ASSIGNMENT ON BOARD OF DIRECTORS AND THEIR DUTIES

Even though BOD appoints one of independent non executive directors as the senior independent directors to oversee the matters over looked by BODs, the question arise regarding his independence compared to other members of the board of directors

Introduction:

A board of directors is a group of individuals elected to represent shareholders. A board’s mandate is to establish policies for corporate management making decisions on major company issues. Every public company must have a board of directors .Needs to follow Roles and responsibilities of directors and boards. The board of directors’ key purpose is to ensure the company’s prosperity by collectively directing the company’s affair whilst meeting the appropriate interests of its shareholders and stakeholders.[1] A Member of the Board of Directors earns an average salary. Pay for this job rises steadily for more experienced workers, but goes down noticeably for the few employees with more  experience[2]. A non-executive director is a member of a company’s board of directors who is not part of the executive team. A non-executive director typically does not engage in the day-to-day management of the organization but is involved in policymaking and planning exercises.

Understanding of non executive directors:

Non-executive directors, also known as external directors, independent directors or outside directors who are put in place to challenge the direction and performance of a company as well as its existing team. Since non-executive directors do not hold C-level or managerial positions, they are thought to understand the interests of the company with greater objectivity than the executive directors, who may have an agency problem or conflict of interest between management and stockholders or other stakeholders. Additionally, non-executive directors are often installed on a firm’s board for public relations reasons. For instance, a particular non-executive director’s community standing, record of philanthropy, and prior experience could provide positive exposure and symbolic value for the firm. Provide entrepreneurial leadership of the Company within a framework of prudent and effective controls which enable risk to be assessed and managed. Set the Company’s strategic aims, ensure that the necessary financial and human resources are in place for the company to meet its objectives, and review management performance. Set the Company’s values and standards and ensure that its obligations to its Association Members and others are understood and met[3].

The Board as a whole is collectively responsible for promoting the success of the Company by directing the company’s affairs. In addition to these requirements for all directors, the non-executive directors are expected constructively to challenge and help develop strategy, to participate actively in the decision-making process of the Board, and to scrutinise the performance of management in meeting agreed goals and objectives[4].

The role of the Non-Executive Director has the following key elements:

1. Strategy. Non-Executive Directors should constructively challenge and help develop proposals on strategy.
2. Performance. Non-Executive Directors should scrutinise the performance of management in meeting agreed goals and objectives and monitor the reporting of performance.
3. Risk. Non-Executive Directors should satisfy themselves on the integrity of financial information and that financial controls and systems of risk management are robust and defensible.
4. People. Non-Executive Directors are responsible for determining appropriate levels of remuneration of executive directors, and have a prime role in appointing, and where necessary removing, executive directors and in succession planning[5].

In order to fulfill their role, Non-Executive Directors will:

Meet from time to time, if appropriate, as a group without executive directors being present, and at least once a year without the Chairman being present. In this case the meeting is led by the Senior Independent Director[6].

Be entitled to seek independent professional advice, at the Company’s expense, in the furtherance of their duties. Non-Executive Directors may be asked by the Board to serve on one or more of the board committees. If appointed to a board committee, Non-Executive Directors will be advised of the committee terms of reference, and any specific additional responsibilities involved[7].

All directors must be able to allocate sufficient time to the Company to perform their responsibilities effectively.

 Non-Executive Directors will be required to:

(i) Undertake that they will be able to allocate sufficient time to meet the expectations of the role, as set out in their letter of appointment, or as agreed from time to time.

(ii) Disclose their other significant commitments to the Board before appointment, with a broad indication of the time involved.

(iii) Inform the Board of any subsequent changes[8].

A Non-Executive Director should seek the agreement of the Chairman before accepting additional commitments that might impact on the time he or she would be able to devote to the role as a director of the Company.

Non-Executive Directors are appointed for an initial term of three years. The term may be renewed if both the director and the Board agree. Appointments are subject to the provisions of the Companies Act and the articles of association, including those relating to election/re-election by the Association Members at annual general meetings and the removal of directors. No compensation for lost fees is payable if a director leaves office for any reason.

