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Board Role in Corporate Governance and Financial Oversight
- 1. Better Companies, Better Societies Global Corporate Governance ForumGlobal Corporate Governance Forum Role of Board of Directors in Corporate Governance Financial Media Workshop Chile, January 2010 1
- 2. Outline of Presentation ï§ What is Corporate Governance?What is Corporate Governance? ï§ Building effective Board GovernanceBuilding effective Board Governance ï§ The different roles related to the BoardThe different roles related to the Board ï§ Some Concluding Thoughts!Some Concluding Thoughts! 2
- 3. 3 What is Corporate Governance? Corporate Governance is a mechanism through which boards andboards and directorsdirectors are able to direct, monitor and supervise the conduct and operation of the corporation and its management in a manner that ensures appropriate levels of authority, accountability, stewardship, leadershipleadership, direction and control. ââThe importance ofThe importance of corporate governancecorporate governance lies in its contributionlies in its contribution both to businessboth to business prosperity and toprosperity and to accountability.âaccountability.â Paragraph 1.1, Committee on Corporate Governance: Final Report Hampel Committee ââCorporate governance is concerned withCorporate governance is concerned with holding the balance between economic andholding the balance between economic and social goals and between individual andsocial goals and between individual and communal goalsâŠâŠ The aim is to align ascommunal goalsâŠâŠ The aim is to align as nearly as possible the interests ofnearly as possible the interests of individuals, corporations and society.âindividuals, corporations and society.â Sir Adrian Cadbury Corporate Governance Overview, 1999 [World Bank Report]
- 4. 4 Itâs about LeadershipâŠâŠâŠ! ï§ Leadership for efficiencyâŠâŠLeadership for efficiencyâŠâŠ âłto compete in the global economy, create jobs ï§ Leadership for probityLeadership for probity (honradez, rectitud)(honradez, rectitud)âŠ..âŠ.. âłbecause investors require confidence âłto provide assurance of management's integrity ï§ Leadership with responsibilityâŠ.Leadership with responsibilityâŠ. âłto take account of broader stakeholder interests ï§ Leadership that is accountable and transparentLeadership that is accountable and transparent âłto build trust in companies and in the economy!!
- 5. 5 Building Effective Board Governance ï§ Defining key board rolesDefining key board roles âł Board Chairman âł Chief Executive Officer âł Board Directors - executive and non-executive ï§ Putting in place board governance arrangementsPutting in place board governance arrangements âł Board committees to support decision process âł Supporting functions to regulate processes âł Board procedures and rules, e.g. conflicts of interest âł Delegated authorities for management ï§ Ensuring proper oversight and supervisionEnsuring proper oversight and supervision âł Management reporting and public disclosures âł Assurance processes and controls
- 6. 6 The Board of Directors is Pivotal ââThe board should exercise compelling and relentlessThe board should exercise compelling and relentless leadershipleadership and should not underestimate the power ofand should not underestimate the power of leading by example - evidenced by high levels of visibilityleading by example - evidenced by high levels of visibility and integrity, strong communications, and demandingand integrity, strong communications, and demanding expectations. This leadership should be clear to ALL withinexpectations. This leadership should be clear to ALL within the organization, as well as shareholdersthe organization, as well as shareholders (accionistas)(accionistas) and otherand other stakeholdersstakeholders (grupos de(grupos de interĂ©sinterĂ©s)).â.â Boardroom BehavioursBoardroom Behaviours A report prepared for Sir David WalkerA report prepared for Sir David Walker by the Institute of Chartered Secretaries and Administrators , UKby the Institute of Chartered Secretaries and Administrators , UK June 2009June 2009
- 7. 7 Audit Committee Remuneration Committee Other Committees Board Committees Strategy Board of Directors âą Achievement of strategic objectives and value creation âą Fulfil responsibilities and duties in law and prescribed functions BoardOperations Chairman Board Meetings Reporting & Disclosure Internal Controls & Assurance Executive Committee Internal Audit External Audit Other Assurance Providers Management Combined Assurance Model Governance System and Controls Corporate Policies & Procedures Board Governance Instruments Monitoring and Evaluation KeyAreasofResponsibility CEO & Management Shareholders InformationandCommunication Corporate Secretary Source: KPMG Board Governance Framework
