“the Economic Efficiency Principle Underlies Management Effectiveness”

Topics: Corporate governance, Management, Board of directors Pages: 12 (3002 words) Published: March 6, 2013

Before any discussion on strategies the Board undertakes to properly direct and control an entity it will be prudent to have an understanding of the role and responsibilities of the Board. It is also important to note here that the role of the Board of Directors has changed significantly since the Enron Scandal of 2001. Far more responsibilities have been placed on the Board after the Enron Scandal in USA than before.

The Sarbanes/Oxley Act of 2002, which was America’s response to the Enron Scandal, introduced what is perhaps one of the most significant pieces of legislation associated with the oversight of corporate ethics - which sets guidelines and requirements for Accounting, financial disclosure, and the ethical behavior of corporations.

Other scandals that have contributed “positively” to corporate governance in entities include the Worldcom Scandal and the Parmalat Scandal. Both of these scandals, along with the Enron Scandal, led to significance changes on the composition, structure, ethical behavior, roles and responsibilities of Boards of Directors over the past decade. Details of these scandals and what contribution they made to corporate governance will be discussed in this paper.

Through Board decisions and decisions of Sub-Committees of the Board, control is exercised in an organisation. However, as shall be discussed later in this presentation, the integrity of the individual Directors and Managers and their commitment to good corporate governance is essential for the success of these controls.

The failure and bankruptcy of key global enterprises including Enron, Parmalat and WorldCom between 2001 and 2003 point to a total lack of ethical behaviour by Board and Management despite the existence of Sub-Committees of the Board.

Traditional Role of Boards

"At the core of corporate governance, of course, is the role of the board in overseeing how management serves the long-term interests of share owners and other stakeholders. An active, informed, independent and involved board is essential for ensuring the company’s integrity, transparency and long-term strength…” General Electric, 2002 Annual Report.

Boards have always been expected to play significant roles in the management of an entity. How effectively Boards play these roles is dependent on a variety of factors including its composition ,whether its members are non-executive or executive, and whether or not the CEO plays the role of chair as well.

As I indicated earlier, these roles are quickly changing and evolving.

• The Oversight Role of the Board

The role of the Board has traditionally been understood to be one of oversight. The Board is expected to supervise top Management of an entity on behalf of shareholders (some could be part of the board as non executive directors). Shareholders appoint the Board and delegate certain authority, including oversight authority, to the Directors to “direct” and “control” the entity on behalf of the shareholders. Their role therefore, is not just limited to taking care of shareholders’ wealth and ensuring a good return on investment but also supervising the top Management to ensure prosperity and survival of the entity.

In this role the Board is held accountable to the shareholders.

• Focal Point for Corporate Governance

Conflict of interest between sitting Directors and the company on whose Board they sit is discouraged. The Board is meant to ensure that there exist no business interests and conflict between their private companies or those of Management and the company. Proper division of the roles and responsibilities of the Board and Management is also enforced. In order to enhance good corporate governance the Board formulates policies and oversees their implementation by Management.

This is important as it ensures independence of the Board. Involvement in business association with the company often erodes the...
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