Corporate Governance and

Business Ethics
Dr. A Khoza
20 March 2022
 The Board of Directors-Key insights
• Agency theory’ is an economic theory that drives a
whole lot of thinking about corporations today.
• At the heart of this prevailing authority is the idea
that the board is the ‘agent’ of the collective
shareholders or members in a not‑for‑profit.
• The shareholder or members are in this thinking the
collective ‘principal’ for the company.
 The Board of Directors-Key insights
• The theory continues on that the board’s role is to
strive to ‘minimise the cost of agency’
• To ensure that the cost of running the business is
kept as low as possible so as to return maximum
value to the shareholder
• In the case of the NFP to deliver on behalf of the
members, maximum value to the beneficiaries of the
organisation’s services.
The Board of Directors as an agent of the
Principal
 The Board of Directors-Key insights
1. Directors are elected to represent shareholders’
interests.
2. In most organisations, internal board members are
not paid for their work, but outside board
members (Non Executive Directors or NEDs) are.
3. Board members determine board policies,
dividend pay-outs, executive compensation and
executive recruitment.
 The Board of Directors-Key insights
4. An individual is likely to be removed from a
board if they violate foundational rules, for
instance, if they engage in a conflict of interest
transaction or strike a deal with a third party to
influence board decisions.
5. Directors are elected by shareholders but
nominated by the nominations committee.
 The Board of Directors
• In a corporation, a board of directors is a group of elected
individuals representing the shareholders.
• The board is the governing body that meets at regular
intervals to set policies and oversee corporate management.
• A board of directors is a requirement for every public
company.
• Non-profit, State Owned Enterprises and private organisations
may also have boards of directors.
 What does a board of directors do?

• For the most part, the board is a trusted advisor

(fiduciary) on behalf of shareholders.
• Fiduciary can be described as an individual that
acts in the best interest of another individual
• The hiring and firing of senior executives,
dividend policies, options policies, and executive
compensation are the main issues under a
board’s remit.
 What does a board of directors do?

• The board of directors also ensures the

company has sufficient, well-managed
resources at its disposal while also helping it
set broad goals and supporting the
executive team’s responsibilities.
 Who sits on a board of directors?
• A good board of directors should represent both
shareholder and management interests and have internal
and external non-executive directors.
• Internal directors have the interests of significant
shareholders, executive managers, and employees in mind,
and their expertise within the organisation should add value.
• The average internal director does not typically receive
compensation for board activity since they are often already
executive employees
 The Non-Executive Director (NED)
• Outside directors, or non-executive directors, do
not take part in any of the company’s daily
operations.
• Non-executive board members are reimbursed
and are often paid extra for attending committee
meetings.
 The Non-Executive Director (NED)
• In ideal circumstances, an independent, non-
executive, outside director will bring a fresh
perspective to goal-setting and dispute
resolution.
• Choosing both internal and external board
members is often vital to the success of a board
and the organisation.
 Powers of The Board of Directors
• Usually, an organisation’s by laws define the
structure and powers of the board.
• By laws should specify how many board
members are elected and how they are elected
(by shareholder vote at an annual meeting, for
example) and how often the board meets.
Powers of The Board of Directors
• A board can have any number of members;
however, most have between three and fifteen
members.
• Some believe the optimal size is nine.
 Election and Removal of Board Members
• While shareholders elect directors, the
nominating committee decides which candidates
are put forward for nomination.
• Directors’ terms should be staggered to ensure
only a few are elected each year.
• Nine years is considered the most time a director
should sit on a particular board
 Removing a Board Member

• It can be challenging to remove a member by resolution

at a general meeting.
• A director can be expelled for breaking foundational
rules.
• There are several types of infractions, including, but not
limited to:
i. Using directorial power for purposes other than the
corporation’s financial well-being
 Removing a Board Member

