MODULE 3:

THE BOARD OF DIRECTORS

CHAPTER I. When to Create a Board?

1 Board of directors is a body of elected or appointed members who jointly oversee the activities of a company or organization. The body sometimes has a different name, such as board of trustees, board of governors, board of managers, or executive board. It is often simply referred to as "the board. A board's activities are determined by the powers, duties, and responsibilities delegated to it or conferred on it by an authority outside itself. These matters are typically detailed in the organization's bylaws. The bylaws commonly also specify the number of members of the board, how they are to be chosen, and when they are to meet.

This is what the following couple of posts will be about, looking first at how to go about choosing who should be on your board, followed by defining the purpose and structure of such a board.

Choosing the Right People Diversity One of the most important factors in creating your personal board of directors is choosing a diverse group of people. Just as a corporation is strategic in choosing board members with various areas of expertise, one should avoid filling their council with the same type of person or a bunch of yes men

Relationship It is important that you have a relationship with each member of your board since the most intimate details of your life will be the subject of constant scrutiny Shared Values While stress diversity as a necessary element of any successful board, there must also be an underlying consensus on major values and world view. For example, it does you no good to ask the help or advice of someone on the subject of prayer if they do not believe in God or the importance of prayer in the first place, it will simply be a waste of time for everyone involved.

Leaders - By picking leaders in various fields, careers, etc. you ensure that you will have a proactive board constantly pushing you towards excellence and more willing to challenge you than the average person. Leaders love making other leaders, its a natural process and one that should be tapped into if you are going to create a powerful and effective board of directors.

Two-Tier Board Model in Germany

The Role of the Supervisory Board -The central feature of internal corporate governance lies in the organisational and personal division of management and control by a two-tier structure that is mandatory for all public corporations, regardless of size or listing -While the clearers possibility of the management board is the running of the business, the role of the supervisory board is not easy to describe. Its legal functions are primarily the appointment, supervision, and removal of members of the management board. Recently its important soft functions were highlighted from a comparative perspective

Board Composition, Independence, and Labor Co-determination

-Membership in the supervisory board is incompatible to simultaneous membership inthe management board. Further, one person cannot take more than ten parallel supervisory board mandates. However, business relationships are inherent characteristics of the German supervisory board and can involve difficult questions of independence, objectivity, and conflicts of interests The chairman of the management board often changes over and takes the chair of the supervisory board. Further seats are offered to representatives of business partners, particularly in cases of cross shareholdings.

Internal Controls and Auditing

Recent proposals on improving internal control plead for an increase of approvalrights of the supervisory board. The success of both stronger involvement inmanagement decisions and the strengthening of control efficiency as a whole depends foremost on the level of information. The functioning of information systems as they exist under the law or as recommended by the German Corporate Governance Code is strongly determined by the two-tier structure

One-Tier Board Model in the United Kingdom

The Role of the Board of Directors The one-tier board model in the United Kingdom entrusts both management and control to the hands of the board of directors, who are vested with universal powers63. In larger companies, managerial power is revocably devolved to groups of directors (committees) or individuals below board level. According to the Combined Code, a formal schedule of matters should be reserved to the board for decision, which is a recommendation not far from that concerning the approval rights of the German supervisory board

Board Composition, Independence, and Outsider Participation

According to the revised Combined Code independence primarily means that the reared no relationships or circumstances which are likely to affect, or could appear to affect, the directors judgement The board should explain its reasons in the annual report if it determines that a non-executive director is independent although one of the specific examples indicates that he is not. The list of indicators is a new feature of the revised Combined Code.

Internal Controls and Auditing

- The system of internal controls as promoted under the Combined Code includes the group wide supervision of financial, operational, and compliance controls and risk management. Its effectiveness is to be reviewed at least annually, and the results of the review have to be reported to shareholders -The task of the audit committee is to set the scope and to review the results of the audit, its cost effectiveness, and the independence and objectivity of auditors98. It further reviews the financial relationship between the company and auditors. Again a flexible approach is sought in that the Combined Code states that if non-audit services are also supplied, the committee must seek to balance objectivity and value for money

Chapter II. Why Board so important?

Board Director Role

- is someone who is responsible for the conduct and management of a company and its affairs, protecting the shareholders' assets. They act to ensure that the shareholders receive a respectable return on their investment. The board of directors is the ultimate governing body within the management structure of any publicly traded company

is to collaborate with the other board directors to perform CEO assessment, approve appropriate Compensation Governance for the CEO, assess and pay dividends, approve the company's financial statements, and recommend or discourage acquisitions and mergers. The board usually selects, hires, and works with an outside auditing firm to do this. The role of the compensation committee is to set base compensation, stock option awards, and incentive bonuses for the company's executives, which includes the CEO.

