Role and Responsibilities

of the Board of Directors

Fiduciary Duties and

Independence of the Board

February 26 2004 Sophie L’Hélias

Fiduciary Duties
vs.
Director Duties
Directors’ Fiduciary Duties

• A legal concept that is pillar in Anglo-

American corporate governance
• A legal concept that does not exist per
se in many developed markets
• Shouldn’t we be addressing director
duties?
Director Duties Vary
• Economic environment

• Legal environment

• Cultural environment

• Shareholder base: a result of the above

Economic Environment
• Role of government

• Sources of capital

• Role of capital markets in economic

development
Legal Environment
• Regulators, codes and laws

• Courts and enforcement

• Civil vs. criminal actions

Cultural Environment
• Perception of capital markets by society
(population, courts, media, government)

• Proportion of population “tied” to capital

markets (retirement, investment)

• Free market vs. planed economy

Shareholder Base
• Government agencies
• Public institutional (pension funds)
• Private individual
• Family
• Domestic institutional
– Pension funds, mutual funds, alternative funds
• Foreign institutional:
– Pension funds, mutual funds, alternative funds
Comparing Shareholder Base
• Anglo-American • Continental European
– Domestic institutional: – Domestic institutional:
large limited

– Private individual: limited

– Private individual: large

– Public institutional:
– Public institutional: large limited

– Foreign institutional: – Foreign institutional:

limited large
Investor Remedies
Anglo-American Continental European
• Offers remedy to investors • Balances interests of the
who have been wronged company with other interests

– Numerous investor law suits – Few investor law suits

– Class action suits action – No class actions

– Large punitive damages – No punitive damages

– Extensive civil director liability – Limited civil director liability

– Limited criminal liability – Extensive criminal liability

Convergence of Duties ?

• Global investors’ expectations & demands

• Media exposure: domestic & international

• Competing for funds: domestic investors

• Corporate governance codes

• Laws (voting, proxies, etc)

Director Independence
Why is Independence
Important?

• Conflicts of interest hinder judgment and

affect decision-making
• Judgment and decision-making are what
directors are asked to do
• Directors must feel free to think, express,
question and decide in the interest of those
they represent
Box-Ticking vs. Effective
Independence
• Current definitions are based on
– Ownership of shares
– Contracts and services rendered
– Relationships
– Family ties

• What about effective independence?

– “Independent minded”
– Commitment (time and knowledge)
Importance of Selection

• Who selects directors?

• How are they selected (pool, resources,
interviews)?
• Who determines their independence?
• Who elects directors?
• Who evaluates directors?
• Who removes directors?
Independence of Directors
• Disclosing conflicts of interest:
– Does the Board have clear guidelines of
conflicts that must be disclosed?
– Who discloses conflicts?
– To whom are conflicts disclosed?
– What happens if conflicts are not disclosed?

• How is independence enforced?

– What if conflicts are disclosed later?
• good faith vs. bad faith
– What is disclosed to the Board and/or to
shareholders?
Board Committees
• What is their purpose?

• What is their power?

• How are members selected, renewed or

removed?
How Committees Operate
• Process:
– Setting the agenda
– Discussion, debate, vote, minutes
– Recommendation, decision, report

• Constraints:
– Budgetary and resources
– Access to outsiders: management, advisors, suppliers, etc.

• What happens to committee findings and

recommendations?
Conclusion: Several Models
with Converging Objectives
• Prevent (and react to) wrong-doing by
management, directors, advisors/suppliers,
partners and shareholders

• Ensure protection of shareholder interests

and rights

• Ensure the long term growth of the company