CHAPTER FOUR

4. THE STRUCURE AND ROLE OF BORDS

The principal governing authority of an enterprise is its board of directors. The board is the top
management organ responsible for implementing the objectives of an enterprise. One aspect of the
managerial and operational autonomy of a public enterprise is its insulation from political and
bureaucratic interference in its day-to-day activities and administration. The governing board is
the body typically entrusted with the function of protecting its enterprise from such interference,
as well as with the function of representing the government in the management of that enterprise.

Governing boards differ in their ability both to preserve the integrity of the enterprise and to give
administrative leadership according to the length and conditions of appointment. They do vary
widely in their structure, appointment/selection, character, role, powers and responsibilities.
Boards also have numerous problems in many respects like: uncertainty of tenure, inadequacy in
power and authority definition, lack of confidence and innovativeness. As a result of these, boards
may find themselves helpless, sandwiched between the political power of the state and the
managerial power of the enterprise's professionals.

For these and many other reasons, they remain weak and inefficient in most instances. This in turn
has an implication and reflection in the performance of public enterprises. The principal
proposition is that effective boards make effective enterprises and weak boards will produce weak
enterprises. In general, boards are in effect trustees, and the effectiveness with which the trust is
fulfilled will depend on the standing and credibility of the board vis-à-vis the professional
managers and the confidence placed in it by the government.

4.1 TYPES AND STRUCTURES OF THE BOARD OF DIRECTORS

The first issue, which needs careful examination is the type of board to be set up- its structure and
composition. There are five possible options in the setup of a board; namely no board, a wholly
external board, a wholly internal board, a two-tier board, and a composite board.
A) No Board
In this option, the top management of the enterprise is entrusted to a single individual. Although
this option may suit more to the needs of a parastatal, which has a regulatory or promotional
function of a non-public enterprise character, there are some instances of public enterprises
functioning under such arrangement. Prima facie, this option may appear attractive. Its advantages
are:
 It allows for speedy decisions, unhindered by laborious discussions and delays involved in
board meetings,
 It pinpoints responsibility and eases accountability
This option has also several disadvantages such as:
 It has the danger of placing too much authority and responsibility in one person
 It leaves the fate of the enterprise entirely dependent in that person's competence and
integrity
 It doesn't allow for participation of top management
 It makes no provisions for the leavening influence of outside opinion
 It makes the sole controller vulnerable to illegitimate pressure
Therefore, this option doesn't commend itself as a long-term arrangement. It can at best be
employed in a transitional basis.

B) A Wholly External Board

Many developing countries have adopted this pattern. Under this pattern, all members of the board,
except the managing director of the enterprise, are "outsiders". They are not employees of the
enterprise, nor are they directly responsible for specific management functions. It has some
obvious plus points or advantages such as:

 It provides for the nomination of external professionals with mature experiences who can
provide a "second option" and who can guide professional managers within the enterprise
 It allows for the nomination of interest groups such as consumer councils, trade unions,
environmental groups and academics
 It provides rooms for representatives of relevant government ministries and agencies
 Such external groups are unbiased by day to day problems of management, hence provides
an objective assessment of performance
The major drawbacks of this model are:
 The board members bear no direct responsibility for management
 It is possible that board members can be "manipulated" by an aggressive and skilful chief
executive
 Even worse is that the model excludes the top management from the highest policy-
making body
 It doesn't consequently provide for participative management and cadre building

C) A Wholly Internal Board

This is the obverse situation - the setting up of a board composed entirely of fulltime directors,
who are holding senior staff positions in the enterprise. Generally, they include the major
department heads such as the finance, production, marketing, and personnel managers. The chief
executive who holds the posts of chairperson and managing director preside. The advantages of
this option (model) are:

 It ensures professional competence

 It establishes a direct linkage between authority and responsibility
 It provides room for participative management
 It provides an atmosphere of incentive, involvement and motivation
 It opens up opportunities for senior managers to reach the top in terms of management and
career development and planning. It creates, for example, a pool of top management
capability from which the chief executive of public enterprises can be drawn

The major drawbacks of this option are:

 It is too "inbred", and doesn't provide exposure to a second opinion
 It makes no room for representation of relevant interest groups
 It shuts out the participation of the concerned government agencies

This pattern is seldom applied in the public sector and it may not be desirable, in the long run, to
encourage its emergence.

D )A Two-Tier Board
This model is an attempt to combine option "B" and "C" above. It has got a growing popularity in
many countries like Germany and USA. In effect two boards are set up:
(1) At the higher policy-making level, a supervisory board composed of outsiders
(2) At the operational level, a management board composed of the enterprise managers

The chief executive presides over the management board and is a member of the supervisory board,
thus providing a link between the two bodies. This option is attractive in that it has advantages
such s:
 It combines the advantages of options "B" and "C" and avoids the drawbacks.
 It provides a balance between participative management and the rigors of external control
 It has a particular validity in the case of public corporations servicing the general public
such as public transportation, electricity, and water supply systems

Problems do, however, arise when this model is put into operation such as:
 Difficulty in the demarcation of the authority and responsibility between the two boards
 The filtration of decisions through two levels might also create bureaucratic delays
 In practice, it is likely that one of the boards will "usurp" power making the other board
only a nominal body
 The possibility of the management board will run the enterprise, converting the
supervisory board into a sort of advisory or auditing council

E) A composite Board

This pattern would appear to provide most of the answers and perhaps for this reason it is being
increasingly adopted in many developing countries. The board is composed of a judicious blend
of "insiders" and "outsiders". From within the enterprise, the board includes the chief executive
and the senior managers controlling various operations. From the outside, the board includes
experts chosen for their professional experience and familiarity with the problems of the enterprise,
selected representatives of interest groups and concerned government ministries or agencies. This
model has all the advantages of option "D" with the additional merit that it secures cohesion and
unity of command.

