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Submitted By:
Marzia Fatimah
Fa09-mm-0048
Submitted to:
Mr. Atifuddin
Mention the phrase "board of directors" to the average investor, and they are likely to conjure up
images of nicely dressed men and women standing around a mahogany table, smiling
congenially. This is entirely understandable; many annual reports prominently feature glossy
photographs of just such a scene. Now, ask the investor to describe the primary responsibility of
the board of directors and very few will be able to give you a definitive answer.
Purpose, Authority and Responsibility of the Board of Directors
The primary responsibility of the board of directors is to protect the shareholders' assets and
ensure they receive a decent return on their investment. In some European countries, the
sentiment is much different; many directors there feel that it is their primary responsibility to
protect the employees of a company first, the shareholders second. In these social and political
climates, corporate profitability takes a back seat the needs of workers.
The board of directors is the highest governing authority within the management structure at any
publicly traded company. It is the board's job to select, evaluate, and approve appropriate
compensation for the company's chief executive officer (CEO), evaluate the attractiveness of and
pay dividends, recommend stock splits, oversee share repurchase programs, approve the
company's financial statements, and recommend or strongly discourage acquisitions and
mergers.
The number of directors can vary substantially between companies. Walt Disney, for example,
has sixteen directors, each of whom are elected at the same time for one year terms. Tiffany &
Company, on the other hand, has only eight directors on its board. In the United States, at least
fifty percent of the directors must meet the requirements of "independence", meaning they are
not associated with or employed by the company. In theory, independent directors will not be
subject to pressure, and therefore are more likely to act in the shareholders' interests when those
interests run counter to those of entrenched management.
In General Electric's 2002 annual report, the issue of director independence was addressed: "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 GE’s integrity, transparency
and long-term strength. As a result of the 2002 changes, 11 of GE’s 17 directors are
'independent' under a strict definition, with a goal of two-thirds."
In exchange for providing their services, corporate directors are paid a yearly salary, additional
compensation for each meeting they attend, stock options, and various other benefits. The total
amount of directorship fees various from company to company. Tiffany & Company, for
example, pays directors an annual retainer of $46,500, an additional annual retainer of $2,500 if
the director is also a chairperson of a committee, a per-meeting-attended fee of $2,000 for
meetings attended in person, a $500 fee for each meeting attended via telephone, stock options,
and retirement benefits. When you consider that many executives sit on multiple boards, it's easy
to understanding how their directorship fees can reach into the hundreds of thousands of dollars
per year.