4-Corporate Governance.

The Board Committees And CEO Succession And Selection.


The Board Committees.
• A Board of Directors normally does its work through a well organized Committee Structure, that Partitions the Work of the Board. There are several Benefits to this approach. • It allows a few Directors to concentrate on Specific Issues in much more detail than the entire Board could Manage, and it also takes advantage of the Individual Expertise of the Directors. • The Committee Structure thus provides for the efficient use of the Time and Expertise. • Committee Work can be done in one of the Two Ways: • The Board can delegate Certain Decisions to the Relevant Committees, or it can ask the Committee to study the Issues and Report back to the Board with Recommendations. • Each Committee should have a clear Charge stating its Responsibilities, which are usually contained in its Charter. • Each Committee should also record Minutes of its Meetings and regularly Report its Findings and Actions to the Board.

and Temporary Tasks such as Studying Merger Opportunities or Investigating a specific Managerial Issue. important. Investor’s Grievance Committee. Audit Committee. • 3 . Compensation Committee.The Board Committees (Cont’d). following a short Discussion of Principles applying to all Committees of a Board. They may also appoint Adhoc or Special Committees. Each of the Standing Committees is described briefly later. • 1) 2) 3) 4) 5) 6) 7) • • Most Boards have the following Standing Committees in some form: Executive Committee. Boards may have other Standing Committees that reflect their particular circumstances. which generally are used for very specific. Committee Of Outside Directors. Investment Committee. Nominating Committee.

When Executive Committee acts in this capacity. Organization. to get their views. for their ability to be available on short notice. Be properly informed by and have Open and Candid Communications with Management. if possible. b) It may be Composed of the Chairs of other Standing Committees. and it may be the means for Coordinating their activities. Have a Written Charter approved by the Board that describes its Mission.Guiding Principles For Committees. keeping the full Board informed about its Decisions and Actions. • • • • • 1) • • • • • Each Committee of a Board should: Have Members who are Intellectually Independent. Policies and Practices. Qualified and Diligent. and should present a Full Report on its Action to the Board. 4 . among other Criteria. it should notify other Members of the Board in advance. The Executive Committee: The Executive Committee can be used in at least the following Three Ways: a) It may provide a back up mechanism that acts for the Boards when Time or Circumstances make it difficult to bring a Quorum of the Full Board together Members are chosen. Meet regularly and deal Promptly and Decisively with Issues. Roles and Responsibilities.

particularly when the Committee must address Issues that have Legal 5 Implications. he or she typically Chairs the Meeting. or Disagreements among the Directors with the CEO’s Position or Company’s Operating Results. in appearance. These Issues usually involve the CEO’s Performance. The Chair Person of this Committee is elected by other Independent Directors and commonly serves as the Lead Director. The Company’s General Counsel often advises this Committee. If the Board has a Non Employee Chairman.The Executive Committee (Cont’d). 2) The Committee Of Outside Directors: This Committee is composed of the Outside or Independent Directors. The Purpose of the Discussions is to Explore and Articulate an Independent View. if not in fact. • • • • • . The Committee of Outside Directors normally meets at the end of each Board Meeting without the CEO or any other Inside Members of the Board to discuss any Issues that it deems Appropriate. This is usually found. The Lead Director follows up. • • • c) It may be Senior Board to which all Issues are presented before going to the Whole Board. when there is a very large Board that does not meet as frequently as the situation requires. acting as the Intermediary with the CEO unless the Committee asks the CEO to return to the Meeting to discuss an Issue. One disadvantage of this arrangement is that it may create an “In Group” and an out Group. if the CEO also serves as a Chairman.

requiring Effective Investment Management. • Retirement Plans. however. often have a large quantity of Assets. particularly to Design Plans intended to establish 6 Eternal Parity. .The Compensation Committee. • Staff Assistance for Compensation Committee is normally provided by the Senior Human Resources Officer. • Because Fringe Benefits are normally part of the Compensation Package. the Responsibility of Managing Retirement Benefits can be Delegated to a Sub-Committee. or Separate Standing Committee of the Board. and frequently the Committee employs outside Compensation Consultants. • It is charged with Designing and Administering Compensation and Benefit Plans of the Key Executives and usually addresses Performance Appraisals. the Management of Retirement Plans frequently falls under this Committee. • As a result. • The Compensation Committee should be composed of Independent Directors.