There is an expectation that appointments are renewed for one term of three years only. In line with the corporate governance code issued by the Financial Reporting Council  any extension of a term beyond six years for a Non-Executive Director will be subject to a particularly review[9].

As recommended in the UK Corporate Governance Code, the Board will identify in the annual report each Non-Executive Director it considers to be independent. The Board will determine whether the director is independent in character and judgment and whether there are relationships or circumstances which are likely to affect, or could appear to affect, the director’s judgment. The Board will state its reasons if it determines that a director is independent notwithstanding the existence, of relationships or circumstances which may appear relevant to its determination, including if the director[10].

Senior independent directors:

The Board will appoint one of the independent Non-Executive Directors to be the Senior Independent Director, to provide a sounding board for the Chairman and to serve as an intermediary for the other directors where necessary. As per sub section 4 of Section 149 of the Companies Act 2013, every listed public company is mandatorily required to have at least one-third of the total number of directors as independent directors. Unlisted public companies must appoint at least two independent directors[11].

The senior independent directors in common with all Non-Executive Directors, has the same general legal responsibilities to the Company as any other director. The Board as a whole is collectively responsible for promoting the success of the company by directing the Company’s affairs.

A board of directors is a team of people elected by a corporation’s shareholders to represent the shareholders’ interests and ensure that the company’s management acts on their behalf. The head of the board of directors is the chairman or chairperson of the board.

Directors attend board meetings, evaluate management performance, tend to major decisions declare dividends, create stock-option policies and establish executive compensation packages. Boards of directors often have several committees dedicated to specific decision-making processes[12]. The compensation committee constructs the executive compensation packages and brings them before the full board for a vote; the audit committee evaluates and hires the company’s auditors after bringing its research and judgment before the full board; and the finance committee evaluates merger bids or potential sources of capital[13].

Directors are elected by the shareholders usually once a year and usually at the annual shareholders’ meeting. In most cases, directors have staggered terms, meaning that they will not all be up for re-election in the same year.

The CEO of the company is on the board, or even the COO might hold board seats. Most shareholders agree that management’s presence on the board brings detailed expertise to the board’s decision-making processes, but this can also create conflicts between acting in management’s best interests and the shareholders’ best interests. Independent directors  are directors who don’t work for the company[14]. Non-executive directors are compensated with cash for their directorships; quite often they also receive stock options or stock grants. Introduced new standards for board conduct to ensure that directors are aware of and accountable for the financial condition of the companies they manage. These new standards include holding the board responsible for the integrity of the company’s internal controls, but higher accountability is even more evident in the act’s requirement that the board of directors of most public companies have an audit committee. This committee must appoint, inspect, regulate and control the actions of the company’s auditing firm. The auditors in turn report directly to the audit committee. Committee members cannot be employees of the company, and companies are required to disclose which members meet the definition of “financial expert[15].” The audit committee must be prepared to address complaints and confidential or anonymous submissions about the company’s accounting practices. In most cases, directors are covered by directors’ and officers’ insurance in order to protect the company against judgments caused by board misconduct.

The purpose of the board of directors is to make sure management is acting in the best interests of the shareholders. This is why the board of directors lays at the heart of the notion of corporate governance. It has a fiduciary duty to the shareholders, and only to the shareholders[16]. This can be difficult, especially when the vast majority of information that boards receive about corporate performance comes from management. Board members also aren’t “there” everyday and thus generally don’t know their companies as well as the managers do. In addition, there is often pressure to agree with executive directors given their day-to-day knowledge of the company.

Election and Removal Methods of Board Members:

While members of the board of directors are elected by shareholders, those put up for nomination are decided by a nomination committee.  Ideally, directors terms are staggered to ensure only a few directors are up for election in a given year. Removal 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[17]. In addition many directors’ contracts include a disincentive for firing – a golden parachute clause that requires the corporation to pay the director a bonus upon being let go.

