The Role of Board Of Directors

Corporate governance is a system by which directors control and direct the management of a company to achieve the

best financial returns for its owners-stockholders (Wong and Yeung, 2000). The OECD provides functionality to the

definition by adding that “corporate governance structure specifies the distribution and rights among different

participants in the organization and it also provides structure for setting those objectives and means of attaining those

objectives”. Modern day corporate governance incorporates the interests of all stakeholders and this directly impact on

the scope of the roles of the Board of Directors as they play a vital part in an effective corporate governance process.

There is variety of literature in business field that sets out the roles of board of directors called which are regarded as

“Myths” by Mace as they deviate substantially from the reality. The first myth is that directors set the basic objectives,

strategies and policies. The management of the company establishes the objectives. As forming objectives requires

deep study of strengths and weaknesses, and opportunities and threats of the firm and the board consists of directors

that are appointed directors of more than one firm; consequently, they do not have adequate time and information.

Their role in reality is more of advisory (general or specialized) to the management then decision-making. Board adds

value to management decision as the board of directors comes from specialized backgrounds with substantial amount

of experience. The only can approve decisions of management based on scanty representations made to them by the

management.

The second role that literature states is that the board asks discerning questions; however, this is not always the case

due to several reasons. Firstly many board members do not have a deeper knowledge of the problems being presented

in the meeting. Secondly, many Presidents do not want challenging questions and directors often experience rebuffs by

them. Thirdly, the president selects directors, thus directors in reality represent the President. However, directors that

hold larger portions of shares do ask discern questions due to the defacto power of control. Also, in real terms, the role

of directors does bring some discipline for the president and management as they act as an administrative tool which

the president utilize for establishing work standards for the sub-ordinates.
The third misconception relating to the role of board of directors is that they select the President. The directors can

merely name the potential candidates; the retiring Presidents primarily make these decisions since they know the

members of their organization better. The new President is selected through voting of board, however, board of

directors do not usually reject President’s candidate because the President discuses his choice with before the meeting

with board members. Directors can only choose directors in emergency situations e.g. if a president dies or becomes

incapacitated.

However, in past few years corporations have witnessed pressure from several external sources such as institutional

investors, employers, community and courts due to which of Board of directors have increased their involvement in

strategic business decision making and ask discern questions.

In Pakistan, most companies are family owned and this imposes adverse effects on the board. In most of the cases

family owns nearly greater then 50 percent of the shares and thus the family members select the board members. There

is a significant gap between the stakeholder’s view of board of directors in Pakistan and the actual view. The majority

members on board are either from the family and so the family decides the roles of the board of directors. The

decisions made are primarily in the interests of the family itself rather then other shareholders or stockholders. The

executive directors (who are family members) are dominant and many times injustice decisions are being authorized

and the board approves manipulated financial statements. The members of the family use the company’s assets for

personal purposes and this becomes a problem when there are other shareholders involved apart from the family

members. Board of directors cannot form strategy, ask discern questions or evaluate the president (who is an internal

family member). Also, they cannot elect new president if the existing president dies because the positions inherited.

Board of directors only serves as discipline to outside members of the family only and to some extent to the president.

Board members sometimes act as arbitrators on problems that arise between the family. Board of directors are seldom

asked for advise by the family members on important issues related to the firms.

Effective corporate governance can be achieved through effective board of directors. Board of directors needs to have

power in real terms and also independent directors need to be strong. These innovations require structural changes e.g.

in the laws of the company as well as of the stock exchange.

 Work Cited

Habib M (2015) Stakeholders Perspective of an Ideal Board of Director in Pakistan:

A Survey from Pakistan. Arts Social Sci J 6: 149.

OECD (1999) Principles of Corporate Governance, Paris: OECD.

Mace l (1971) Directors, Myth and Reality: Harvard Business School

WONG, D.W.K., AND P.S.L. YEUNG (2000), Corporate Governance in Hong Kong, in: D.G.

Lethbridge, and S.H. Ng, eds, The Business Environment in Hong Kong, 4Edition (Oxford

University Press (China) Limited, Hong Kong) 143-153.