ii. Profiting from proprietary information

iii. Negotiating with third parties to influence a
board vote
iv. Conflict of interest situations involving
financial reward
• Many corporate boards also have protocols
regarding fitness to serve.
 Two Tiers Board of Directors
• Board structure can differ slightly from country
to country.
• Some European and Asian countries divide
corporate governance into two tiers – executive
boards and supervisory boards.
• The executive board is headed by the CEO or
managing director, who employees and
shareholders elect.
 Two Tiers Board of Directors
• The executive board is responsible for the day-to-day
operations of the business.
• The supervisory board is chaired by an independent
outside director (the chair) and consists of non-
executive directors.
• These directors are not involved in the day-to-day
running of the business but are there to advise on
strategy and the organisation’s overall direction.
 Board Directors Remuneration
• Typically, insider directors aren’t compensated for
their board activity since they are often executives
• Directors outside the company (NEDs) are paid.
• NEDs are usually selected based on their expertise in
related fields that will benefit the company’s strategy
and growth.
• Pay varies according to the organisation’s size.
 Board Of Directors titles and job
descriptions
Chair of the Board
• On a board, the highest rank is held by the chair.
• Chairs also collaborate with CEOs and executive directors
to shape the culture of an organisation.
• Chair of the board (COB) holds the most power and
authority on the board of directors
• Chair provides leadership to the firm's officers and
executives.
 Chair of the Board
• The chair of the board ensures that the firm's
duties to shareholders are being fulfilled by
acting as a link between the board and upper
management.
 Board Members And Non-executive
Directors
• Directors who do not hold one of the mentioned
positions often volunteer/or appointed to serve
as heads of committees.
• They attend meetings, participate in discussions,
and vote on board matters.
• Following their service on the board of directors,
they may be elected to more advanced roles.
 Board Committees

• In addition to the board of directors, there are

several committees that handle all of the work
assigned by the board and these are:
1. Governance committee for recruiting and on-
boarding new members
2. Finance committee for reviewing accounting
policies
 Board Committees

3. Audit committee
4. Risk Committee
5. Remuneration Committee
• Ad hoc committees are formed when necessary and dissolved
when their work is done.
• Below are some examples of ad hoc committees:
1. Budget
2. Insurance
3. Litigation
 The Audit Committee
• The audit committee’s primary task is to monitor
the integrity of the company’s financial
reporting.
• It also has a role in checking the company’s
internal financial controls, reviewing them and
their operation
 The Audit Committee
• It also has to ensure that necessary risk
management systems are in place.
• It is responsible for overseeing the
company’s external audit process and relations
with the external auditor.
• This includes making recommendations on the
appointment, reappointment and removal of the
external auditors.
 The Audit Committee

