Lacking between balancing power of the management and the board affects its independence from management which continues to be affected by the directors who has limited accountability to shareholders and possess a significant control on management.
Introduction
Companies are artificial legal entities and as such they must operate through their human organsthe management of company is vested in the board of directors who are expexted to act on collective basis although in large companies deligation of power is seperated to smaller commmitties of board. In small companies one person may be having multiple roles liike directors, worker, shareholder, however large com pany have clear division between board and shareholders[1].
Board and management duties
While it may sometimes appear that the board and management of a company are closely connected, their duties and responsibilities are very distinct. In order to understand the differences in their functionality, first it is essential to define each of their positions.
A “board” consists of an organized group of people (usually a qualified executive and staff) with the collective authority to control and advance an institution.
The board makes the decisions and the management carries them out.[2] Due to the litigious nature of our society, boards are taking a stronger interest in day-to-day management activities because of the ensuing impact on its fiduciary responsibilities. Boards need to be informed of how the organization is being managed to protect its legal responsibilities, but the board’s role should not cross over into performing management duties. Here are some of the basic responsibilities for boards and management.[3]
Responsibilities of Boards
The Board Chair leads the board in keeping with the organization’s vision, mission, and strategic planning goals. Duties of boards include:
- Choosing the CEO.
- Approving major policies.
- Making major decisions.
- Overseeing performance.
- Serving as external advocate.
Responsibilities of Management
The CEO leads the organization in keeping with the board’s direction. The duties of management include:
- Making operational decisions.
- Making operational policies.
- Keeping the board educated and informed.
- Bringing well-documented recommendations and information to the board.
Boards routinely review performance reports to establish positive or negative trends and growth benchmarks. Boards review trends from at least three consecutive reporting periods before deciding if an issue needs board attention. Boards may need to take prompt action to address unethical or illegal activities. Before taking direct action, boards consult with management to determine how they are addressing the issues and if they have the capability to redirect the trend in a positive direction. Boards hold management accountable for results without directly micromanaging specific matters.[4]
On the other end of the spectrum, management has the responsibility to inform boards about major issues, particularly if they have been contacted by Congress, the IRS, the state attorney general or the media.
When boards and management have a strong and open working relationship with each other, the organization benefits from fluid operation.
The two units are greatly interdependent. Boards support the CEO in implementing board decisions, such as awarding or ending contracts. At times, the CEO may need to ask the board for intervention or support. CEO’s may need the board to intervene with management in ways that help him raise performance. Boards may also support CEO’s by using their networks within the community to support the work of the organization.
Boards that routinely infringe upon management duties and responsibilities risk upsetting a structure that is intended to help both of them. CEO’s and other managers need to know that boards have confidence in them to manage things when they go awry. Boards that cross over into the management role risk turnover in the CEO and executive positions. The relationship between boards and management was strategically developed for high-efficiency organizational success. Boards address the broader, mission-focused activities, leaving the daily managerial activities to the CEO and other managers. When each entity directs its attention towards its own duties and responsibilities, the framework works like clockwork.
This can be demonstrated by looking into the corporate governance of the USA and Germany and to see how the power is distributed betweed the board and management.
The corporate governance structure of joint stock corporations in a given country is determined by several factors: the legal and regulatory framework outlining the rights and responsibilities of all parties involved in corporate governance; the de facto realities of the corporate environment in the country; and each corporation’s articles of association. While corporate governance provisions may differ from corporation to corporation, many de facto and de jure factors affect corporations in a similar way. Therefore, it is possible to outline a “model” of corporate governance for a given country.
US model
The Anglo-US model is characterized by share ownership of individual, and increasingly institutional, investors not affiliated with the corporation (known as outside shareholders or “outsiders”); a well-developed legal framework defining the rights and responsibilities of three key players, namely management, directors and shareholders; and a comparatively uncomplicated procedure for interaction between shareholder and corporation as well as among shareholders during or outside the AGM.
Equity financing is a common method of raising capital for corporations in the United Kingdom (UK) and the US. It is not surprising, therefore, that the US is the largest capital market in the world, and that the London Stock Exchange is the third largest stock exchange in the world (in terms of market capitalization) after the New York Stock Exchange (NYSE) and Tokyo. There is a causal relationship between the importance of equity financing, the size of the capital market and the development of a corporate governance system. The US is both the world’s largest capital market and the home of the world’s most-developed system of proxy voting and shareholder activism by institutional investors. Institutional investors also play an important role in both the capital market[5] and corporate governance in the UK.
