Jimuel D.

De La Rosa
MKTMGT 2201
MGT 202- Good Governance and Social Responsibility

Chapter 4: Board of Directors: A Powerful Instrument in Governance

Subtopic No. 1
Board of Directors in Corporate Governance

What Is Board of Directors (B of D)?

A board of directors (B of D) is an elected group of individuals that represent

shareholders. The board is a governing body that typically meets at regular intervals to set
corporate management and oversight policies. Every public company must have a board of
directors. Some private and nonprofit organizations also have a board of directors. The board of
directors is elected to represent shareholders’ interests.

Internal board members are not usually monetarily compensated for their work, but
outside board members are paid. The board makes decisions concerning the hiring and firing of
personnel, dividend policies and payouts, and executive compensation. A board member is likely
to be removed if they break foundational rules, for example, engaging in a transaction that is a
conflict of interest or striking a deal with a third party to influence a board vote. A board of
directors is elected by shareholders but nominated by a nominations committee.

Every public company has a board of directors, and it is the board of directors that
governs the organization. The directors owe a fiduciary duty to the venture. The board must act
honestly, in good faith and in the best interests of the venture. But good governance by a board
of directors is much more than governance. Often-stated references to good governance include
the following:

 Vision: Envisioning the future and developing the mission

 Direction: Setting goals and policies

 Transparency: Maintaining open processes, shared information, effective

communication standards, and regular and meaningful reports

 Guidance: Providing advice and direction

  Due diligence: Getting inside the metrics and judging the risks involved

 Commitment: Being engaged emotionally and intellectually to the venture’s

course of action

Much has been written on the subject of good governance. Essentially, a board provides
good governance when it is able and willing to ask the right questions at the right time and to
provide good advice while demonstrating confidence in the venture.

A board of directors is essentially a panel of people who are elected to represent

shareholders. Every public company is legally required to install a board of directors; nonprofit
organizations and many private companies – while not required to – also name a board of
directors.
The board is responsible for protecting shareholders’ interests, establishing policies for
management, oversight of the corporation or organization, and making decisions about important
issues a company or organization faces.
Functions of a Board of Directors

In a broad sense, a corporate board of directors acts as a fiduciary for shareholders. The

board is also tasked with a number of other responsibilities, including the following:

 Creating dividend policies
 Creating options policies
 Hiring and firing of senior executives (especially the CEO)
 Establishing compensation for executives
 Supporting executives and their teams
 Maintaining company resources
 Setting general company goals
 Making sure that the company is equipped with the tools it needs to be managed
well

Concept of Board of Directors

Any public limited or private company needs to have a board of directors constituted for
the purpose of oversight and accountability to the company. The concept of the board of
directors is that it provides an umbrella for the company to operate in and ensures that the
decisions and actions taken by its management are reviewed and held to the mirror. The reason
for the existence of the board of directors is that there needs to be a body that is above the
management and which can be accountable to the regulators and shareholders for the decisions
taken by the management of the company. Hence, it is common to find many members of the
management sitting on the board as executive directors. Again, it is for this very purpose that the
regulators deem the company to have a certain percentage of directors in the non-executive
capacity and those who are independent.

In recent years, the concept of the board has become crucial for corporate governance
because of the incidence of several corporate scandals involving unethical conduct by the
management.

In some of these cases like the Enron scandal and the Satyam scandal in India, the board
was found to have played a major role in facilitating the scandal. This has led to the regulators
asking for greater oversight from the board and to make the board accountable to its
shareholders. Of course, there are many instances that prove the contrary where the board has
stepped in to stem the rot that the management has through its actions engendered. Prominent
among these are the actions of Reebok in recent months where the board asked the top leadership
to resign in the wake of corporate scandals involving them.

The concept of the board has been introduced explicitly to ensure that ethical and
normative rules of conduct of corporate governance are followed. The point here is that since the
buck stops with the board of directors, shareholders and regulators know who to turn to in case
they have queries or doubts about the decisions taken by the company. In many cases, the board
of directors acts as the ombudsman as well for shareholder complaints and grievance redressal.
Further, the board of directors is comprised of individuals with exemplary records of managing
companies and hence it is expected that the board of directors would provide technical and
managerial guidance to the way in which the company is run.