4.2 SELECTION AND TENURE OF BOARD MEMBERS

Once the structure of the board is decided, the government will be faced with the question of
selecting appropriate board members. In the case of the internal members of the board, no
particular problem arises since they secure their seats in an ex-officio capacity as heads of various
management functions in the enterprise. The board of directors of a public enterprise is nominated
by the government as part of those areas proposed for state intervention in the affairs of public
enterprises. The manner in which this prerogative is exercised by the sate could well determine the
health and performance of the enterprise. For example, as studies reveal in developing countries,
political compulsion often outweigh managerial necessities in the assignment of board members
to an enterprise.

Many boards, perhaps most of them, are appointed by the minister of the administrative ministry,
and include some ex-officio members such as representatives of relevant bureaus. Boards are
typically composed of government officials, at least in the majority. Sometimes the ministers
themselves are also members of the governing boards of major public enterprises such as those,
which are in the holding companies of large number of development operations. Moreover, in
some countries like Zambia and South Korea, the presidents themselves were the board chairmen
of the paramount public enterprises. Governments need to be careful in deciding on the status of
their nominees. The real issue of selectivity arises in the nomination of non-officials. It would be
wise to keep the following guidelines in mind:

 They must have an awareness of government policies and development strategies,

 They must have adequate familiarity with the problems of the enterprise,
 Their credibility as professional experts must be recognized and respected by the in-house
professionals,
 They should have the time and interest to devote to regular attendance at and preparation
for board meetings,
 There should be no conflict of interest,

Some countries are building data banks of suitable candidates for appointment to the board of
public enterprises. The most common available source is the group of retired government officials
and public enterprise managers who have had proven success during their careers. With regard to
the their tenures, their members may serve sometimes full-time and in other cases part-time, they
sometimes tenures of specified time and in other instances may have none at all, serving at will.
The life of the board is entirely at the will of the government, a prerogative derived from the right
to appoint. Available evidences appear to reveal a high state of fluidity and uncertainty in the
tenure of office. There is no universal rule concerning the optimum tenure. There are two
considerations to bear in mind:

 The tenure should be long enough to provide the board members adequate time and
opportunity to familiarize themselves with the problems of the enterprise and to develop and
implement medium-term strategies,
 The tenure should not be so long as to create a state of stagnation of ideas or vested interest.
Fresh blood brings in fresh idea.

These two factors or considerations seem to point the tenure of the board members to be a
minimum of four and maximum of six years

4.3 POWERS AND RESPONSIBILITIES OF THE BOARD OF DIRECTORS

Finally, one needs to determine the precise role of the board and the range of its authority. The
board's function may be generally said to be "trusteeship" and "entrepreneurial" as distinguished
from the "executive". The board acts as a trustee for efficient operation of the enterprise. The
entrepreneurial role of the board implies innovation in a constantly changing environment. Thus,
the most important function of the board is risk assessment and risk bearing, and an enterprise
cannot be successful if entrepreneurial skill doesn't provide innovative efficiency (Mathur,
1999:95). Theoretically, all powers of the enterprise, subject to the reservations of authority made
by the government would vest in the board, while in practice this has been little possible.

The board has interface relationships with the government for what needs government approval
and with the operating management for what needs board approval. In other words, the board's
function is to support the enterprise for which it is responsible and to determine its policy within
the limits of the controlling statute and guidelines from government. It would be impractical to
draw up a standard list of items to be reserved for board decisions and items to be delegated to the
management. However some examples will clarify the point:

 Enterprises in sensitive areas exposed to public opinion such as utilities, public transport,
water supply, electricity, telephones will require strong board guidance,
  Labor intensive enterprises may require greater board attention than capital intensive
enterprises,
 Monopolies need more intensive supervision than competitive enterprises, since the market
takes over many of the board's responsibilities in the latter case,
 The degree of board control over the managers is likely to be in direct control proportion to
the degree of government control over the enterprise.

Given these variables, which give rise to different patterns of control, a list of common items that
would normally come to the board for decision are suggested as follows (Fernandes, 1986:129-
130):

(1) All matters, which constitute the statutory responsibilities of the board of directors specified in
the enactment creating the enterprise,
(1) All matters, which require government approval,
(2) The annual capital and operating budget,
(3) The annual financial statements - balance sheet and profit and loss accounts,
(4) Audit reports
(5) The corporate plan
(6) Investment proposals above prescribed financial limits,
(7) Proposals for expansion and diversification,
(8) Raising of capital and long-term borrowing,
(9) Pricing policy,
(10) Utilization of financial surplus,
(11) Appointments of senior managers
(12) Wages and salary structure
(13) Recruitment and promotion regulations,
(14) Incentive schemes and benefit packages

The above listed decisional mandates of the board could be simply categorized under four groups
of functions, Namely:

(i) Establishment of basic policies and general strategy of operation

(ii) Decision on major financial matters
(iii) Selection of key personnel and approval of wage and salary structure as well as other
benefits
(iv) Monitoring performance and passing judgment on them

These being the general and detail functions of the board, all other powers should be delegated to
the chief executive and operating managers.