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CORPORATE GOVERNANCE
STI400

OBJECTIVES :

• Identify the difference between decision management and decision control.

• Understand the role of the board of directors.
• Understand that the board of directors is ultimately responsible for the business
and its affairs.
• Provide an overview of what the oversight function entails.
• Identify and explain the fiduciary duties of the board of directors.
• Gain awareness of the variety of board models.
• Identify the board attributes that affect the quality of monitoring and oversight.
• Illustrate the importance of an independent board of directors.
• Become familiar with the best practices of determining directors’ compensation.
• Identify and describe the determinants of an effective board of directors.

SESSION 2 • Become familiar with board accountability, evaluation, and the legal obligations
and liabilities facing outside directors of public companies.
BoD roles and responsibilities

Role of the Board of Directors

The board of directors is ultimately responsible for the Many state laws require a corporation to form
company’s business affairs and governance as stated in its a board of directors to represent shareholders
governing documents, including the articles of and make decisions on their behalf.
incorporation, the by laws, and shareholder agreements.
The success of the board of directors depends
The board of directors is directly responsible for defining the company’s on the composition, structure, resources,
objectives; establishing policies and procedures to ensure achievement of diligence, and authority of the entire board, as
well as their working relationships with other
defined objectives; monitoring the established policies and procedures;
participants of corporate governance,
assuming ultimate accountability for the company’s business and affairs; and
including management, external auditors,
ensuring that the company is conducting its business in the utmost ethical, internal auditors, legal counsel, professional
legal, and professional manner to create long-term shareholder value while advisors, regulators, standard-setting bodies,
protecting the interests of other stakeholders. and investors.