Finally, the concept of the board of directors is also important for the way in which it is
deemed to play a pivotal role in providing good corporate governance. In most cases, the way in
which the company is governed depends on the way in which the board directs the management
in its operation of the company. This is relevant to the contemporary times where the managerial
class has been found to enrich itself at the expense of the company and its shareholders. It is for
this reason that the board of directors is expected to steer the company away from agency
problems, conflicts of interest and asymmetries of information in the way shareholders are
briefed about the decisions taken by the company.

The board attends board meetings to evaluate managerial performance, decide on

executive compensation, assess the prospect of an acquisition or merger, decide on the dividend
policy and create a stock-option policy. The board is acting as a fiduciary on behalf of the
company’s shareholders and is seeking to protect their rights.
 Additional duties of a board member include assisting an organization to set its goals and
objectives, support executive management in executing their duties, and ensuring that the
organization has adequate resources to achieve effective operations. Often, the board of directors
organizes separate committees, which are dedicated to specific decision-making projects. For
example, issues of executive compensation are handled by the compensation committee; issues
about potential merger and acquisitions are handled by the finance committee and so on.
Corporate governance is fundamental for a firm to maintain good standards and an ethical
code of doing business. Ineffective governance may compromise effective management and
cause great problems to an organization. Effective governance, on the other hand, can greatly
assist organizational performance, allowing room for exchanging ideas, suggesting new policies
and working in a synergistic manner.

Basic structure of a Board of Directors

The structure, responsibilities, and powers given to a board of directors are determined by
the bylaws of a company or organization. The bylaws generally determine how many board
members there are, how the members are elected, and how frequently the board members meet.
There’s not a set number or structuring for a board of directors; it depends largely on the
company or organization, the industry in which the company or organization operates, and the
shareholders.
It’s widely agreed upon that the board needs to represent shareholder and
owner/management interests and that it’s usually a good idea for the board to include both
internal and external members. Accordingly, there is usually an internal director – a member of
the board that is invested in the daily workings of the company and manages the interests of
shareholders, officers, and employees – and an external director, who represents the opinions and
interests of those who function outside of the company.
There is no convenient formula for defining how many directors a company should have,
though in some jurisdictions company law specifies a minimum and/or Maximum number of
directors for different types of company. The board of directors is made up of executive directors
and non-executive directors.

 Executive directors are full-time employees of the company and, therefore, have two
relationships and sets of duties. They work for the company in a senior capacity, usually
concerned with policy matters or functional business areas of major strategic importance.
Large companies tend to have executive directors responsible for finance, IT/IS, marketing
and so on.
 Non-executive directors (NEDs) are not employees of the company and are not involved in
its day-to-day running. They usually have full-time jobs elsewhere, or may sometimes be
prominent individuals from public life. The non-executive directors usually receive a flat fee
 for their services, and are engaged under a contract for service (civil contract, similar to that
used to hire a consultant.

KEY POSITIONS
The chairman of the company is the leader of the board of directors. It is the Chairman's
responsibility to ensure that the board operates efficiently and effectively, get the best out of all
of its members. The chairman should, for example, promote regular attendance and full
involvement in discussions. The chairman decides the scope of each meeting and is responsible
for time management of Board meetings. ensuring all matters are discussed fully, but without
spending limitless time on individual agenda items. In most companies the chairman is a non-
executive director.
The chief executive officer (CEO) is the leader of the executive team and is responsible for the
day-to-day management of the organization. As such, this individual is nearly always an
executive director. As well as attending board meetings in his or her capacity as a director, the
CEO will usually chair the management committee or executive committee. While most
companies have monthly board meetings, it is common for management/executive committee
meetings to be weekly.
The secretary the chief administrative officer of the company. The secretary provides the agenda
and supporting papers for board meetings, and often for executive committee meetings also. He
or she takes. minutes of meetings and provides advice on procedural matters, such as terms of
reference. The secretary usually has responsibilities for liaison with shareholders and the
government registration body. As such, the notice of general meetings will be signed by the
secretary on behalf of the board of directors. The secretary may be a member of the board of
directors, though some smaller companies use this position as a means of involving a high
potential individual at board level prior to being appointed as a director.

Why Is a Board of Directors Important in a corporation?