Guarantee Compliance with Generally Accepted Accounting Principles( GAAP) and ensure Full. and Timely Disclosure of all relevant information to the Public. Legal Compliance. Forthright Financial Reporting. and Strong Financial Controls. Have Direct. • • In Today’s Climate.The Audit Committee. Accurate. The Primary Purpose of the Audit Committee is Overseeing the Accounting and Financial Reporting Processes of the Company and Audits of the Financial Statements. Make it unequivocally clear that the Ultimate Accountability of both Internal and External Auditors is to the Audit Committee and the full Board. the Audit Committee has even assumed greater Importance than in the past. Independent Communications with both External and Internal Auditors. The Audit Committee should: Encourage a strong operating Culture that Espouses Basic Values of Integrity. • 1) 2) 3) 4) 7 .

and the Corporate Code of Conduct. The Internal Control Function should include Managing the Control Environment. these Responsibilities have tended to Expand to Overseeing the Process that Monitors Compliance with Laws. Most recently. the Audit Committee’s Emphasis in most Companies was on Accurate Financial Reporting. Control Activities. the Audit Committee’s Function has expanded into overseeing of Financial Controls. and the Monitoring Efforts. 8 . Risk Assessment. Compliance with Laws and Regulations. Reliability of Financial Reporting. and other Personnel. often using an Internal Audit Staff. Internal Control is a Process implemented by the Board of Directors. designed to provide reasonable assurance regarding Achievement of Objectives in the following three areas: Effectiveness and Efficiency of Operations.The Audit Committee (Cont’d). Information. Regulations. Over years. Management. and Communications . • • • • 1) 2) 3)   In the past. It should be noted that Internal Control goes beyond the Financial Function of the Business to include the much broader areas of Operation and Legal Compliance. and to conduct Special Investigations.

Audit Committees are dependent on Member’s Abilities to ask Tough Questions and Pursue any line of Enquiry until they fully understand and are satisfied with answers. The Members of the Committee shall be elected by the Board of Directors and shall continue until their Successors are duly elected. • • • • • • Given the Crucial Role of Overseeing the Processes related to the Reporting and Auditing of Financial Results. Audit Committee Members must be Good Judges of the Character of the Managers with whom they deal. Interested in the Job and Willing to Devote Substantial amount of Time and Energy to the Responsibilities of the Committee. and they must create a Culture that minimizes the Risk of Strong and Deceitful Personalities cutting corners or not providing full disclosure. They should be Diligent. Dedicated. One of the Members shall be elected as the Chairman either by the Full Board or by the Members themselves. At least one of the Members shall have Accounting. Knowledgeable. The Audit Committee should consist Solely of “Independent” Directors of the Company and shall be comprised of a Minimum of Three Directors.The Audit Committee (Cont’d). in addition to the Board of Director’s Responsibilities. 9 . or related “Financial Management Expertise. preferably a Chartered Accountant. each of whom is Financially Literate or shall become Financially Literate within a Reasonable Period of time after his or her Appointment.

In many Companies. and Maintaining and Ensuring Compliance with By Laws. when openings occur. This Committee also may be Responsible for Administering Director’s Compensation. and if it also Serves as Governance Committee. sometimes known as the Governance Committee. Based on these Evaluations. This Committee has the Mandate to Review and Redress Shareholders and to attend Share Transfers.• • • • The Nominating Or Governance Committee. Directors are or are not Re-Nominated for a New Term.for Overseeing the Governance Process and Practices. The Committee has the Mandate to Approve Investments in various 10 Corporate Bodies within Statutory Limits and the Powers Delegated by the Board. The Evaluation Results should also be used to find Ideas for ever Improving the Board’s Interactions and Performance. this Committee has also begun to Manage the Process of Evaluating the Performance of the Board as a Whole as well as Individual Members. identifies and Recruits New Members of the Board. Investment Committee: The Investment Committee consists exclusively of Executive Directors. Investors Grievance Committee: The Investors Grievance Committee will be headed by an Independent Director and will have Four Other Executive Directors. • • • . headed by the Chairman. The Nominating Committee.