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Roles and responsibilities of boards of directors are to:
(1) Represent shareholders and create shareholder value.
(2) Align the interests of management with those of shareholders while protecting the interests of other
stakeholders (customers, creditors, suppliers).
(3) Define the company’s mission and goals.
(4) Establish or approve strategic plans and decisions to achieve these goals.
(5) Appoint senior executives to manage the company in accordance with the established strategies, plans,
policies, and procedures.
(6) Oversee the company’s performance by setting objectives, establishing short-term and long-term strategies to
achieve these objectives, and assessing the performance of senior executives in fulfilling their responsibilities
without micromanaging.
(7) Approve major business transactions and corporate plans, decisions, and actions according to the bylaws.
(8) Develop and approve executive compensation, pension, post-retirement benefits plan, and other long-term
benefits, including stock ownership and stock options.
(9) Review financial reports, including audited annual financial statements, quarterly reviewed financial
statements, and other important financial disclosures such as management discussion and analysis (MD&A)
earnings releases and reports filed with regulators (SEC) or disseminated to the public.
(10) Review management’s report on the effectiveness of internal control over financial reporting.
Fiduciary Duties of Board of
Directors
The fiduciary duty means that, as shareholder’s guardians,
directors are trustworthy, acting in the best interest of
shareholders, and investors in turn have confidence in the
directors’ actions. Fiduciary duties of boards of directors
are mandated by the laws of the state of incorporation, are
generally specified in the company’s charter and bylaws,
and are often interpreted by courts when there are
allegations of breach of fiduciary duties. Directors should
realize that their primary duty is to be the corporate
gatekeeper by protecting investors and working towards the
achievement of shareholder value creation and
enhancement while protecting the interests of other
stakeholders.
The corporate governance literature presents the following
fiduciary duties of boards of directors:
• Duty to avoid conflicts of interests - potential
conflict of interest may occur when director:
receives a gift from a third party he is doing business
with, either directly or indirectly enters into a
transaction or arrangement with that company,
obtains substantial loans from the company, or
engages in backdated stock options.
• Fiduciary Duties and Business Judgment Rules -
directors operate under a legal doctrine called
“business judgment rules”. Under that law directors
that make decisions in good faith, based on rational
reasoning, and an informed manner can be protected
from liability to the company’s shareholders in the
ground that they appropriately fulfilled their fiduciary
duty of care.
Note : Situations that may create potential conflicts of interest are when a
director: (1) receives material gifts or benefits from a third party that is
doing business with the company; (2) either directly or indirectly enters
into a transaction or arrangement with the company; (3) obtains
substantial loans from the company; or (4) engages in backdated stock
options.
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(11) Provide counsel to the company’s senior executives, especially the CEO,
on material strategic decisions and risk management.
(12) Ensure the company’s compliance with applicable laws, rules, and
regulations.
(13) Approve the company’s major operating, investing, and financial
activities.
(14) Set the tone at the top by promoting legal and ethical conduct
throughout the company.
(15) Evaluate the performance of the board, its committees (e.g., audit,
compensation, and nominating), and the members of each committee.
(16) Hold the board, its committees, and directors accountable for the
fulfillment of the assigned fiduciary duties and oversight functions.
(17) Approve dividends, financing, capital changes, and other extraordinary
corporate matters.
(18) Oversee the sustainability of the company in creating long-term
shareholder value and protecting interests of other stakeholders.
Fiduciary Duties of Board of Directors
Duty of Due Care - determines the manner in which directors
should carry out their responsibilities. Failure to uphold the
set stipulations may constitute a breach of the fiduciary duty
of care of expected directors.
Duty of loyalty - requires directors to refrain from pursuing
their own interests over the interests of the company.
Breach of loyalty can occur even in the absence of conflicts
of interest if directors consciously disregard their duties to
the company and its shareowners.
Duty of Good Faith – Its an important of directors fiduciary
obligations, and any irresponsible, reckless, irrational or
disingenuous behaviors or conduct can breach that fiduciary
duty.
Duty to promote success – directors should act in a good
faith and promote the success of the company to benefit of
its shareholders and other stakeholders. Includes: approving
the establishment of strategic goals, objectives and policies
that promote enduring shareholders value as well as protect
existing value
Duty to exercise due diligence, independent judgment, and
skill - directors should be knowledgeable about the
companies’ business and affairs, continuously update their
understanding of the company activities and performance,
and use reasonable diligence and independent judgment in
making decisions.
Board Committee
Board committees normally function independently from each other, are
provided with sufficient resources and authority, and are evaluated by the
board of directors.
THUS board committee are a subset of the board and perform specific
functions that assist the board in discharging its advisory and oversight
responsibilities.
Public companies usually have the following board committees:
• Audit committee
• Compensation committee
• Governance committee
• Nominating committee
• Disclosure committee
• Other standing or special committees
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Board Models
• Audit Committee – composed of at least three independent directors; should be
formed to implement and support the oversight function of the board, specifically in
the areas related to the internal controls, risk management, financial reporting, and
audit committees. • One-Tier Board Model - consists of both inside (executive) directors
and outside (nonexecutive) directors. Inside directors are perceived One –
• Compensation Committee – composed of at least three independent directors; serves as the decision managers and outside directors are assumed to have
to design, review, and implement ‘directors’ and ‘executives’ compensation plans. the power and duty to monitor those decisions. Tier
Model
• Governance Committee - consist of both executives and nonexecutives directors;
should be established to advise, review, and approve management strategic plans, • Two-Tier Board Model - The two-tier board system, consisting of a
decisions, and actions in effectively managing the company. supervisory board and a management board, better known as the
Two-
German board model, establishes different authorities and
• Nominating committee – composed of at least three independent directors; should be responsibilities for members of each board. tier
formed to monitor issues pertaining to the recommendations, nominations and
elections activities of directors.
Model
• Modern Board Model - the structure of the modern board based on Modern
• Disclosure committees – this committee is usually led by corporate counsel, CFO’s, or the two components of strategic board and oversight board is the
controllers. It is responsible for reviewing and monitoring the company’s 10-Ks, 10-Qs, natural offshoot of the emerging corporate governance reforms. Board
and other SEC fillings, earning releases, materiality issues, conference call scripts, Model
and presentations to the investors by senior management.
• Special committee – the board of directors may form a special committee to assist
the board in carr ying out its strategic and oversight function, including financing,
budgeting, investment, mergers and acquisitions.