For over 150 years, boards have provided varying experience, insight, and wisdom (some from
within the company/industry and some from outside of it). Since companies are composed of
many shareholders, it would be impossible for them to gather and agree on policies and
decisions. By electing a board, shareholders participate in many company decisions but do not
need to be directly involved in the day-to-day aspects of operations.

How a Board of Directors (B of D) Works?

In general, the board makes decisions as a fiduciary on behalf of shareholders. Issues that fall
under a board's purview include the hiring and firing of senior executives, dividend policies,
options policies, and executive compensation. In addition to those duties, a board of directors is
responsible for helping a corporation set broad goals, supporting executive responsibilities, and
ensuring the company has adequate, well-managed resources at its disposal
The board of directors should represent both management and shareholder interests and
include both internal and external members. An inside director is a member who has the interest
of significant shareholders, officers, and employees in mind and whose experience within the
company adds value. An insider director is not typically compensated for board activity as they
are often already a C-level executive, major shareholder, or another stakeholder, such as a union
representative.

Independent or outside directors are not involved in the day-to-day inner workings of the
company. These board members are reimbursed and usually receive additional pay for attending
meetings. Ideally, an outside director brings an objective, independent view to goal-setting and
settling any company disputes. When putting together a board, It is considered critical to strike
a balance of internal and external directors.

The structure and powers of a board are determined by an organization’s bylaws.

Bylaws can set the number of board members, how the board is elected (e.g., by a shareholder
vote at an annual meeting), and how often the board meets. While there is no set number of
members for a board, most range from three to 31 members.

Election and Removal Methods of Board Members

While members of the board of directors are elected by shareholders, which individuals
are nominated is decided by a nomination committee. In 2002, the NYSE and NASDAQ
required independent directors to compose a nomination committee. Ideally, directors’ terms are
staggered to ensure only a few directors are elected in a given year. 1
Removal of a member by resolution in a general meeting can present challenges. Most
bylaws allow a director to review a copy of a removal proposal and then respond to it in an open
meeting, increasing the possibility of a rancorous split. Many directors’ contracts include a
disincentive for firing—a golden parachute clause that requires the corporation to pay the
director a bonus if they are let go.
Breaking foundational rules can lead to the expulsion of a director. These infractions
include but are not limited to the following:
  Using directorial powers for something other than the financial benefit of the
corporation
 Using proprietary information for personal profit
 Making deals with third parties to sway a vote at a board meeting
 Engaging in transactions with the corporation that result in a conflict of interest

Corporate Governance and the Board of Directors

The board of directors is the primary direct stakeholder influencing corporate
governance. Directors are elected by shareholders or appointed by other board members, and
they represent shareholders of the company.
The board is tasked with making important decisions, such as corporate officer
appointments, executive compensation, and dividend policy. In some instances, board
obligations stretch beyond financial optimization, as when shareholder resolutions call for certain
social or environmental concerns to be prioritized. A board of directors should consist of a
diverse group of individuals, those that have skills and knowledge of the business, as well as
those who can bring a fresh perspective from outside of the company and industry.
Boards are often made up of inside and independent members. Insiders are major
shareholders, founders, and executives. Independent directors do not share the ties of the
insiders, but they are chosen because of their experience managing or directing other large
companies. Independents are considered helpful for governance because they dilute the
concentration of power and help align shareholder interests with those of the insiders.

The board of directors must ensure that the company's corporate governance policies
incorporate the corporate strategy, risk management, accountability, transparency, and ethical
business practices. Corporate governance refers to how a board directs and manages the
corporation, taking into account the impact of decisions on employees, customers, suppliers,
communities and shareholders.

The board oversees the conduct of the business and supervises management. Corporate
statutes allow directors to delegate certain powers to the officers of the corporation such as the
CEO or CFO. The board delegates responsibility for the company’s day-to-day affairs to the
executives.

