The Board of Directors

 Director is an officer of the company charged

by the board of directors with the conduct and
management of its affairs.
 The directors of the company collectively are
referred to as a board of directors and have a
duty of corporate governance,
 The shareholders appoint the chairman of the
board and all other directors (upon
recommendations from the nominations
committee).
Board Structures
 There are two kinds of board structure, unitary and two-
tier (dual) boards.
1) The unitary board
Is the form of board structure characterised by one
single board comprising both executives and non-
executive directors.
Advantages
 Compromise: less extreme decisions developed prior to
the need for supervisory approval.
 Responsibility: a cabinet decision making unit with wide
viewpoints suggests better decisions.
 Reduction of fraud, malpractice: this is due to wider
involvement in the actual management of the company.
 Improved investor confidence
 2) Two-Tier Board
A corporate structure with two boards of
directors. These are predominantly associated
with France and Germany.
a) Lower tier: management (operating) board
 Responsible for day-to-day running of the
enterprise
 Generally only includes executives
 The CEO coordinates activity.
b) Upper tier: supervisory (corporate) board
 Appoints, supervises and advises members of
the management board
 Strategic oversight of the organisation
 Includes employee representatives,
environmental groups and other stakeholders’
management representatives
 The chairman coordinates the work
 Members are elected by shareholders at the
annual general meeting (AGM)
 Receives information and reports from the
management board.
 Advantages of a two-tier board

 Clear separation between those that manage the

company and those that own it or must control it
for the benefit of shareholders.
 Implicit shareholder involvement in most cases
since these structures are used in countries where
insider control is prevalent.
 Wider stakeholder involvement implicit through
the use of worker representation.
 Independence of thought, discussion and decision
since board meetings and operation are separate.
 Direct power over management through the right
to appoint members of the management board
 Problems with a Two-Tier Board

 Dilution of power through stakeholder

involvement.
 Isolation of supervisory board through non
participation in management meetings.
 Agency problems between the two boards.
 Added bureaucracy and slower decision
making.
 Reliant upon an effective relationship between
chairman and CEO.
 ROLE AND FUNCTION OF THE BOARD

The board should act as the focal point for corporate

governance

 Companies should be headed by a board that should direct, govern

and be in effective control of the company.
 The board should collectively provide effective corporate governance
that involves managing the relationships between the management
of the company, its board, its shareholders and other relevant
stakeholders.
 The board’s paramount responsibility is the positive performance of
the company in creating value for its shareholders.
 The board should exercise leadership, enterprise, integrity and
judgment in directing the company so as to achieve continuing
survival and prosperity for the company.
 The board should ensure that stakeholders are engaged in such a
The board should ensure that the company acts as and
is seen to be a responsible corporate citizen

 The company should not undermine the

sustainability of the social and natural
environment.
 As part of corporate citizenship the company
should be sustainable and should enable
future generations to meet their needs.
The Board should cultivate and promote an ethical corporate culture

 Ethical conduct should be promoted.

 Integrity should permeate all areas of the
company.
 Ethical conduct should be evident in the
company’s relationship with society and the
natural environment.
 Ethical standards should be involved and
followed in all aspects of the company’s
business.
 The Board should appreciate that strategy, risk,
performance and sustainability are inseparable

 All Directors should participate in strategy. The Board

should not merely receive strategy from management.
 Long and short term strategy should be considered
and approved by the Board.
 Key performance indicators and risk areas should be
identified for the financial, ethical standing and
sustainability of an enterprise.
 Strategy should be set in accordance with the purpose
of the company.
 Long term planning should result in sustainable
outcomes.
 The Board should consider sustainability as a
business opportunity
 The business should result in value being created. This
value should include the triple bottom line, namely:
 Social performance
 Economic performance
 Environmental performance
 The needs of future generations should not be
adversely affected by business practices which are not
sustainable.
 Sustainability is a business opportunity, to eliminate or
minimise adverse consequences for the company, on
the community and the environment and to improve
the impact of the company’s operations on the
 The Board should appoint the Chief Executive Officer
and establish a framework for the delegation of
authority

• The Board should appoint the Chief Executive Officer.

• A succession plan should exist for the CEO, senior
Executives and Board Members.
• The Board may delegate authority but should not
attempt to abdicate its responsibilities.
• Levels of materiality should be defined by the Board.
• The Board should exercise objective judgment; which is
independent from that of management.
• A process should be agreed to provide directors with
access to company information and records.
 The Board should be responsible for the
process of risk management

 Risk appetite and risk tolerance levels should

be set.
 Key risk areas should be identified.
 Key risks should be quantified and monitored.
The Board should be involved in this process
always
 The Board and its Directors should act in the best
interests of the company
 Each director has individual responsibility, despite the
Board having a reflective role.
 Each director has a duty to exercise a degree of care,
skill and diligence.
 Each director also has a fiduciary duty to act in good
faith and in the best interests of the company and/or
other entity.
 Failure to exercise his/her duties may render a
director personally liable.
 Directors should be entitled to take independent
professional advice, by a process which is clearly set.
The Board and its Directors should manage conflicts
of interest

 The interests of the company should take

precedence over the personal interests of a director.
 Representatives of major shareholders should
recognise the potential for a conflict of interest.
 Conflicts of interest should be disclosed timeously.
 Dealing in securities/shares should be prohibited
during closed periods and in periods in which
directors are in possession of price-sensitive
information.
The Board should ensure the integrity of
financial reporting

