Corporate Governance - Role of Board of Directors

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CORPORATE GOVERNANCE - ROLE OF BOARD OF DIRECTORS
People often question whether corporate boards matter because their day-today impact is difficult to observe. But, when things go wrong, they can become the center of attention. Certainly this was true of the Enron, Worldcom, and Parmalat scandals. The directors of Enron and Worldcom, in particular, were held liable for the fraud that occurred: Enron directors had to pay $168 million to investor plaintiffs, of which $13 million was out of pocket (not covered by insurance); and Worldcom directors had to pay $36 million, of which $18 million was out of pocket. As a consequence of these scandals and ongoing concerns about corporate governance, boards have been at the center of the policy debate concerning governance reform and the focus of considerable academic research. Because of this renewed interest in boardsmuch of the research on boards ultimately touches on the question “what is the role of the board?” Possible answers range from boards’ being simply legal necessities, something akin to the wearing of wigs in English courts, to their playing an active part in the overall management and control of the corporation. No doubt the truth lies somewhere between these extremes; indeed, there are probably multiple truths when this question is asked of different firms, in different countries, or in different periods.

So what is a Board of Director (BoD) and what do Directors actually do?

“A Board of Directors is a body of elected or appointed members who jointly oversee the activities of a company or organization. Other names include board of governors, board of managers, board of regents, board of trustees, and board of visitors. 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 country’s company law, organization's bylaws and/or the Article of Association (AoA). The bylaws commonly also specify the number of members of the board, how they are to be chosen, and when they are to meet.

To better understand corporate boards, one should begin with the question of ‘what do directors do’?

Over the years there has been several indepth studies conducted and research literature published by some of the most brilliant academics only to answer this very question e.g. Mace, 1971, Whisler, 1984, Lorsch and MacIver, 1989, Demb and Neubauer, 1992, and Bowen, 1994 and their conclusions are presented breifly:

The principal conclusions of Mace were that “directors serve as a source of advice and counsel, serve as some sort of discipline, and act in crisis situations”. The nature of their “advice and counsel” is unclear but Mace suggests that a board serves largely as a sounding board for the CEO and top management, occasionally providing expertise when a firm faces an issue about which one or more board members are expert. Yet Demb and Neubauer’s survey results find that approximately two-thirds of directors agreed that “setting the strategic direction of the company” was one of the jobs they did. 80% of the directors also agreed that they were “involved in setting strategy for the company”. 75% of respondents to another of Demb and Neubauer’s questionnaires report that they “set strategy, corporate policies, overall direction, mission, vision”. Indeed far more respondents agreed with that description of their job than agreed with the statements that their job entailed “oversee[ing], monitor[ing] top management, CEO” (45%); “succession, hiring/firing CEO and top management” (26%); or serving as a “watchdog for shareholders, dividends” (23%).

According to Epstein and Roy (2006), a high performance board must achieve three core objectives; in other words Epstein and Roy nail the core responsibilities of the board:

1. Provide superior strategic guidance to ensure the company's growth and...
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