Failure of Corporate Governance at Enron

Enron enjoyed admiration and respect among investors, managers of other companies, and the public. Government regulators uncovered multiple instances of : Juggling accounting records to inflate sales and profits. Hiding debt, concealing excessive CEO perks and compensation in vague footnotes. Ignoring standard accounting and financial practices Shredding documents to destroy incriminating records. The boards Special Investigative Committee did not place sole blame for Enrons failure on its directors, but it accused the board of failing to exercise it oversight responsibility. A fundamental cause of the catastrophe was the culture of the company. In 2006 a federal jury found Chairman of the Board Lay and CEO Skilling guilty of conspiracy

Vigilant Board

Agency-based studies of boards of directors address factors relevant to board vigilance with respect to the monitoring of senior managers. We argue that relying solely on director vigilance may be limiting because vigilance without relevant experience is unlikely to ensure board effectiveness.

Related Party Transaction

A business deal between two related parties. There are special regulations which must be followed when completing a related party transaction, including that all companies must report related party transactions. Due to the potential conflict of interest that often exists, related party transactions can sometimes result in scandals or illegal business practices

2 Succession Planning

Succession planning is a process whereby an organization ensures that employees are recruited and developed to fill each key role within the company. Through your succession planning process, you recruit superior employees, develop their knowledge, skills, and abilities, and prepare them for advancement or promotion into ever more challenging roles.

Through your succession planning process, you also retain superior employees because they appreciate the time, attention, and development that you are investing in them. To effectively do succession planning in your organization, you must identify the organizations long term goals. You must hire superior staff.

Importance of a Vigilant Board in an Emerging Country

The board devotes a high enough percentage of its time to in depth discussions of issues related to the strategy and its long-term competitiveness. The board reflects its understanding of, strategies and plans in its discussions and actions on key issues throughout the year. The board reviews and adopts an annual operating budget. It effectively monitors performance against budget throughout the year and ensures corrective action is taken if deviations occur.

The following list outlines a few of the roles of a board director to keep in mind:

Always act in the best interests of the company and in good faith at all times. Be certain that you are using the powers bestowed on you by the company for their proper purpose. Make sure there is no conflict of interest between you and the company by fully disclosing to the board of directors all of your interests relating to transactions or shares held. Never deal in your own interests rather than the company's when dealing with company business and property. Attend as many board meetings as possible and make sure you are aware what is happening with the company at all times.

Chapter III: The Difference Between Board and Management

BOARD OF DIRECTOR -is a body of elected or appointed members who jointly oversee the activities of a company or organization. . - - is a body of elected or appointed members who jointly oversee the activities of a company or organization. The body sometimes has a different name, such as board of trustees, board of governors, board of managers, or executive board. It is often simply referred to as "the board."

3 MANAGEMENT -Management in all business and human organization activity is simply the act of getting people together to accomplish desired goals. .. - the act of managing something; "he was given overall management of the program"; "is the direction of the economy a function of government?" - those in charge of running a business

Responsibilities and Duties of the Board

Directors' Fiduciary Duty
Directors shall have fiduciary duty in performing his/her duties.

Directors shall have fiduciary duty in performing his/her duties.

Directors shall carry out his/her duties faithfully for the Company, in accordance with relevant laws and Articles of Incorporation.

Prohibition of Competition by Directors No Director shall effect any transaction which falls within the same class of business as that of the Company without consent of the Board of Directors or such committee as authorized by the Board of Directors, except when a Director is elected with the knowledge that his business is in competition with the Company.

In accordance with relevant laws, a Director may not maintain directorship if he/she becomes a public official.

Directors' Duty to Resign When Serving on a Company in Competition with the Company

A Director shall resign from office in case he/she serves on a company in competition with the Company or becomes a public official, as provided in Article 32 of Articles of Incorporation.

Chapter IV. Board Size, Composition, and Evaluation

Board Composition

Size: Average 12 15 directors. Outside directors: Average 75 80% Insiders: Average 3 Diversity: 1 in 6 is a woman 1 in 8 not a corporate executive 2/3s have minorities

Board Committees

Audit Nominating (sometimes corporate governance) Compensation Executive

Insiders only? Includes CEO / senior executives?

