Corporate Governance

By: 1. Kenneth A. Kim John R. Nofsinger

And 2. A. C. Fernando

The Board of Directors

Lecture 9

Last Lecture Review◦ A BoDs is a body of elected or appointed members who

jointly oversee the activities of a company.◦ BoDs are appointment at the public Annual General

Meeting of shareholders.◦ Types of board are depending upon company status as

well as the territory where the company prevails. ◦ Normally, we can see One-Tier board in common law

based societies (like US and UK) and Two-Tier board in civil law based societies (like Germany etc).

The Board of Directors

BoDs functions involve to hire, evaluate or even fire the top management, to vote in support or against of major proposals as well as financial decisions.

In short, BoDs main primary function is to safeguard the shareholder’s interest.

But the most important factor is to think a lot before selecting your board.

The Board of Directors

Lecture Outlines◦ Overview of the Board

Board legal duties May not be the federal law requirement but the state

wants BoDs. Firms profitability and increase in share value Loyal and fair Take care of the rule of ethics

Employment practices Human rights Environment regulations Corruptions Moral obligations

The Board of Directors

Board Committees

◦ An Executive Committee◦ A Finance Committee◦ A Public Relation Committee

Board Sub Committees◦ Audit Committee◦ Compensation Committee◦ Nomination Committee

The Board of Directors

Overview of the Board

The Board Legal Duties

◦ No federal law explicitly dictates that public corporation must have a BODs.

◦ State laws vary from one state to the others.

◦ Fortunately every state requires that a corporation having a BODs.

The Board of Directors

◦ Directors are supposed to enhance the firm’s profitability and share value.

◦ Directors also have a duty of loyalty and fair dealing.

◦ They must put the interest of shareholders before the their own individual interest.

◦ Must perform the duty of care, means being informed and making rational decision.

The Board of Directors

◦ Must perform the duty of Supervision to establish the rules of ethics by holding regularly meetings to review the firm’s performance, operations and management. Business ethics are Employment Practices, Human

Rights, Environment Regulations, Corruption, Moral Obligation of MNCs.

◦ They must ensure that the accurate financial reporting and objective auditing are taking place.

The Board of Directors

Board Committees

Some board include;

◦ An executive committee Group of directors appointed to act on behalf of, and

within the powers granted to them by, the board of directors. Typically it consists of a chairperson, vice-chairperson, secretary, and treasurer.

The Board of Directors

Or◦ Senior-level management committee empowered to

make and implement major organizational decisions.An executive committee often acts as an overseer of organizational activities and has the authority to request justification of certain matters as well as to plan activities.

The Board of Directors

◦ A finance committee The main duty of the Finance Committee is to

maintain a continuing review of the financial affairs of the Institute. Using this information, it is the committee’s duty to make appropriate recommendations to the Board or the Executive Committee regarding financial matters.

The Board of Directors

A community relations committee

The Community Relations Committee (CRC) facilitates

dialogues and activities between different

stakeholders.

The Board of Directors

The most common board sub committees are;◦ Audit Committee

◦ Compensation Committee

◦ Nomination Committee

“A great deal of important board work occurs at the subcommittee level and subsequently goes to the full board for approval.”

The Board of Directors

Audit Committee

◦ an audit committee is an operating committee of the BOD charged with oversight of financial reporting and disclosure.

◦ Committee members are drawn from members of the company's board of directors, with a Chairperson selected from among the committee members.

The Board of Directors

◦ A qualifying audit committee is required for a U.S. publicly-traded company to be listed on a stock exchange.

◦ To qualify, the committee must be composed of independent outside directors with at least one qualifying as a financial expert.

The Board of Directors

Responsibilities of an Audit Committee

◦ Overseeing the financial reporting and disclosure process

◦ Monitoring choice of accounting policies and principles.

◦ Overseeing hiring, performance and independence of the external auditors.

The Board of Directors

◦ Oversight of regulatory compliance, ethics, and whistleblower hotlines.

◦ Monitoring the internal control process.

◦ Overseeing the performance of the internal audit function.

◦ Discussing risk management policies and practices with management.

The Board of Directors

Compensation CommitteeThe main purpose of the Compensation

Committee is;

To assist the BODs in discharging its responsibility to the shareholders with respect to the company’s compensation programmes

To review the annual compensation discussion and analysis in the annual report.

The Board of Directors

Appointment and Removal

◦ The members of the Compensation Committee shall be designated by the Board.

◦ Any member of the Compensation Committee may be removed from the committee with or without cause

The Board of Directors

Nomination Committee The Board of Directors shall appoint a

Nominating Committee of at least two members, consisting entirely of "independent" directors of the Board

Each member shall serve on the committee at the pleasure of the Board of Directors and may be removed by the Board at any time with or without cause.

The Board of Directors

Purpose of Nominating Committee

(i) to identify individuals qualified to become Board members,

(ii) to recommend to the Board director candidates for each annual meeting of stockholders or as necessary to fill vacancies and newly created directorships and

(iii) to perform a leadership role in shaping the Company's corporate governance policies, including developing and recommending to the Board a set of corporate governance principles.

The Board of Directors

Duties and ResponsibilitiesSome of the duties and responsibilities are ;

◦ Recommend criteria for Board membership.

◦ Identify and recruit candidates for the Board.

◦ Conduct the appropriate and necessary inquiries into the backgrounds and qualifications of possible candidates for Board membership.

The Board of Directors

◦ Recommend to the Board candidates to fill new or vacant positions on the Board.

◦ Recommend to the Board candidates for the election of directors at each annual meeting of stockholders.

◦ Oversee the Company's corporate governance matters and policies, including the development of a set of corporate governance principles, and periodically review such principles and recommend changes to the Board as necessary.

The Board of Directors

◦ Oversee the evaluation and assessment of the Board and Board committees.

◦ Evaluate annually the performance of the

Nominating Committee . ◦ Perform such other duties and responsibilities

as are consistent with the purpose of the Nominating or as may be assigned from time to time by the Board of Directors.

The Board of Directors

Summary◦ Overview of the Board

Board legal duties May not be the federal law requirement but the state

wants BoDs. Firms profitability and increase in share value Loyal and fair Take care of the rule of ethics

Employment practices Human rights Environment regulations Corruptions Moral obligations

The Board of Directors

Board Committees

◦ An Executive Committee◦ A Finance Committee◦ A Public Relation Committee

Board Sub Committees◦ Audit Committee◦ Compensation Committee◦ Nomination Committee

THE END

The Board of Directors