The Current Condition of the Business and the Trend or Trajectory of its Results. The Results for the Company and the Shareholders can be Exceptional when Board makes a Good Choice. can produce an Expensive Disaster. CEO Succession and Selection: Except in Start Up Situations. This Duty has a Profound Impact on the Success of a Corporation and is the Exclusive Duty of the Board. on the other hand. The Circumstances under which the Board must make this Selection vary Tremendously. The Board-CEO Relationship. even a Mediocre Choice can lead to a Large Cost of Unrealized Opportunities. with Major Variables encompassing the following: Reasons for the Change Of Leadership The Time Interval during which the Board has notice of the Impending Change. The Strength and Effectiveness of a Leader can and should have a marked Impact on the Operating Results of a Business. A Poor Choice. . 11 The Table in the Next Slide shows various Permutations of these Important Variables involved in the Replacement of a CEO. Further more. a Board faced with Hiring a CEO always faces the Task of Selecting a Successor to an Existing CEO.• • • • • • • 1) 2) 3)  Among the Most Important Responsibilities of a Board Of Directors is the Selection of the Chief Executive Officer (CEO)..

Stable Business Situation Trajectory. Unexpected. Death or Disability. Notice Timing. 4) Crisis. 3) 4) Termination. 1) 2) Strong. Short-Term Anticipation. Stable results. 1) 2) Long Term Anticipation. Reasons For Change. 1) 2) Normal Retirement. 1) 2) Positive Results. 3) 3) Weak. 12 .CEO Succession And Selection (Cont’d). Business Situation Condition. Negative Results. 3) Resignation..

We will examine three possible Scenarios derived from certain common combination of the variables. An unexpected Situation. A Termination. allowing ample time to Plan and Prepare for Transition. the Board must decide how it will organize itself to perform the Task.1. We will examine each of these Scenarios in Turn. The Ideal Scenario under which a Board must select a Successor CEO occurs when a successful CEO retires normally.• CEO Succession And Selection (Cont’d). Orderly Transition. This will serve as the initial case to which the other two will be compared. Business in this Circumstances can have widely varying Performance Results and Trends. Scenario-1. Another Stressful Scenario is one in which the Board must Select a Successor CEO after having Terminated an Under Performing CEO. in a Business enjoying a Strong Condition with improving Results. Because selecting a CEO is a Board Decision. An ordinary Transition. The 13 Committee must then decide on the Process it will follow. The Scenarios are: Scenario. The Board usually assigns this Responsibility to the Nominating Committee or forms a Special Committee to address the Task. The Unexpected Departure of a Strong CEO from a Business in a Weak Condition with Declining Results is the Worst Scenario for Boards. Scenario-2. Scenario-3. 1) 2) 3) • • • .

If so. including the Selection of the Successor. an Act Sitting CEOs are often reluctant to do. shorter notice should not create a problem.Succession Planning For a CEO. or they might fear operating as a Lame Duck once they identify their Plans for Retirement. Step-2. Then the Board has to decide whether there are inside candidates for the position. 14 2) • • 3) . The Transition Phase during which the Baton is Passed on to the Successor CEO. During this period. The length of this Phase will vary from Firm to Firm.) If a Succession Plan is in place. The First Step in Succession Planning is Selecting a Target Succession Date. the Board should quietly get to know the candidates and give them Assignments that would test and prepare for the Job of CEO. however. the Situation might be troublesome for the Board. If a Succession Plan is not in place. The CEOs truly may not know when they will want to Retire. Step-3. The actual Succession Process. A Proposed Time Line for High-Level Succession Planning is Outlined below: Step-1. Approximately One Year in advance of his or her Retirement. the Board considers the Condition and Trajectory of the Firm and develops a desired Profile of the New CEO. • • • • 1) • The Timing of when to Create a Succession Plan is a delicate issue. the CEO should announce his or her Retirement (although some CEOs will prefer to give much shorter notice. Two to Five years in advance of an approximate change over date.

most CEOs would find it difficult to remain Impartial. After years of concurrent service with his or her Potential Successors. a Retiring CEO should not be permitted to Pick his or her Successor. which normally takes place 6/1215 months in advance. Inside Candidates. Outside Candidates. • • 1) • 2) 3) 4) • The Board must make a number of Potentially Crucial Decisions in the Succession Planning Process. For this reason alone. never the Person making the Decision. The Decisions will certainly be influenced by the Circumstances of the Organization at the time and Individuals involved: The Role Of Sitting CEO: A Successful CEO who is Retiring might be looked upon to for a Great Deal of Input. Communications: An important part of the Selection Process is Communicating Progress both inside the Firm and to the Public. CEO should be seen only as an Advisor to the Board . . The Communication starts usually when Retirement Date of Current CEO is announced.Considerations In Succession Planning.