- 8. 8 Chairman as Leader of the Board ï§ Primary rolePrimary role âł Provide overall leadership to the board ï§ FunctionFunction âł Principal link between board and CEO/management team âł Responsible for board agenda and work plan âł Work with board committee chairmen âł Involved in selection and induction of new directors âł Counsel individual directors on their performance âł Participate in discussions with investors, key stakeholders
- 9. 9 CEO as Leader of the Company ï§ Primary rolePrimary role âł Lead the management team, reporting to the board ï§ FunctionFunction âł Work closely with board chairman âł Responsible for performance of management team âł Formulate corporate strategy, annual business plan and budget âł Responsible for corporate and financial objectives âł Formulate major corporate policies âł Ensure continuous improvement in services and products âł Manage relations with investors, major customers, regulators âł Responsible for companyâs long-term sustainability
- 10. 10 Board Structure and Composition ï§ Balancing executive and non-exec. participationBalancing executive and non-exec. participation ï§ Ensuring an effective selection processEnsuring an effective selection process âł Key personal and professional attributes âł Skills aligned to strategy and business âł Also fill board committee requirements, where appropriate ï§ Some general guidelinesSome general guidelines âł Must have time to devote to responsibilities âł Must exercise judgment in best interests of company âł Must be informed about the business and its markets âł Must avoid interest conflicts between personal and business âł Must treat board information confidentially âł Should act objectively and be receptive to other perspectives âł Should prepare adequately for meetings, regular attendance
- 11. 11 Common Legal Principles of Directorship ï§ Exercise reasonable standard of careExercise reasonable standard of care âł Special business acumen or expertise not necessarily required âł Not necessarily liable for errors of judgment âł Given events following financial crisis, will this change? ï§ Duty to act in best interests of the companyDuty to act in best interests of the company âł In other words, for ALL shareholders, not special interests ââThe legal framework and company charters should not permitThe legal framework and company charters should not permit practices (such as âpre-meetingsâ and instructions on how to votepractices (such as âpre-meetingsâ and instructions on how to vote by shareholders whose votes placed a director on the board)by shareholders whose votes placed a director on the board) wherein shareholders may limit the ability of directors to exercisewherein shareholders may limit the ability of directors to exercise their duties to act in the best interest of the company and alltheir duties to act in the best interest of the company and all shareholders.âshareholders.â Paragraph 90, OECDâs White Paper onParagraph 90, OECDâs White Paper on Corporate Governance in Latin AmericaCorporate Governance in Latin America
- 12. 12 Benefits of Effective Board Committees ï§ Assist the board in its decision makingAssist the board in its decision making âł Brings together non-executives and management âł Allows detailed discussion on management matters âł But, filters out operational issues that remain with management âł And, focuses on strategic decisions required of the board ï§ Supports board responsibilities in key areasSupports board responsibilities in key areas âł Audit, internal controls and risk âł Executive compensation and management appointments âł Governance issues and corporate policies âł Nomination and selection of non-executive directors âł Others, e.g. health, safety, environment, etc. ï§ Defined terms of reference and limitationsDefined terms of reference and limitations ï§ Generally, no executive powersGenerally, no executive powers
- 13. 13 Instruments to Enhance Effectiveness ï§ Board Charter setting out procedural rulesBoard Charter setting out procedural rules âł Clarifies leadership roles and core responsibilities âł Reserves matters specifically reserved to board âł Sets management delegations and reporting arrangements ï§ Comprehensive induction for new directorsComprehensive induction for new directors âł Legal and regulatory obligations âł Financial structure of business, budgets and KPIs âł Understanding of strategic priorities and current status âł Familiarize with business operations, e.g. site visits ï§ Annual board work planAnnual board work plan âł Meetings and budget cycle, annual reporting ï§ Code of ethics or statement of business principlesCode of ethics or statement of business principles âł Defines corporate values and conduct of staff and directors