 Structures should exist to verify and safeguard

the integrity of financial reporting.
 The factual presentation of the company’s
financial position should be ensured by:
– Requiring the Audit Committee to review financial
statements; and
– Ensuring the independence of external auditors
 The Board should report on the effectiveness of
internal financial controls

 The Integrated Sustainability Report should

contain a statement from the Board on the
establishment of formal policies and
frameworks, which will result in effective internal
financial controls.
 A written assessment should be provided by
internal audit with regard to the effectiveness of
internal financial controls.
 The Board should ensure that the company makes full and
timely disclosure of material matters concerning the company
 Effective communication should be maintained with
stakeholders.
 Formal contact with stakeholders is possible through the
Integrated Report.
 The Board should provide commentary on the company’s
financial results, to enable an investor to assess the company’s
economic value.
 The Board should disclose if the company is a going concern.
 The Integrated Report should contain:
 The reason for any directors ceasing to be in office
 The names of directors and their attendance at meetings
 The age and length of service of each director
 Each director’s list of other directorships
 Shareholders should be encouraged to attend Annual General
 Potential Problems for Boards
• Most boards largely rely on management to
report information to them (and may not have
the time or the skills to understand the details of
company business), thus allowing management
to obscure problems and the true state of a
company.
• A board that meets only occasionally may be
unfamiliar with each other. This can make it
difficult for board members to question
management.
 CEOs often have forceful personalities,
sometimes exercising too much influence over
the rest of the board.
 The current CEO's performance is judged by
the same directors who appointed him/her
making it difficult for an unbiased evaluation.
 Composition of the Board
 A board should have a balance of executive and
non-executive directors, with a majority of non-
executive
 This is to reduce an unfavourable balance of
power towards executives.
 The principal of independence should also be
considered.
 A minimum of two executive directors should be
appointed. This should include the CEO and the
Chief Financial Officer / Director.
 Rotation of non-executive directors should be
Non -Executive Directors (NEDs) Roles
 Independence
The board should consist of most independent
directors excluding the chair because of the
following reasons.
 To provide a detached and objective view of board
decisions.
 To provide expertise and communicate effectively.
 To provide shareholders with an independent
voice on the board.
 To provide confidence in corporate governance.
 To reduce accusations of self interest in the
behaviour of executives
Threats to Independence of Directors
 NEDs on the Board
 Monitoring: they offer a clear monitoring role,
particularly on remuneration committees to dampen
the excesses of executives.
 Expertise: to expand this resource available for
management to use.
 Perception: institutional and watchdog perception is
enhanced because of their presence.
 Communication: the implied improvement in
communication between shareholders interests and
the company.
 Discipline: NEDs may have a positive influence on
the success or otherwise of takeovers
Chairman and CEO
• It is vital for good corporate governance to
separate the roles of CEO and chairman.
• The division of responsibilities between the
chairman and CEO should be clearly
established, set out in writing and agreed by
the board.
 Chairman’s Responsibilities
 Setting the ethical tone
 Providing overall leadership
 Participating in the selection of Board members
 Overseeing a formal succession plan for the Board
 Setting the Board work plan
 Being a link between the Board and management
 Maintaining an arms-length relationship
 Adopting a lead role in removing non performing directors;
 The Chairman should meet with individual directors, at least
once in every year
 Mentoring new directors
 Ensuring that directors have a knowledge of their duties and
responsibilities
 Ensuring that good relationships are maintained with major
 CEO's Responsibilities
 Achieving financial and operating goals and
objectives
 Ensuring that a long term strategy is developed
 Ensuring that a positive and ethical work climate
exists
 The CEO should be the chief spokesman of the
company
 Take responsibility for the performance of the
company, as determined by the board’s strategy
 Report to the chairman and/or board of directors.
 BOARD APPOINTMENT PROCESSES

 Directors should be appointed through a formal

process
 Shareholders are responsible for the composition
of the Board.
 The Board as a whole would normally appoint
directors, assisted by recommendations from the
Nominations Committee.
 The background of all potential directors should
be verified before an invitation is extended to
join the Board.
 The induction process of the Board
The purpose of the induction is to achieve the
following:
 To communicate vision and culture.
 To communicate practical procedural duties.
 To reduce the time taken for an individual to
become productive in their duties.
 To assimilate an individual as a welcome
member of the board.
 To ensure retention of individuals for future
periods
 Continuing Professional Development (CPD)
The following offers guidance on directors' CPD
requirements:
 To run an effective board, companies need to
provide resources for developing and refreshing the
knowledge and skills of their directors, including the
NEDs.
 The chairman should address the developmental
needs of the board as a whole with a view to
enhancing its effectiveness as a team.
 The chairman should also lead in identifying the
development needs of individual directors
 NEDs should be prepared to devote time to keeping
 Fiduciary Duties of Directors
Being aware of the objective and the power
vested in directors leads to consideration of the
nature of the fiduciary relationship.
 The duty to act in good faith- as long as
directors' motives are honest and they genuinely
believe they are acting in the best interests of
the company they are normally safe from claims
that they should have acted otherwise.
 The duty of skill and care - The law requires a
director to use reasonable skill and care in
carrying out their tasks.
 Conflict and Disclosure of Interests

 The fiduciary duty of directors is to act in the

best interests of shareholders
 the directors should not put themselves in a
position where their own
 personal interests conflict with the duties
that they owe to the company as director.