• It must also keep a close check on the external

auditors’ independence and objectivity.
• The audit committee has a role in fraud prevention.
• It needs to be confident that there are opportunities
throughout the company for employees to act as
“whistle-blowers” and report improprieties and
abuses
 The Audit Committee
• Corporate Governance Codes recommend that
the audit committee should be comprised of at
least three, or in the case of smaller companies
two, independent non-executive directors, one
of whom should have recent and relevant
financial experience.
 The Nomination/Governance Committee
• One of the board's most crucial functions is to decide
on new appointments to the board and to other senior
positions in the company.
• This is done within a committee, composed of executive
and non-executive directors, whose task it is to ensure
that appointments are made according to agreed
specifications.
• Board members’ appraisal is often tied directly into the
 The Nomination/Governance Committee
• As a matter of good practice, the selection process of
directors should be carried out by the nomination
committee, which then makes recommendations to
the full board.
• Non-executive directors should form a majority of this
committee.
• The nomination committee will typically also ensure
that succession plans are in place for the board and
the executive level immediately below it.
 The Remuneration Committee
• Devising the appropriate remuneration packages for the
executive directors can be one of the most contentious
issues a board faces
• This is because of the publicity executive pay has
attracted in recent years.
• Levels of remuneration should be sufficient to attract
and retain the executive directors needed to run the
company
• Companies should avoid paying more than necessary.
 The Remuneration Committee
• It is vital that decisions on executive
remuneration, benefits and bonuses are seen to
be taken by those who do not stand to benefit
directly from them.
• In listed companies and some larger private
companies therefore, policy on executive
remuneration is usually decided by a committee
of non-executive directors.
 The Remuneration Committee
• As a matter of good practice, executive directors
should not be responsible for determining their
own remuneration.
• Good Corporate Governance Code recommends
that this should be the remit of a remuneration
committee made up of at least three or in the
case of smaller companies two, independent non-
executive directors.
 Risk Committee
• Should consists of at least 4 NEDs
• To advise the Board on the corporate’s risk appetite,
profile and tolerance
• To oversee risk management framework
 Risk Committee
• To identify and deal with financial,
model, operational, information security and
cyber risks, and risks associated with the strategic
direction, new products and change initiatives of
the company
• To review the company’s risk policies, risk reports
and breaches of risk tolerances and policies
 Risk Committee
• To consider current top and emerging risks and risk
exposures relating to the business and strategies to ensure
that appropriate arrangements are in place to control and
mitigate the risks effectively
• To review the effectiveness of the company’s risk
control/mitigation tools and risk management functions
• To monitor the effectiveness of controls across key risk
types and controls to manage regulatory obligations and
compliance risks across key functions
 Separation of Power in Corporate
Governance
• Separation of powers is an organizational structure
where responsibilities, authorities, and powers are
divided between groups rather than being centrally
held.
• Separation of powers is most closely associated with
political systems, in which the legislative, executive,
and judicial powers of government are vested in
separate bodies.
 Separation of Power in Corporate
Governance
• While the separation of powers is most closely
associated with politics, this type of system can also be
used in other organizations.
• We have seen the Hempel Report advocates in terms of
separation.
• It says that if Boards felt it was in the interests of
enhancing 'prosperity over time' to have a unitary CEO
and Chair, or not to put remuneration policy before the
AGM for approval then that was their concern.
 Separation of Power in Corporate
Governance
• In business, the CEO and Chair positions are often
separated to prevent abuse of power.
• There are good reasons to separate the positions of the
chief executive officer (CEO) and chair, in order to increase
checks and balances and give corporate governance real
integrity.
• The board of directors main job is to oversee management
on behalf of shareholders
 Separation of Power in Corporate
Governance
• When a CEOs holds both roles he/she is
effectively monitoring themselves, which leads
to potential abuses of power and reduced
transparency and accountability.
 Evolution of Boards (Very important!!!!)
• Boards of directors have undergone a rapid
transformation since the Sarbanes-Oxley Act of 2002
since Enron.
• The shift in power between the CEO and the Board
has become evident
• Companies increasingly will need agile boards with
the energy and expertise to deal with emerging
threats and opportunities.
• Investors have become more vocal that board
 Types of Board of Directors
• Ram Charan described in his book “Boards That
Deliver.” www.wiley.com/en-
• Fortune Magazine calls Ram Charan “the most
influential consultant alive,” thanks to a reputation
earned through more than thirty years of wise counsel
to the top companies, CEOs, and boards of our time.
• No matter the size of the board, it likely fits into one
of the three categories
 Boards That Deliver.

• Charan described three types of Boards :

1. Ceremonial Board/Docile Board
2. Liberated Board
3. Progressive Board
 1. Ceremonial Board

• Often described as a “good old boys” board.

• All the board members were friends/school mates or former
colleagues of the CEO
• They are there more to rubber stamp the CEO’s strategy and
business plan.
• This is often the case in private companies, especially when
the board is comprised of advisors that do professional work
for the company such as a banker and lawyers
 2. The Liberated Board

• This is a more involved board in the true governance of

the company.
• A Liberated Board is a truly independent group of
directors or advisors.
• This means that there are no ties to the company and the
directors vote and act independently.
• This can, at first, be very distracting to the CEO and the
company trying to satisfy a variety of independent
directors or advisors.
 3. The Progressive Board
• These boards come together as a team but maintain
their independent viewpoint.
• A tell-tale sign of a Progressive Board is one that is
very diverse.
• This includes age, gender, race, geography,
experience, etc.
 3. The Progressive Board
• Progressive Boards work closely with the CEO
and the senior management team inside and
outside the boardroom.
• The board members best represent the
stakeholders (ownership, employees, customers,
suppliers, communities, etc.)
 Take home exercises
• Discuss the 3 types and phases of Boards developing post the Enron
Scandal
• What is separation of powers and how does this concept feed into
Corporate Governance. Give examples where it has played out
• Board committees are a vital aspect of a Board of Directors work.
Discuss this statement citing three Board Committees you are aware
of.
• What is the role of a Board of Directors in a corporate. Discuss the
role of the Board chair.
 Handout
• Ten things that make a great Board of Directors