- 14. 14 Role of Corporate Secretary Supervises and co- ordinates board papers & presentations Takes the minutes of board meetings Resolves organizational matters for board meetings Works closely with Chairman and CEO on board agenda Arranges the annual shareholders meeting and other special meetings Ensures compliance with the board procedures Oversees, conducts induction trainings for newly elected directors Explains the procedural requirements of laws, the charter, and byâlaws of the company Key link between company and non-executive directors
- 15. 15 Board Role in Financial Oversight ï§ Duty to maintain proper accounting recordsDuty to maintain proper accounting records ï§ Periodic reporting of financial position, performancePeriodic reporting of financial position, performance ï§ Establishing, monitoring proper internal controlsEstablishing, monitoring proper internal controls ï§ Ensuring proper external controls and auditEnsuring proper external controls and audit ï§ Skills, knowledge required by directorsSkills, knowledge required by directors
- 16. 16 Boardâs Role in Risk Management ï§ The board should know about and evaluate the:The board should know about and evaluate the: âł Most significant risks facing the company âł Possible effects on shareowners âł Companyâs management of a crisis âł Importance of stakeholder confidence in the organization âł Communications with the investment community ï§ The board should ensure that:The board should ensure that: âł Sufficient time is devoted to discuss risk strategy âł Appropriate levels of awareness exist throughout the company âł Risk-management processes work effectively âł A clear risk-management policy is published
- 17. 17 Not an easy task - Identified Risks ï§ StrategicStrategic âł Unfocused strategy âł Strategy not aligned with capabilities âł Complacency arising from past success âł Unsuccessful acquisition/abortive bid âł Failure to manage major changes âł Reputational risk âł Loss of investorsâ confidence âł Political/general economic risk ï§ PeoplePeople âł Management leadership weak âł Inadequate succession planning âł Loss of key executives âł Poor employee motivation âł Internal communication weaknesses ï§ MarketplaceMarketplace âł Failure to respond to market trends âł Missed opportunities â new tech., global markets âł Weak or obselete brands âł Over-reliance on a few customers âł Poor customer satisfaction â quality/timeliness ï§ EthicalEthical âł Failure to enact high standards of ethics âł Obtaining contracts unethically âł Stakeholder concerns on products/business probity â poor community relations ï§ Suppliers/OutsourcersSuppliers/Outsourcers âł Over-dependence on suppliers/outsourcers âł Failure to manage cost/quality of outsourced service âł Supply chain problems âł Joint ventures, strategic alliances not working ï§ FinancialFinancial âł Cash flow/going concern problems âł Treasury operations risk âł Susceptibility to fraud/accounting irregularities ï§ Legal/ComplianceLegal/Compliance âł Failure to protect intellectual property âł Health, safety, environmental issues âł Litigation risk âł Breach of competition, corporate, employee, tax laws
- 18. 18 ââBoards must re-establish and enforce the standard thatBoards must re-establish and enforce the standard that risks are to be undertaken for the benefit of theirrisks are to be undertaken for the benefit of their constituents, not for the personal gain of management.âconstituents, not for the personal gain of management.â George Vojta Chairman of the Advisory Board of the Yale School of Management Millstein Center for Corporate Governanance and Performance and Former Vice-Chairman, Bankers Trust Corp. Restoring Integrity and Trust
- 19. 19 Six Critical Questions for Directors! ï§ Do I believe I have all theDo I believe I have all the informationinformation?? ï§ Have I the necessaryHave I the necessary skillsskills to make this decision?to make this decision? ï§ Do I have anyDo I have any conflictconflict in this matter?in this matter? ï§ Objectively, is this aObjectively, is this a rational business decisionrational business decision?? ï§ Can I explain this in aCan I explain this in a transparenttransparent manner?manner? ï§ Is it aIs it a responsible dischargeresponsible discharge of my duties?of my duties?
- 20. MCIâS GUIDING PRINCIPLESMCIâS GUIDING PRINCIPLES Build Trust and Credibility!Build Trust and Credibility! âłRespect for the Individual âłCreate a Culture of Openness and Honesty âłSet the Tone at the Top Uphold the Law!Uphold the Law! âłAvoid Conflicts of Interest âłSet Metrics and Report Results Accurately Do the Right Thing!Do the Right Thing! âłPromote Substance over Form âłBe Loyal to your Company, your Family, yourself Philip ArmstrongPhilip Armstrong Global Corporate Governance ForumGlobal Corporate Governance Forum Telephone +1 202 458 9114Telephone +1 202 458 9114 parmstrong@ifc.orgparmstrong@ifc.org www.gcgf.orgwww.gcgf.org Thank You!Thank You! 20