Board of Directors

Introduction
Te board of directors leads and controls a company and hence an board is fundamental to the success of the company. The board is the link between mangers and investors, and is essential to good corporate governance and investor relations.

Types of Board Structure

Unitary Board (One tier) Dual Board (Two tier)

Unitary v/s Dual Board

A major CG differences between countries is the board structure, which may be unitary or dual depending on the country. In the majority of EU members states, the unitary board structure is predominant. However In Austria, Germany, The Netherlands and Denmark , the Dual Structure is predominant.

Unitary Board
A Unitary BOD is the form of Board Structure in the UK and USA, and is characterized by one single board comprising both executive and non executive directors. The Unitary Board is responsible for all aspects of the companys activities, and all the directors are working to active the same ends. The shareholders elect the directors to the board at the companys annual general meeting.

UNITARY BOARDS
A single board comprising executive (those with direct responsibility for operations) and nonexecutive (independent, with no management responsibilities within the organisation) Elected by shareholders

 Unitary boards include both executive and non-executive directors and make decisions as a unified group.

Two -tier boards

Two -tier boards (Dual Board) Two -tier boards have two separate boards: a) the management board and b) the supervisory board.

DUAL BOARD
Supervisory board responsible for strategic management Management board responsible for operating the organisation Clear separation of management and control Shareholders elect supervisory board members, who then appoint management board members

 a) The management board generally includes only executives. It focuses on major operational issues and is headed by the chief executive.

 b) The supervisory board deals with the strategic decisions and oversees the management board. The chairman of the company sits on the supervisor board. Supervisory boards consist exclusively of non executive directors.

 The supervisory board is often used as a way to represent various stakeholder groups, by including representatives on the board, such as employees or environmental consultants.

 Two- tier boards are effective relationship between the chief executive (head of the management board) and the chairman (head of the supervisory board).

UNITARY VERSUS DUAL

the supervisory board is unable to monitor the activities of management supervisory boards usually meet infrequently, and do not receive sufficient management information to enable them to have a clear understanding of day to day events conflicts of interest may occur, caused by the differing stakeholders on the senior board (for example, German supervisory boards include representatives of the workforce and trade unions, as well as management)

UNITARY VERSUS DUAL (CONTD)

Unitary boards increase likelihood of agency problem, especially if CEO/Chairman are not separated Unitary boards may not take a sufficiently long view Lack of employee representation on unitary boards may adversely affect employee relations

ROLES
Chairman (CM): ideally independent (NED). Task is to manage the board, not run the organisations operations Chief Executive Officer (CEO): Task is to manage the operations of the organisation on behalf of the board Usual practice in USA is to have joint CEO/CM, in UK and many other economies it is considered to be poor governance practice

NON-EXECUTIVE DIRECTORS

NONEXECUTIVE DIRECTORS (NEDs)

Also known as independent directors No direct management responsibility for operations May be senior managers from other similar enterprises Best practice is for chairman and other key roles to be NED Some governance codes have specific descriptions of the role NEDs should take

BOARD SUBCOMMITTEES

MAIN BOARD SUB-COMMITTEES

Audit committee Remuneration committee Nominations committee

GOOD AND BAD PRACTICES Good The CEO sees the board as providing positive and constructive advice and guidance Information is freely and comprehensively provided Agendas are designed to encourage and enable open debate All board members are able to make effective contributions in discussions The roles of CEO and Chairman are separated All board members are able and prepared to address important issues without the threat of removal Independent directors have the ability to request and obtain the information they need Independent directors are able to make contributions to strategic direction as appropriate

 Bad The CEO sees the board as an unnecessary bureaucratic burden Information flow to directors from management is poor CEO sets rigid agendas, and discourages debate and interjection Senior management do not facilitate open debates to discuss serious issues Directors are subordinate to the wishes of the CEO Directors are unwilling to confront important issues due to a fear of being replaced or sidelined Strategic information is provided solely by executive directors Timely interventions to avoid strategic errors are discouraged

THE THREE GOLDEN RULES

Separation of CEO and Chairman Effective and properly independent NEDs (ideally also chairing the key sub-committees) An effective and competent audit committee

It is probable that if any more than one of these rules is not complied with effective corporate governance cannot be guaranteed