Transition To A New CEO. In general. both Inside and Outside the Company. although Resignation might involve varying degrees of Damage to the Company. while Company is in a Weak Position. 1) • 2) • • • When a Successful CEO is Retiring. this Situation entails a CEO becoming Disabled or Dying Unexpectedly. Transition After An Unexpected Departure: This is the most difficult Scenario for a Board. It involves the Unexpected Departure of a Strong CEO of a Business Competing from a Weak Situation and with Declining Results ( Scenario 2 discussed earlier). it is normally useful that he or she remains Affiliated with the Company for Six Months to a Year to Support the New CEO. . A similar Situation arises when a CEO abruptly resigns. A Primary consideration for the Board is the Urgency of finding a Replacement for a Weak Company. depending upon the Precipitating16 Reasons. Obvious Benefit of this Strategy include Access to the Retiring CEO’s Institutional Knowledge and Smooth Introduction of the New CEO by the Departing CEO into Important Relationships.

• The Interim CEO is Customarily a member of Management or the Board. it is invaluable to the Board to have a Contingency Plan already prepared. • The Board does not have the Luxury of Pursuing a lengthy Process to appoint a Permanent CEO under the conditions. • To formalize this Plan. the appointed Successor would be in place to be Promoted. • In the event that the Board finds the Firm’s Succession Plan acceptable. particularly during Executive Sessions. • The Board may also have Private. the Nominating Committee might ask the CEO to name annually to recommend a Successor in the event of his or her Incapacitation. periodic discussions about Succession.Transition To A New CEO (Cont’d). the Board will have to Launch a Search for another Outsider as described above. • If the Board determines that no Insider is appropriate. • In Situations when a CEO Departs Unexpectedly. 17 . • The Board will usually appoint an Interim CEO to serve while the Search is conducted.

• Due to the Need to move quickly. In Practice. the Board in this Situation( as well as the 2nd Situation) might tend to settle for Mediocrity as a safe Course. The Firm would be better served if the Board chose to appoint someone not yet proven. the Board might want to remove them to eliminate their Negative Attitudes. Here the Board Terminates an Under Performing CEO. • This is the Third Scenario discussed earlier. .Transition After Termination Of CEO. the Board again is faced with the Insider Vs Outsider Choice. such Situations tend to be rare. • In the long run. • When they do occur. this is not an effective Strategy. • If the Recalcitrant Executives do not Depart. the Departing CEOs tend to leave fairly quickly after the Decision is made to Terminate Employment. • The difference in the Scenario is that there might be some strong feelings about the Departing CEO and some Mangers Loyal to him or her might Depart as well. • In this Situation. but appearing to have the Potentiality to quickly grow18 into the Job of CEO. • Under Performing Lame Ducks are of Marginal Value to the Organization.

• • 1) 2) 3) . special Communications are required. Developing Mutually Agreeable Goals.Transition After Termination Of CEO (Cont’d). the Rank and File Employees. This is done Primarily through Stock Ownership and 19 Incentive Plans. Policies. Aligning the Interests of the Board and CEO with those of the Shareholders. In particular. Working Relationship-The Board And The CEO. and the Standards of Performance for the Firm with the Input of the CEO. • • • The Board then would need to be prepared for the possibility of having to act if the New CEO were incapable of Effectively serving in the New Position. An Appropriate CEO is one who shares the Values of the Board and the Organization and has the requisite abilities to run the Business effectively. When the Board Terminates a CEO. An effective Management Model for a Board-CEO Relationship should involve the following: Hiring an Appropriate CEO for the Firm. it is important for the Board to demonstrate its Control of the Situation by Effectively Communicating its Intentions to the Key Managers.

20 • 5) • • . 4) Agreeing on the Decisions that should be brought to the Board.Working Relationship-The Board And The CEO (Cont’d). those Decisions on which the Board wants to “Advise and Consent”. Failure to have the Controls and Communication in place to remain Knowledgeable indicates a Failure on the part of the Board to Execute its Responsibilities. Remaining Knowledgeable about the Firm’s Activities and Performance in Appropriate detail and in a timely manner and Evaluating the Results. Reacting Appropriately to the Results by holding Management Accountable and Rewarding or Intervening as necessary. and those that are Delegated to the CEO. Such arrangements should serve to establish a well understood line between the Responsibilities of the Board and those of the CEO.

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