The board may also have audit and compensation sub-committees. The members of the
committee will be subsets of the board and report back to the board of directors on specific
issues.
 What Is the Appropriate Board Composition?
Boards tend to look differently in the early stages of development. Early-stage boards
usually include one or more founders. Boards are typically smaller in the early stages, with five
to seven board directors having various areas of expertise. Odd numbers prevent tie votes. Each
board director gets one vote.
The size of boards typically increases with growth and is often related to the needs of the
corporation and the normal practices for the industry. As boards acquire investors, they usually
offer the CEO a board seat. Some investors will also insist that they get a board seat, so they can
visibly oversee their investments. Investors also often have influence on recruiting independent
board directors, who have increasing influence on the board and the corporation as the company
grows.
Best practices for corporate governance encourage boards to offer the majority of board
seats to independent directors. A well-composed board brings a diverse range of expertise,
perspectives and knowledge into the boardroom. Regulators, investors and others are also
making a big push for boards to consider diversity in a multitude of realms, including age,
gender, experience, ethnicity, race, religion, skills and experiences.

Benefits of good corporate governance and examples

With the support of a solid compliance culture, boards of directors can benefit in a
multitude of ways from best-practice corporate governance. Below are some good corporate
governance practices and examples.
Encouraging positive behavior. “Having clearly delineated policies and processes and a
board of directors and executive managers who maintain the compliance culture directly supports
improved results,” writes chartered secretary Monique Legair. It is imperative that all board
members themselves participate in that culture, ensure clear lines of communication with
management and the rest of the organization, and are immediately responsive to any evidence
that part of the organization is not participating.
Reducing the cost of capital. In today’s volatile environment, the implementation of
good governance practices can lead to a reduction in a company’s cost of capital. An
organization that is seen to be stable, reliable and able to mitigate potential risks will be able to
borrow funds at a lower rate than those with weak corporate governance. Companies with debt or
equity investors may find that their investors pay a premium to work with a company that has a
sound governance framework.
Improving top-level decision-making. There is a strong and demonstrable link between
an organization’s governance and rapid decision-making associated with improved
performance, explains the Corporate Governance Institute in a recent report. Moreover, a number
of performance failures have been directly linked to poor governance. There is no doubt that
good governance assures rapid access to information and the good communication among
stakeholders that leads to better results. Good governance also enables rapid and accurate
prioritizing of actions. This can prove invaluable in enabling the organization to weather tough
economic storms and supports the organization’s sustainability.

Assuring internal controls. By implementing corporate governance correctly across the

organization, the board may be certain that an adequate and effective control environment is in
effect, with the level of assurance associated with each important component of governance.
What’s more, the board or the board committee is better positioned to take action when the
controls signal non-compliance.

Enabling better strategic planning. With more rapid access to information and good
communication with management, boards are able to formulate more successful strategies. This
includes more efficient allocation of resources and capital. The strong governance framework
will further assist the board in some of the following ways – understanding the regulatory
environment governing the business; leveraging technology from a production, distribution and
communications point of view; and identifying and managing the reasonable interests of all
stakeholders in the business. All these components are essential elements of a robust strategic
plan.

Atracting talented directors. Bringing in talented non-executive directors with

complementary skillsets helps to make an overall and comprehensive assessment of the overall
sustainability of the organization, including its level of compliance with relevant legislation. This
kind of new talent is vital to the sustainability of the organization which has to adapt to the ever-
evolving conditions of the market. For the candidate to the non-executive post, providing this
kind of environment is equally important.
What Is The Purpose Of Corporate Governance ? What Are Its Benefits?
 Ensures that the management of a company considers the best interests of
everyone;
 Helps companies deliver long-term corporate success and economic growth;
 Maintains the confidence of investors and as consequence companies raise capital
efficiently and effectively;
 Has a positive impact on the price of shares as it improves the trust in the market;
 Improves control over management and information systems (such as security or
risk management)
 Gives guidance to the owners and managers about what are the goals strategy of
the company;
 Minimizes wastages, corruption, risks, and mismanagement;
 Helps to create a strong brand reputation;
 Most importantly – it makes companies more resilient.
 Why is the board of directors important in corporate governance?
The role of the board is to plan and strategize goals and objectives for the short- and
long-term good of the company and to put mechanisms in place to monitor progress against the
objectives. To this regard, board directors must review, understand and discuss the company’s
goals.
Having a better board of directors can make a better governance and it really help the
corporation or company. The law imposes a number of important duties and responsibilities on
directors. A group of directors working within a board structure is particularly helpful in
bringing together expertise and advice, in areas such as:
 Strategic direction: ensuring your company develops and implements business
plans, strategies and policies to operate with profits and sustainability in mind
 Performance: helping you set and monitor performance targets
 Compliance: ensuring your company complies with its legal and accounting
requirements
 Risk: ensuring your company identifies and mitigates risks and looks for new
opportunities
Also, good corporate governance means that your business’s processes are aimed at
producing results which meet the needs of society and organizational prosperity while making
strategic use of its available resources. Being first practiced and influenced by leadership, –
because strong leadership is needed to drive inspiration within an organization – the steady
application of these policies and principles, among other things, intends to create a healthy,
compliant, transparent, and accountable corporate culture that is continuously reviewed and
improved in order to ensure that your behaviour aligns with the values your organization seeks to
embody. Good corporate governance has become a key focus area for businesses to position
themselves favorably in order to withstand a difficult economic climate.
Some of the benefits of good corporate governance include:

 Builds morale, reputation, and a legacy: Implementing procedures that

support good governance enhances a company’s identity where stakeholders and potential
investors are confident to place increased levels of trust in you, which in turn allows you to
develop stronger, longstanding relationships.
 Increases success rate for financial performance and enhances
sustainability: Implementing protocol for good governance is intended to assist with being
able to quickly identify issues as well as to quickly make decisions to resolve these potential
issues thus reducing the eventuality of a crisis and the cost it bears.
 Creates a greater ability to attract and retain talent: A significant focus
has been placed on culture being a key contributing factor to the success of a company.
Maintaining transparency surrounding fairness, accountability and operations, gives your
employees a greater sense of responsibility and awareness as to where they are positioned to
create value within an organization.
  Creates an effective framework aimed at meeting business
objectives: Decision-making that takes into consideration major stakeholders such as
employees, suppliers and the community alike, has created a wider vision for successful
results. Providing each stakeholder with a percentage of valuable involvement creates a
more accountable culture, generating a higher potential to reach objectives within an
organization.
 Creates more opportunities to gain a competitive advantage: Every
industry is either constantly evolving or has the potential to evolve at a certain point;
adopting good governance and creating an environment where its practices can be sustained
is vital to ensuring that your organization is adaptable to change, thus providing a greater
competitive  advantage and chance at survival.
 Creates opportunities for investment: An organization that represents
stability and reliability increases its chances of attracting premium investors, as well as
increasing their opportunity to borrow funds at a better rate.
 Provides a practical way to guide decision-making at all levels: The
ability to make informed decisions can quickly improve performance and reduce the effects
of potential failures. One way to promote this kind of decision-making ability is to ensure
that information is readily available to key stakeholders, i.e. a culture of transparency.

Expanding Board of Directors can give the corporation a:

Better business performance: Independent directors can bring additional skills that your
business may be lacking. They can also contribute their experience, especially if they have been
through the growth stage of a company, like yours. Independent directors offer you an invaluable
source of expert advice and act as a ‘sounding board’ outside of your friend, colleague and
family networks. They also introduce their networks that you and your company can draw on.
Improved access to capital: Outside expertise can improve your company’s positioning
and credibility in the market. Establishing an independent board demonstrates that you are
committed to good governance and compliance. If you are trying to raise funds, investors will
have a greater degree of comfort if they can see real independence demonstrated in your board
and an audit committee, chaired by at least one experienced director with financial expertise.
Management accountability: By distinguishing between management and oversight you
take the next step in forming a business with intrinsic value. This enables greater attention to be
paid to both governing and managing respectively. Managers become accountable to the owners,
who are represented by the board.

REFERENCES:
 https://corporatefinanceinstitute.com/resources/careers/jobs/board-of-directors/

https://www.managementstudyguide.com/board-of-directors.htm

https://www.myaccountingcourse.com/accounting-dictionary/board-of-directors

https://investinganswers.com/dictionary/b/board-directors

https://www.investopedia.com/terms/c/corporategovernance.asp

https://aicd.companydirectors.com.au/resources/all-sectors/the-benefits-of-a-board

https://www.curasoftware.com/the-benefits-of-good-corporate-governance-2/

https://www.thecorporategovernanceinstitute.com/insights/lexicons/what-is-a-board-of-directors/