Traditionally, the same person has served as both chairman of the board of directors and chief executive officer (CEO) of the corporation. In many instances, this practice led to abuses, including: concentration of power in the hands of one person (for example, a board of directors firmly controlled by one person serving both as chairman of the board of directors and CEO); concentration of power in a small group of persons (for example, a board of directors composed solely of “insiders”; management and/or the board of directors’ attempts to retain power over a long period of time, without regard for the interests of other players (entrenchment); and the board of directors’ flagrant disregard for the interests of outside shareholders. As recently as 1990, one individual served as both CEO and chairman of the board in over 75 percent of the 500 largest corporations in the US. In contrast to the US, a majority of boards in the UK have a non-executive director. However, many boards of UK companies have a majority of inside directors: in 1992, only 42 percent of all directors were outsiders and nine percent of the largest UK companies had no outside director at all.[6]
In response, individual and institutional investors began to inform themselves about trends, conduct research and organize themselves in order to represent their interests as shareholders. Their findings were interesting. For example, research conducted by diverse organizations indicated that in many cases a relationship exists between lack of effective oversight by the board of directors and poor corporate financial performance. In addition, corporate governance analysts noted that “outside” directors often suffered an informational disadvantage vis-а-vis “inside” directors and were therefore limited in their ability to provide effective oversight. Several factors influenced the trend towards an increasing percentage of “outsiders” on boards of directors of UK and US corporations. These include: the pattern of stock ownership, specifically the above-mentioned increase in institutional investment the growing importance of institutional investors and their voting behavior at AGMs; and recommendations of self-regulatory organizations such as the Committee on the Financial Aspects of Corporate Governance in the UK and shareholder organizations in the US.
Players in the Anglo-US model include management, directors, shareholders (especially institutional investors), government agencies, stock exchanges, self-regulatory organizations and consulting firms which advise corporations and/or shareholders on corporate governance and proxy voting. Of these, the three major players are management, directors and shareholders. They form what is commonly referred to as the “corporate governance triangle.” The interests and interaction of these players may be diagrammed as follows: The Anglo-US model, developed within the context of the free market economy, assumes the separation of ownership and control in most publicly-held corporations. This important legal distinction serves a valuable business and social purpose: investors contribute capital and maintain ownership in the enterprise, while generally avoiding legal liability for the acts of the corporation. Investors avoid legal liability by ceding to management control of the corporation and paying management for acting as their agent by undertaking the affairs of the corporation. The cost of this separation of ownership and control is defined as “agency costs”. The interests of shareholders and management may not always coincide. Laws governing corporations in countries using the Anglo-US model attempt to reconcile this conflict in several ways. Most importantly, they prescribe the election of a board of directors by shareholders and require that boards act as fiduciaries for shareholders’ interests by overseeing management on behalf of shareholders.
German module
There are three unique elements of the German model[7] that distinguish it from the other models outlined in this article. Two of these elements pertain to board composition and one concerns shareholders’ rights: First, the German model prescribes two boards with separate members. German corporations have a two-tiered board structure consisting of a management board (composed entirely of insiders, that is, executives of the corporation) and a supervisory board (composed of labor/employee representatives and shareholder representatives). The two boards are completely distinct; no one may serve simultaneously on a corporation’s management board and supervisory board. Second, the size of the supervisory board is set by law and cannot be changed by shareholders.
Composition of the Management Board (“Vorstand”) and Supervisory Board (“Aufsichtsrat”) in the German Model The two-tiered board structure is a unique construction of the German model. German corporations are governed by a supervisory board and a management board. The supervisory board appoints and dismisses the management board, approves major management decisions; and advises the management board. The supervisory board usually meets once a month. A corporation’s articles of association sets the financial threshold of corporate acts requiring supervisory board approval. The management board is responsible for daily management of the company. The management board is composed solely of “insiders”, or executives. The supervisory board contains no “insiders”, it is composed of labor/employee representatives and shareholder representatives. The Industrial Democracy Act and the Law on Employee Co-determination regulate the size and determine the composition of the supervisory board; they stipulate the number of members elected by labor/employees and the number elected by shareholders. The numbers of members of the supervisory board is set by law. In small corporations (with less than 500 employees), shareholders elect the entire supervisory board. In medium-size corporations (defined by assets and number of employees) employees elect one-third of a nine-member supervisory board. In larger corporations, employees elect one-half of a 20-member supervisory board.
While the supervisory board includes no “insiders”, it does not necessarily include only “outsiders”. The members of the supervisory board elected by shareholders are usually representatives of banks and corporations which are substantial shareholders. It would be more appropriate to define some of these as “affiliated outsiders”.
