4/04/2017

IBU5GW

Ch.8 Board theories

Governance
and board structure
in a Globalising World
Thomsen, S., Conyon, M., 2012,
Week 6 Corporate Governance; Mechanisms
Board and directors and Systems, McGraw Hill.

Introduction The Board of Directors

Boards are a central corporate governance
mechanism
Sometimes synonymous with corporate
governance
Appointed by shareholders to perform
monitoring duties, i.e., and intermediary thats
also finally responsible for all major business
The key purpose of the Board is to ensure the companys
prosperity by directing its affairs and meeting the legitimate
interests of its shareholders and other interested parties.
The principal agent of risk taking, enterprise and
commercial judgment.
The Board of Directors is clearly accountable for
discovering risks associated with the firms industry and
assessing its ethics programme to ensure that it is capable
of uncovering misconduct.
[Institute of Directors UK]

decisions

ASX Regulatory Framework

An effective Board is one that facilitates the Corporations Act 2001 [amended 2004 & 2010]
effective discharge of the duties imposed by Company Constitution
law on directors and adds value in a way that Common Law [Case Law]
is appropriate to the particular companys Guidelines/Codes
circumstances. Listed companies ASX Guidelines Listing Rules

[Institute of Directors UK]

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Corporations Act Corporations Act 2001

All aspects of corporate governance. Powers of directors;

Director duties & liabilities; Appointment process;
Shareholder rights; Remuneration;
Financial reporting; Termination;
Company meetings.
Calling meetings;
Chairing meetings;
Passing of resolutions.

Constitution Common Law

Internal governance rules; Judge-made law;
Constitution usually states that directors can exercise all
powers of the company except those which the
Develop and apply legal principles;
Corporations Act requires the company to exercise at a Interpret the law if law is vague;
general meeting.
Only change by special resolution from shareholders;
Commonly acceptable practice.
Appointment or removal of directors;
Transfer of shares & dividend payments;
Procedures at meetings;
Borrowing powers;
Director remuneration etc

Discussion Board Composition

Who would be on Appointment determined by Constitution. Public

company if appointed by directors resolution must be
your Board of Directors? confirmed at AGM. Notify ASIC within 14 days. ASX
requires notice of general meeting proposing of
directors appointment and board changes.
Listing Rules prohibits director for holding office for
more than 3 years without re-election. Casual vacancy
only for 1 year.
Cannot be removed by other directors. Simple majority
at shareholder meeting can remove director. Notice of
intention must be given to company 2 months prior.
Director has right to reply.
Corporations Act permits directors to hold shares. ASX
requires disclosure of interest and changes to interest.

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Board Composition Board membership in Australia

Director qualifications Unitary board structure.
Membership criteria Employees not entitled by law to have
representation on board.
Director nomination process
Corporations Act sets minimum number of
Board independence majority directors public companies at 3.
Leadership Corporations Act sets minimum age 18, and retire
Personal characteristics independent thought, at 72 unless shareholders agree at each AGM.
Core competencies financial language, business Corporations Act requires that 2 directors reside in
environment Australia for public companies.
Availability Guidelines recommend that majority of non-
executive directors
Guidelines recommend roles of CEO and Chairman
separate. If combined an independent non-exec
deputy chair
Board members, Australand

Combining Chairman and

Board of directors in Australia
Managing Director Roles
Not recommended because:- https://www.commbank.com.au/about-
Chairman manages Board, MD manages the us/shareholders/corporate-profile/board-of-
business; directors.html
Difficult to be objective about management
performance; http://www.billabongbiz.com/phoenix.zhtml?c=15427
Role to be played in Boardroom? 9&p=irol-govboard
Too much power in one person;
Two minds better than one; http://www.shareholder.anz.com/node/13748
Under pressure, management demands take
precedence over governance;
Too much work for one person.

A unitary board with committees Two Tier Board Structure

Two separate Boards =

Management Board; specific business dealings;
the board
executive management of the business.
Supervisory Board; shareholders and employees
supervising management.

audit and risk social responsibility occ. health and safety France, Germany.

non-executive director

executive director
nominations remuneration

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Two-tier board example Principles of a good board

Meet frequently;
Maintain balance of power;
No individual dominates;
High level of trust;
Listen to members;
Ethical with integrity;
Effective communication within the Board.