In countries with relatively strong shareholder rights, such as in the US, directors are expected to be accountable to shareholders. However, excessive promotion of the interests of shareholders can lead to conflicts with other stakeholders. Due to different contractual arrangements, the interests of stakeholders are often in conflict. Board members are required to always use ethical and appropriate judgment to make seemingly correct choices when conflicts arise. In many other countries, directors have a duty to the company, not to shareholders. In Germany, for example, the company is considered distinct from the collective shareholders, which prevents shareholders from claiming that the directors have a duty toward them first and foremost[18]. Shareholders are seen as one kind of stakeholder among a pool of many, and the company does not have a duty to maximize shareholder value. Boards are composed of interested directors, such as representatives of employees, shareholders, and other stakeholders[19]. The loyalties of these stakeholder representatives are often divided, and considering that multiple-role directors have to rebalance different interests, the potential for conflict becomes clear.

Conclusion:

A non-executive director may be representing a major shareholder but an independent director will generally have no other links with the company other than sitting on the board. Non-executive directors’ principal role is to provide independent judgement .recognising the division between the board and management. A director is a person who leads or supervises a particular area of a company. A director is a member of a board. Together they are called board of directors. Both positions are involved in overseeing and directing the day-to-day operations and business of an organization. They tone and direct the organization, make strategic decisions on day-to-day operations, as well as insure its success. Conflicts of interest abound at the board level[20]. They constitute a significant issue in that they affect ethics by distorting decision making and generating consequences that can undermine the credibility of boards, organizations or even entire economic systems[21].

Many corporations require board members to sign a conflict of interest policy at the time of appointment or to declare any conflicts of interest at the beginning of board meetings. Conflict of interest policies normally specify how directors should avoid conflicts of interest. This narrow focus only scratches the surface, given the scope, responsibilities and dynamics of decision making in the boardroom. The real danger lies in the extent to which boards and directors are unaware of the many subtle conflicts of interest that they are dealing with. The boardroom is a dynamic place where struggles of ego, power, rules, and authority continuously surface, and it is not always clear, in the turmoil of group dynamics, what constitutes a conflict of interest or the manner in which one should participate in board deliberations. Furthermore, director duties tend to diverge from one company to another and from country to country, which adds even more complexity.

Bibliography :

1. Baysinger, Barry D., and Henry N. Butler. “Corporate governance and the board of directors: Performance effects of changes in board composition.” Journal of Law, Economics, & Organization 1.1 (1985): 101-124.
2. https://www.citycon.com)investors
3. www.directorslabel.com/directorvsmd.htm
4. Yermack, David. “Higher market valuation of companies with a small board of directors.” Journal of financial economics 40.2 (1996): 185-211
5. Baysinger BD, Butler HN. Corporate governance and the board of directors: Performance effects of changes in board composition. Journal of Law, Economics, & Organization. 1985 Apr 1;1(1):101-24.
6. www.directorslabel.com/directorvsmd.htm
7. www.differencebetween.info/difference-between-board-of-directors-and-management
8. Vance, Stanley C. Corporate leadership: Boards, directors, and strategy. New York: McGraw-Hill, 1983
9. https://bursa-malaysia.s3.amazonaws.com
10. Alonso, A., & Vallelado, E. (2008). Corporate governance in banking: The role of the board of directors. Corporate Governance in Banking: The Role of the Board of Directors (December 11, 2008). Journal of Banking and Finance, 32(12), 2570-2580.
11. Noman, Richard, and F. Warren McFarlan. “Information technology and the board of directors.” Harvard business review 83.10 (2005): 96.
12. https://en.wikipedia.org/wiki/Non-executive_director
13. Noman, R. and McFarlan, F.W., 2005. Information technology and the board of directors. Harvard business review, 83(10), p.96.
14. https://www.rya.org.uk/about-us/governance/Pages/senior-independent-director.aspx
15. Corbetta G, Salvato CA. The board of directors in family firms: one size fits all?. Family Business Review. 2004 Jun;17(2):119-34
16. Fried, V. H., Bruton, G. D., & Hisrich, R. D. (1998). Strategy and the board of directors in venture capital-backed firms. Journal of business venturing, 13(6), 493-503.
17. https://www.boardeffect.com
18. Chen, C. J., & Jaggi, B. (2000). Association between independent non-executive directors, family control and financial disclosures in Hong Kong. Journal of Accounting and Public policy, 19(4-5), 285-310.
19. Roberts, J., McNulty, T., & Stiles, P. (2005). Beyond agency conceptions of the work of the non‐executive director: Creating accountability in the boardroom. British journal of management, 16, S5-S26.
20. Ezzal, Mahmoud, and Robert Watson. “Wearing two hats: the conflicting control and management roles of non-executive directors.” Corporate governance (1997): 54-79.
21. Young, Steven. “The increasing use of non‐executive directors: its impact on UK board structure and governance arrangements.” Journal of Business Finance & Accounting 27, no. 9‐10 (2000): 1311-1342.