Importance of seperation and balance in power
The management of a company is entrusted to the board of directors which acts in a fiduciary capacity for the shareholders of the company. Usually, in small private limited companies, there is no separation between the ownership (shareholders) and the management (board of directors). This means that the significant shareholders are also the directors on the Board of the company, which make oversight and accountability one and the same thing. As a company expands and grows and brings in investors/general members of the public, the ownership and management of the company gets separated. Since all day to day decisions of the company are made through the board of directors, it becomes necessary to exercise some level of control and oversight on the board. This is done through introduction of non-executive/independent directors on the board who oversee the functioning of the board to ensure that the board is acting in the best interests of the company.[8]
the directors mainly will look at the intrest of the shareholders as directors also hold a number of shares in the company. so for the directors shareholders benefit would be first priority . and the job of the management is not to ensure the shareholders intrest as first priority. it must consider whats benificial for the company first. the directors main focus stays on how much profit they can return to the shareholders. whaere as the managent focus is more on the long the goal of the company. Thus if there is a imbalance in the power the company is likely to suffrer.
Managers may work less hard than they would if they were the owners of the company. The effect of this ‘lack of effort’ could be lower profits and a lower share price. The problem will exist in a large company at middle levels of management as well as at senior management level. The interests of middle managers and the interests of senior managers might well be different, especially if senior management are given pay incentives to achieve higher profits, but the middle managers are not.[9]
The remuneration of directors and senior managers is often related to the size of the company, rather than its profits. This gives managers an incentive to grow the company, and increase its sales turnover and assets, rather than to increase the returns to the company’s shareholders. Management are more likely to want to re-invest profits in order to make the company bigger, rather than pay out the profits as dividends. When this happens, companies might invest in capital investment projects where the expected profitability is quite small, and the net present value might be negative.
Conclusion
It can be seen though the directors and management both work for the benifit of the company but seeing previous examples it can be said its very necessary to make this two entities diffferent and the balance of power shaould be equal so that both the company and shareholders can benift and one side is not over powered to out rule the decision of other side without consideration.
Bibliography
Primary sources
Journals and Article
- Bebchuk, Lucian Arye” The case for increasing shareholder poiwer”
- Cris taylor “The Company Director: Powers, Duties and Liabilities” 11 MAy 2012
- Curtis J. Milhaupt “On the (Fleeting) Existence of the Main Bank System and Other Japanese Economic Institutions” 01 Aug 2016”
- Julie Garland McLellan, “The changing role of boards and management as companies grow” (Free Management Library, August 27, 2010)
- Oxford Analytica (Firm), Russell Reynolds Associates, Inc, Board Directors and Corporate Governance: Trends in the G7 Countries Over the Next Ten Years : Study (Oxford Analytica, 1992)
- Carter McNamara, “Overview of Roles and Responsibilities of Corporate Board of Directors” (Free Management Library, 2014) <> accessed in July 3, 2019
Secondary sources
BOOKS
1) Alan Dignam, John Lowry, Cris Riley “company law” 2016
2) Alan Dignam and John Lowry “company law” 9th edition
Statutes
1) Companies Act 1985
2) Companies Act 2006
[1] Alan Dignam, john Lowry ”company law” LA3021 page. 149
[2] “Company Directors versus Managing Directors” (Directors Label, 2013) <http://www.directorslabel.com/directorvsmd.htm> accessed July 2, 2019.
[3] Alan Dignam and John Lowry, Company Law (9th edn, Oxford University Press) accessed July 2, 2019.
[4] Carter McNamara, “Overview of Roles and Responsibilities of Corporate Board of Directors” (Free Management Library, 2014) <> accessed in July 3, 2019.
[5] The term “capital market” is broad, encompassing all the markets where stocks (also known as shares), bonds, futures, derivatives and other financial instruments are traded. “Securities market” is more specific, referring to stocks and bonds. “Equity market” is most specific, referring only to stock, also known as equity.
[6] Oxford Analytica (Firm), Russell Reynolds Associates, Inc, Board Directors and Corporate Governance: Trends in the G7 Countries Over the Next Ten Years : Study (Oxford Analytica, 1992)
[7] The German model governs German and Austrian corporations. Some elements of the model also apply in the Netherlands and Scandinavia. Furthermore, some corporations in France and Belgium have recently introduced some elements of the German model.
[8] Julie Garland McLellan, “The changing role of boards and management as companies grow” (Free Management Library, August 27, 2010) < https://managementhelp.org/blogs/boards-of-directors/2010/08/27/the-changing-role-of-boards-and-management-as-companies-grow/> accessed July 4, 2019.
[9] “The role of management in business” (BusinessMatters, January 17, 2013) <https://www.bmmagazine.co.uk/in-business/advice/the-role-of-management-in-business/> accessed July 3, 2019.
Securities Law
Submitted By : MD Mashroor Rahman