress/the-board-of-directors-role-in-compliance-and-ethics-pdf.pdf?sfvrsn=0

Russell, A. (2015). The Role of Board of Directors in Corporate Governance. Retrieved from https://www.linkedin.com/pulse/role-boards-directors-corporate-governance-andrewrussell

Compensation Committee Responsibilities and Best Practices-Chapter 6 Summary. Retrieved from http://paygovernance.com/chapter-6-compensation-committee-responsibilities-andbest-practices/

Corporate Governance and Nominating Committee Charter. Retrieved from http://www.goldmansachs.com/investor-relations/corporate-governance/corporategovernance-documents/corp-gov-charter.pdf

Corporate Governance: The Board of Directors and Standing Committees. Retrieved from http://www.accaglobal.com/content/dam/acca/global/PDF-students/2012s/sa_oct12f1fab_governance.pdf

New York Stock Exchange Manual. Retrieved from http://nysemanual.nyse.com/LCMTools/PlatformViewer.asp?selectednode=chp_1_4_3_9 &manual=%2Flcm%2Fsections%2Flcm-sections%2F

The Top Five Governance Issues Facing Nonprofits Today. Retrieved from https://www.suntrust.com/resourcecenter/article/the-top-five-governance-issues-facingnonprofits-today#.WMJ7zW996pp