Human resources

Boards of Directors:
Duties and Functions
1. 2.

3. 4.

Select, evaluate, replace senior management. Oversee: Strategies, management of corporate resources. Review, approve major plans and actions. Other functions prescribed by law.

Chapter V. The Role and Authority of the Board

Duties of the Board

Fiduciary responsibility Corporate board members have a fiduciary responsibility to care for the finances and legal requirements of the corporation. They must act in good faith and with a reasonable degree of care, and they must not have any conflicts of interest. That is, the interests of the company must take precedence over personal interests of individual board members.

Mission and Vision Board members are responsible for setting the mission of the company and assuring that all actions are related to and adhere to that mission. The board can change the mission, but only after careful deliberation. Oversight Corporate boards of directors do not participate in day-to-day decision-making; instead, they set overall policy, based on the corporate mission and vision, and they exercise an oversight function, reviewing the actions of corporate officers and executives.

Annual Meeting
At the annual meeting of the corporation, the board announces the annual dividend, oversees election of corporate board members, elects or appoints officers and key executives, and amends the bylaws, if necessary.

Other Duties of directors

Directors shall, in performing their duties, do their utmost to observe the duties of prudence and faithfulness expected of a proper manager. Directors, as heads of corporate management, shall at all times seek results that would be in the best interests of the corporation and its shareholders.

shall perform their duties with prudence of a proper manager. Directors shall review various materials with care and shall attend all Board meetings, and if needed, receive the advice of specialists before attending. shall faithfully perform their duty of loyalty toward the corporation and shareholders.

Directors, in accordance to performing their duties, shall not divulge or use, for their own or third parties benefit, any corporate secret obtained. A director must keep secret any confidential matter of the corporation that he has acquired in the process of performing his duties. He shall not openly discuss the confidential matters, and he shall ensure that a third party does not reveal such information.

Shareholder Meetings

-With regard to shareholder meetings, under section 111 a company must give notice to each shareholder, director and auditor of the time and place for meetings not less than 7 days nor more than 30 days before the proposed meeting. To demonstrate the control that may be exercised by minority shareholders under section 131 the holders of not less than 5 per cent of the issued shares of that company that carry the right to vote at meeting sought to be held by them are given the right to requisition the directors to call a meeting of shareholders for the purposes stated in the requisition.

The Board Protect Shareholders Rights

-OECD Principles concerns the protection of shareholders. rights and the ability of shareholders to influence the behaviour of corporations. The Principles list some basic rights including those to: obtain relevant information, share in residual profits, participate in basic decisions, fair and transparent treatment during changes of control, and fair use of voting rights. Shareholders as the legal owners of corporations should expect to be able to enjoy these rights in all jurisdictions.

A. Basic shareholder rights The Principles explicitly state the most basic rights of shareholders. This includes: ensuring adequate methods of ownership registration, conveying or transferring shares, participating in the company's profits, obtaining information on a timely basis, participating and voting in general shareholder meetings. The Company Law provides the explicit foundation for most of these rights; the duty to provide information to the shareholders was considerably expanded through the Securities Law.

B. The right to participate in and be sufficiently informed on decisions concerning fundamental corporate changes.

- Key shareholder rights are the participation in any decision concerning fundamental corporate changes and the right to be informed of options to address these changes. These fundamental changes can be amendments in the corporate chapter; authorization of additional shares; and extraordinary transactions that result in a fundamental change of the asset structure.

c. The right to participate effectively and vote in general shareholder

meetings and to be informed of the rules; including voting procedures, that govern these meetings

- One way for shareholders to influence the company is through the exercise of their voting rights at the AGM. This presupposes a system, which allows the effective participation of shareholders and the accurate representation of their views through the proxy mechanism. -The Principles stress the importance of supplying shareholders with sufficient and timely information concerning the date, location and agenda of general meetings. In order to enable more full participation in meetings by investors

D. Capital structures and arrangements that enable certain shareholders to obtain a degree of control disproportionate to their equity ownership should be disclosed - Management and controlling shareholders use corporate structures, such as groups of companies, pyramids and shareholder agreements to redistribute control over the company in ways that deviate from proportionality.

- Some shareholders bear more risk than others do, even though they are
holding identical instruments. Effective control and strategic direction of an enterprise by a major shareholder is not in itself undesirable and the Principles show no preference regarding what ownership structures might best achieve this goal.