Dual board structure, DVB Bank, Germany

Principles continued Principles continued

Open to new ideas; Dell on effective

Understand company business; Board of Director
Understand risks;
Communicate with shareholders;
Communicate with other stakeholders;
Continuous professional development;
http://www.youtube.com/watch?v=ygu8fnF-RU0

Principles continued Challenges for the Board

Fortune's Geoff Colvin Be entrepreneurial and drive the business forward

whilst being prudent;
talks about how the
Be sufficiently knowledgeable about the workings
success of a Board of of the business to be answerable for its actions yet
Directors be able to stand back and take an objective long
term view;
Sensitive to short term pressures yet have broader
long term plans;
Knowledgeable about local issues but think
global;
http://www.youtube.com/watch?v=zp_jvdTBnD8
Focus on commercial needs but acting responsibly
towards all stakeholders.

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Effective Board Characteristics Evaluating the Board

Clear strategy aligned to capabilities; Chairman evaluate directors;

Non-executives evaluate chairman;
Vigorous implementation of strategy; Set SMARTER objectives;
Key performance drivers monitored; Compare results with competitors; S pecific
Effective risk management; Well prepared for meetings;
Report at AGM;
M easureable
Sharp focus on views of stakeholders; Financial reporting full and R ealistic
Regular evaluation of Board performance. accurate. A chievable
Human Capital Reporting:- T imebound
Skills and experience of employees;
Knowledge that remains in the business; E xciting
R eviewable

Consider The board of directors

The board has decision-making rights over
Boards are effective only when held to
the firms assets
account by vigorous and alert owners who
devote the time and effort needed for Board size usually around ten members
engagement. Three types of directors:
Executive directors
[Paul Myners; Financial Services Minister; UK Government] Outside directors
Independent directors
CEO duality - chairman and CEO in one
person, a central question in the corporate
governance debate

The board of directors (contd) Board structure in the USA

Evaluation of finances Have become smaller over time

Strategy Since 2010 required to include a statement in
Executive compensation the firms proxy statement on whether CEO
Nominate board members
Stakeholder policies (stakeholder, ethics etc) duality is employed and if so, why this is
Advise executives considered most appropriate for the firm
Ensure the law being followed 51.3% of S&P1500 firms employ CEO duality
Risk management Lead directors on the rise: suggestion that
Investor relations
Business relationships companies with CEO duality should nominate an
independent director to serve as the presiding
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director

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The challenge of institutional
theory
Social pressure triggers the spread of organizational
practices, like corporate governance
The mechanism works the same for positive and negative
practices
As we can detect fashion waves in corporate governance,
we know that not everything is decided by financial
rationality, but that firms tend to imitate each other
Leads us to question what practices are valuable, as
firms tend to adopt one size fits all practices even
though scholars stress the need for firm-specific solutions
Board independence
Independence is the most discussed aspect of
board structure
What defines the independent director?
Not an employee (in the past or present)
No business relationship
Has not received remuneration from the firm
Does not participate in stock option schemes etc.
No close family ties
No cross-directorships
Do not represent a significant shareholder
Has not served on the board for more than nine years
Board diversity
Increasingly important
Women on board an intense debate
Other types of diversity considered: ethnicity,
experience, education, background
The case is that board diversity increase quality of
decision making and ultimately performance, reduce
groupthink, and that there are moral and social
justification reasons for diverse boards
Empirical evidence does not support the claimed case
for board diversity
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Board structure and company
performance
Its being argued that independent boards are better at
monitoring (which should lead to higher performance)
but empirical studies report mixed results
Reasons to believe that board structure and board
behavior depend on capital structure, ownership,
corporate law, and other mechanisms
Boards are part of complex systems, making it hard to
isolate board effects
Board size
Large boards less effective due to more extensive free
rider problems?
Board composition is not related to corporate
performance, but board size is negatively related to
corporate performance (Hermalin and Weisbach,
2003)
Several studies support, with some recent studies
producing conflicting evidence
Employee representation
Mandatory employee representation in several
European countries
Some claim that employee representation is essential
to ensure employee investments in specific skills
Opponents claim that codetermination put the firm at
risk of becoming labor-managed and less competitive
Empirical studies report some support to the latter view
when employee representatives are in majority
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Other studies of the board structure Summary

Boards are clearly important in a corporate

governance system

Efficient in handling agency problems, provide

advice to management, and connect the firm to
important constituencies

Limited by time constraints and knowledge