Board Characteristics
• Resources – board of directors should have
• Board Leadership – The effectiveness of board meetings depends
adequate resources to effectively fulfill its
largely on the leadership ability of the chairperson to set an agenda oversight functions. Resources available to
and direct discussions. The board agenda is usually prepared by
chairperson in collaboration with the CEO.
the board consist of legal, financial, and
• CEO Duality – implies that the company’s CEO holds both the position
information resources.
of chief executive and the chair of the board of directors. The are pros • Board Independence – implies that, to be
and cons of that model, but investors usually prefer to separate the
positions. If they don’t, then it is preferable that the company’s board
consists of a ‘substantial’ majority of independent directors.
independent director shouldn’t have any
relationship with the company other than
• Lead Director – demand for Lead Director increased because of the his or her directorship that my compromise
presence of CEO duality, resulting from growing concer n that duality
places too much power in the hands of CEO, which may impede board
independence.
the director’s objectivity and loyalty to the
companies shareholders.
• Board Authority – is granted trough shareholder elections. SOX
substantially expanded the authority of directors, particularly audit
committee members, as being directly responsible for hiring, firing,
• Director compensation – best practices
compensating, and overseeing the work of the companies’ independent suggest that increases in stock ownership,
auditors. reduction in cash payments, and charges in
• Responsibilities – the primary responsibility of the board of directors
that the companies assets are safeguarded and that managerial
compensation should be aligned with
decisions and actions are made in a manner of maximizing shareholders long-term interest determined
shareholders wealth while protecting the interests of other by board, approved by shareholders, and
shareholders.
fully disclosed in public reporting.

Board Selection Director Education and Evaluation

• Corporate governance reforms and best

practices issued by a number of
Traditionally
Have been using a plural voting system to elect
corporate directors. It has been argued that a
organizations recommend continuous
plurality vote system gives too much power to
executive directors and management to
education and evaluation of the board of
influence the election of outside directors. directors.
• Evaluation of the company’s board should
be performed formally and regularly (at
There have been moves toward requiring least annually) through either self-
Now majority vote election procedures for corporate
directors. For example, the California Public
evaluation, independent committee
Employees’ Retirement System (CalPERs) board
adopted a three-pronged plan to advocate
evaluation (audit, compensation,
majority vote requirements. nominating), or outside consulting
evaluations.

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Board Accountability Effective Corporate Boards

• Accountability to shareholders, the company’s board of

directors is accountable to shareholders for protecting their
rights and interests
- Accountability for Board Operation.
- Accountability for Strategic Decisions and Performance, the
company’s BoD should oversee the appropriateness and
soundness of managerial strategic plans, decisions, actions
and performance.
(1) Create and open and engaging boardroom atmosphere
(2) Maximize the value of the board’s time commitment by establishing
clear roles and responsibilities within an appropriate structure
(3) Deter mine the information the board needs and ensure it is delivered in
a timely manner
(4) Dedicate time to strategic issues
(5) Create a transparent, explicit, and accountable executive pay process
(6) Actively engage in CEO succession planning
(7) Access the strength of the company’s management talent
(8) Monitor the companies enterprise risk management system

Director Liability
• What are the direct responsibilities of the board
• One way to influence directors’ ethical conduct and create of directors?
more accountability for them is to increase their legal
liability for poor performance and business misconduct. • Describe the importance and objectives of
directors’ fiduciary duties to the company.
• Directors are not reasonably expected to have first-hand • Explain the impact of the Business Judgment Rule
knowledge of all company business affairs under their on directors’ ability to fulfill their fiduciary duties.
oversight capacity. Nevertheless, directors are responsible
for ascertaining the validity, reliability, and quality of • What are possible situations that could jeopardize
information provided to them. In most circumstances,
directors make decisions by relying on information a director’s duty to avoid conflicts of interest?
furnished by corporate
• officers, employees, and professionals, including legal
counsel and accountants. Thus, the effectiveness of their
performance depends on the validity and quality of the
information provided to directors.

END OF SLIDE
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