E. Markets for corporate control should be allowed to function in an efficient and transparent manner.
-The Principles recommend that markets for corporate control should be allowed to function in an efficient and transparent manner. Regulations for take-overs generally aim at ensuring equal treatment of shareholders in the process of a change of control. Their other aim is to ensure that, in companies that are broadly held, management does not pursue an unbridled, opportunistic behaviour shielded by the takeover market through anti-take-over devices

Chapter VI. Non- Executive, Independent Directors

Role of independent non-executive directors 1) Participating in formulating strategy of the company. The board of directors is responsibility for the management of a company. It does not directly take part in the routine management, but it has to participate in the drafting of strategy of the company.They must use the professional knowledge or common sense, experience and specialty, vision and the advice they get from outside or the people and business relations they have developed to help directors solve related problems.

They must use the professional knowledge or common sense, experience and specialty, vision and the advice they get from outside or the people and business relations they have developed to help directors solve related problems.

2) Oversight of management

Oversight of management covers two aspects: one is to oversee the management and the company in implementing the rules, procedures and plans established, that is, to see whether the company operates along the established orbit; the other is to check the company to see whether or not it has established a proper and effective internal monitoring system, procedure and guide. The former to to see whether the company follows its rules and system in force and the other is to see whether the current system is rational enough.

3) Independent stand

It is very important for independent non-executive directors to air their affirmative and objective views, take independent decisions. As an independent non-executive director, the law demands impartiality in taking decisions by taking into account all available information, instead of casting votes according to the views of shareholders who have appointed you.

4) Protecting the interests of all shareholders

As an independent non-executive director, an important task is protect the interests of all shareholders. In purchasing, separation, other major trading, stock repurchase or concerned party trading, the duties of the board of directors cannot be executed due to disagreement by one or more directors.

The Differences Between CEO and Chairman

4 CEO - is a company's top decision-maker, and all other executives answer to him or her. The CEO typically delegates many of the tactical responsibilities to other managers, focusing instead on strategic issues, such as which markets to enter, how to take on the competition, and which companies to form partnerships with.

Non-executive director
5

Non-executive director or outside director is a member

of the board of directors of a company who does not form part of the executive management team. He or she is not an employee of the company or affiliated with it in any other way. They are differentiated from inside directors, who are members of the board who also serve or previously served as executive managers of the company (most often as corporate officers). Non-executive directors have responsibilities in the following areas, according to the Higgs Report, commissioned by the British Government and published in 2003: Strategy: Non-executive directors should constructively challenge and contribute to the development of strategy.

Performance: Non-executive directors should scrutinize the performance of management in meeting agreed goals and objectives and monitoring, and where necessary removing, senior management and in succession planning. Risk: Non-executive directors should satisfy themselves that financial information is accurate and that financial controls and systems of risk management are robust and defensible. 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, senior management and in succession planning.

6 Executive director
An executive director is the senior manager of an organization, company, or corporation. The position is comparable to a chief executive officer (CEO) or managing director. An executive director is remunerated for his work. The role of the Executive Director is to design, develop and implement strategic plans for their organization in a costeffective and time-efficient manner. The Executive Director is also responsible for the day-to-day operation of the organization, including managing committees and staff and developing business plans in collaboration with the board for the future of the organization. In essence, the board grants the executive director the authority to run the organization. leads the organization

The Executive Director is accountable to the President of the Board and reports to the board on a regular basis - quarterly, semiannually, or annually. The Board may offer suggestions and ideas about how to improve the organization, but the Executive Director decides whether or not, and how, to implement these ideas. The Executive Director is a leadership role for an organization and often fulfills a motivational role in addition to office-based work. Executive Directors motivate and mentor members, volunteers, and staff, and may chair meetings. The Executive Director

The difference between CEO (Chair Executive Officer) and the Chairman of the Board

The 7 Chairman is the Chairman of the Board of Directors, who is voted as chairman over the board meetings. The 8 CEO is the Chief Executive Officer, usually the President who is hired by the Directors. The 9 Chairman runs the board and the 10 CEO runs the Company. The role of the chairman is to chair the board of directors and therefore he/she is responsible for the activities of the board as distinct from the activities of executive management. The chairman will often be a non-executive director. The board is responsible for setting strategy, looking after the interests of the stakeholders, and appointing the senior management team. The Chief Executive Officer is the head of executive management and responsible for the day-to-day running of the company. As such he/she is answerable to the Board and hence the Chairman. These roles are set out in the Combined Code on Corporate Governance.