CORPORATE GOVERNANCE

CORPORATE GOVERNANCE

Role of Board of Directors

A corporation is a company or group of people authorized to act as a single entity. In a corporation different parties contribute capital, labour and expertise for their mutual benefit. The shareholder provides funds for running the company without taking responsibilities for the operation of the business, the management shoulders the responsibility of the smooth running of the business without being responsible for personally providing the funds.To make this possible, laws have been passed that give shareholders limited liability and, correspondingly, limited involvement in a corporation’s activities. That does not mean that the shareholders do not have any say in the business, because they possess the right to elect directors who have a legal duty to represent the shareholders and protect their interests. This being said, the directors run the company on behalf of the shareholders, they establish basic corporate policies and ensure that they are being followed.

The Board of directors set the corporate and strategic goals of the company and should ensure they make decisions that affect positively the long term performance of the company. So it can be said that that the corporation is fundamentally governed by the board of directors overseeing top management, with the concurrence of the shareholders and with the interest of the shareholders in mind. Corporate governance then refers to the relationship among this three groups in determining the direction and performance of the corporation.

In the past, there has been the issue of conflict of interest, between the directors and shareholders. The directors might just be looking to fill their pockets and feather their own nests without making the interest of the shareholders their number one priority. So they came about inside board members who run the company on a day to day basis and are involved in the operations,and the outside board members whose sole purpose is to monitor and provide guidance to the top management. But this was not enough as outside board members often lacked sufficient knowledge,involvement and enthusiasm to do an adequate job. So people started clamouring for the government to demand accountability by the board of directors.

Now lets look at some of the responsibilities of the board of directors

a) Setting corporate strategy,overall direction,mission or vision

b) Hiring and firing the CEO and top management

c) Controlling,monitoring or supervising top management

d) Reviewing and approving the use of resources

e) Caring for shareholder interests.

A survey by the national association of Corporate Directors,in which US CEOs reported that the four most important issues boards should address are corporate performance, CEO succession,strategic planning and corporate governance. Directors must ensure management's adherence to laws and regulations,such as those dealing with issuance of securities,insider trading and conflict of interest situations. In the legal sense of it,directors are charged with directing the affairs of the corporation and not managing it but they often shoulder both responsibility.

A 2008 global survey of directors by McKinsey & Company revealed the average amount of time boards spend on a given issue during their meetings.

• Strategy (development and analysis of strategies) 24%

• Execution (prioritizing prorams and approving mergers and acquisitions) 24%

• Performance management (development of incentives and measuring performance) 20%

• Governance and compliance (nominations, compensations,audits) 17 %

• Talent management 11%

ROLE OF THE BOARD OF DIRECTORS IN STRATEGIC MANAGEMENT

The only role of the oard of directors in strategic management is to carry out three basic tasks which are:

• Monitor: The board of Directors set up committees to monitor developments inside and outside the corporation,bringing to the notice of management developments it miggt have overlooked.

• Evaluate and influence: The board of directors can examine and influence to a great extent managements decisions and actions,throught their expertise they may present better course of action for management to take,and advise managements on projects currently being undertaken.

• Initiate and determine: A board might help in the formation of a company's mission and specify strategic options to its management.

DEFINITIONS OF CORPORATE GOVERNANCE:

Dayton (1984) as cited in Godwin(2006) defines corporate governance as the process,structures and relationships through which the board of directors oversee what executives do.

Robins and Coutler (2005) note that the system used in corporate governance is to ensure that the interest of the corporate owners are protected. The confederation of indian industry (CII) (1997) states that corporate governance deals with laws,procedures,practices and implicit rules that determine the company's ability to take managerial decisions via its claimants in particular its shareholders,creditors ,the state and employees.

Then corporate governance as been defined has a system of law and sound approaches by which

corporations are directed and controlled focusing on the internal and external corporate structures

with the intention of monitoring the actions of management and directors and thereby, mitigating agency risks which may stem from the misdeeds of corporate officers.

Corporate Governance Principles and Codes

They are various guidelines and legal requirements for corporate governance in each country in the world,for example the principles of corporate governance set by the organization for economic cooperation and development includes the following:

• Promotion of transparency and efficiency in the market to be in harmony with the rule of law.

• Guarantee and protect the rights of the shareholders

• Ensure equity in the treatment of shareholders

• Recognition of the rights of shareholders as provided by the law.

• Timely and accurate disclosure of information on all matters relating to the company.

• The strategic guidance of the company and the effective monitoring of management by the board of directors as well as board's accountability to the company and its shareholders.

AGENCY THEORY VS STEWARDSHIP THEORY

what brings about this is the question "Do directors put themselves or the firm first?. Lets now briefly analyse each theory.

AGENCY THEORY: Agency theory is concerned with analyzing and resolving two problems that occur in relationship between principals and their agents,which in this case principals refer to owners / shareholders and agents refers to top management.

1) The agency problem arises when the desires or objectives of the owners and the agents conflict,ie the agents are looking to pursue their own interests at the expense of the principal or in this case shareholders.

2) Risk sharing problem that arises when the owners and agents have different attitudes towards risk.Executives may not select risky strategies because of the fear of loosing their jobs If they fail.

There is an increase of likelihood of occurrence of these problems if there a large number of dispersed shareholders,ie there is no concentration of a large percentage of shares with a single shareholder. Also there are risks of occurrence when the directors are too familiar with management and the concentration of directors is in inside directors.

To combat these problems,agency theory suggests that top management have a significant degree of a ownership in the firm and have a strong financial stake in its long term performance. In support of this argument,research indicates a positive relationship between corporate performance and the amount of stock owned by directors.

STEWARDSHIP THEORY: stewardship theory believes that management can be motivated to act in the best interest of the corporation rather than their own self interest,through avenues such as achievement and self actualization. Stewardship theory argues that senior executives over time tend to view corporations as an extension of themselves.

The relationship between the board and top management now becomes that of principal and steward and not principal and agent.

In contemporary organizations,some of the commonly cited principles of corporate governance include:

• Right and equitable treatment of shareholders

•  Recognition of legal,ethical and other obligations of the corporation

• Maintaining and observing integrity and ethical behaviour by the corporate management and directors.

•  Disclosure and transparency of the roles and responsibilities of the board and management to provide for shareholders some level of accountability and transparency.

• Financial,internal control and independence of auditors.

• Objective procedures for selecting board members

• Review of exexutive compensation

• Appropriate dividend policy

• Commitment to strategic success of the corporation.

IMPACT OF SARBANES-OXLEY ACT

The U.S congress passed the Sarbanes-oxley act in june 2002 as a result of the corporate scandals uncovered since 2000. In implementing the sarbanes-oxley act, the U.S Securities and Exchange commission (SEC) required in 2003 that a company disclose whether it has adopted a code of ethics that applies to the CEO and to the company' principal financial officer.The SEC also requires that the audit,nominating and compensating committees be staffed entirely by outside directors.

The new york stock exchanged has also backed this up by requiring companies to have a nominating governance committee composed entirely of independent outside directors. Also NASDAQ rules require that nominations for new directors be made by either nominating a committee of independent outsiders or by a majority of independent outside directors.