[1] Baysinger, Barry D., and Henry N. Butler. “Corporate governance and the board of directors: Performance effects of changes in board composition.” Journal of Law, Economics, & Organization 1.1 (1985): 101-124.

[2] https://www.citycon.com)investors

[3] www.directorslabel.com/directorvsmd.htm

[4] Yermack, David. “Higher market valuation of companies with a small board of directors.” Journal of financial economics 40.2 (1996): 185-211

[5] Baysinger BD, Butler HN. Corporate governance and the board of directors: Performance effects of changes in board composition. Journal of Law, Economics, & Organization. 1985 Apr 1;1(1):101-24.

[6] www.directorslabel.com/directorvsmd.htm

[7] www.differencebetween.info/difference-between-board-of-directors-and-management

[8]Vance, Stanley C. Corporate leadership: Boards, directors, and strategy. New York: McGraw-Hill, 1983.

[9] https://bursa-malaysia.s3.amazonaws.com

[10] Alonso, A., & Vallelado, E. (2008). Corporate governance in banking: The role of the board of directors. Corporate Governance in Banking: The Role of the Board of Directors (December 11, 2008). Journal of Banking and Finance, 32(12), 2570-2580.

[11]Nolan, Richard, and F. Warren McFarlan. “Information technology and the board of directors.” Harvard business review 83.10 (2005): 96.

[12] https://en.wikipedia.org/wiki/Non-executive_director

[13] Nolan, R. and McFarlan, F.W., 2005. Information technology and the board of directors. Harvard business review, 83(10), p.96.

[14] https://www.rya.org.uk/about-us/governance/Pages/senior-independent-director.aspx

[15] Corbetta G, Salvato CA. The board of directors in family firms: one size fits all?. Family Business Review. 2004 Jun;17(2):119-34

[16]Fried, V. H., Bruton, G. D., & Hisrich, R. D. (1998). Strategy and the board of directors in venture capital-backed firms. Journal of business venturing, 13(6), 493-503.

[17]https://www.boardeffect.com

[18] Chen, C. J., & Jaggi, B. (2000). Association between independent non-executive directors, family control and financial disclosures in Hong Kong. Journal of Accounting and Public policy, 19(4-5), 285-310.

[19] Roberts, J., McNulty, T., & Stiles, P. (2005). Beyond agency conceptions of the work of the non‐executive director: Creating accountability in the boardroom. British journal of management, 16, S5-S26.

[20] Ezamel, Mahmud, and Robert Watson. “Wearing two hats: the conflicting control and management roles of non-executive directors.” Corporate governance (1997): 54-79.

[21] Young, Steven. “The increasing use of non‐executive directors: its impact on UK board structure and governance arrangements.” Journal of Business Finance & Accounting 27, no. 9‐10 (2000): 1311-1342.

Submitted By: Kamrol Hasan