Better Companies, Better Societies

Global Corporate Governance Forum

Role of Board of Directors in Corporate Governance Financial Media Workshop Chile, January 2010
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Outline of Presentation
    What is Corporate Governance? Building effective Board Governance The different roles related to the Board Some Concluding Thoughts!

What is Corporate Governance?

The importance of corporate governance lies in its contribution both to business prosperity and to accountability.
Paragraph 1.1, Committee on Corporate Governance: Final Report Hampel Committee

Corporate governance is concerned with holding the balance between economic and social goals and between individual and communal goals The aim is to align as nearly as possible the interests of individuals, corporations and society.
Sir Adrian Cadbury Corporate Governance Overview, 1999 [World Bank Report]

Corporate Governance is a mechanism through which boards and directors are able to direct, monitor and supervise the conduct and operation of the corporation and its management in a manner that ensures appropriate levels of authority, accountability, stewardship, leadership leadership, direction and control.

Its about Leadership!

 Leadership for efficiency
to compete in the global economy, create jobs

 Leadership for probity (honradez, rectitud).. honradez, rectitud)

because investors require confidence to provide assurance of management's integrity

 Leadership with responsibility.

to take account of broader stakeholder interests

 Leadership that is accountable and transparent

to build trust in companies and in the economy!!

Building Effective Board Governance

 Defining key board roles
Board Chairman Chief Executive Officer Board Directors - executive and non-executive

 Putting in place board governance arrangements

Board committees to support decision process Supporting functions to regulate processes Board procedures and rules, e.g. conflicts of interest Delegated authorities for management

 Ensuring proper oversight and supervision

Management reporting and public disclosures Assurance processes and controls

The Board of Directors is Pivotal

The board should exercise compelling and relentless leadership and should not underestimate the power of leading by example - evidenced by high levels of visibility and integrity, strong communications, and demanding expectations. This leadership should be clear to ALL within the organization, as well as shareholders (accionistas) and other accionistas) stakeholders (grupos de inters). inters)
Boardroom Behaviours A report prepared for Sir David Walker by the Institute of Chartered Secretaries and Administrators , UK June 2009

Board Governance Framework

Shareholders
Board of Directors
Chairman Board Meetings Corporate Secretary Reporting & Disclosure
Achievement of strategic objectives and value creation Fulfil responsibilities and duties in law and prescribed functions

Board Operations

Strategy Corporate Policies & Procedures Board Governance Instruments Monitoring and Evaluation

Governance System and Controls

Board Committees Audit Committee Remuneration Committee Other Committees

CEO & Management Executive Committee Internal Controls & Assurance

Combined Assurance Model Internal Audit External Audit Other Assurance Providers Management
Source: KPMG

Information and Communication

Key Areas of Responsibility

Chairman as Leader of the Board

 Primary role
Provide overall leadership to the board

 Function
Principal link between board and CEO/management team Responsible for board agenda and work plan Work with board committee chairmen Involved in selection and induction of new directors Counsel individual directors on their performance Participate in discussions with investors, key stakeholders

CEO as Leader of the Company

 Primary role
Lead the management team, reporting to the board

 Function
Work closely with board chairman Responsible for performance of management team Formulate corporate strategy, annual business plan and budget Responsible for corporate and financial objectives Formulate major corporate policies Ensure continuous improvement in services and products Manage relations with investors, major customers, regulators Responsible for companys long-term sustainability

Board Structure and Composition

 Balancing executive and non-exec. participation non Ensuring an effective selection process
Key personal and professional attributes Skills aligned to strategy and business Also fill board committee requirements, where appropriate

 Some general guidelines

Must have time to devote to responsibilities Must exercise judgment in best interests of company Must be informed about the business and its markets Must avoid interest conflicts between personal and business Must treat board information confidentially Should act objectively and be receptive to other perspectives Should prepare adequately for meetings, regular attendance

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Common Legal Principles of Directorship

 Exercise reasonable standard of care
Special business acumen or expertise not necessarily required Not necessarily liable for errors of judgment Given events following financial crisis, will this change?

 Duty to act in best interests of the company

In other words, for ALL shareholders, not special interests

The legal framework and company charters should not permit practices (such as pre-meetings and instructions on how to vote preby shareholders whose votes placed a director on the board) wherein shareholders may limit the ability of directors to exercise their duties to act in the best interest of the company and all shareholders.
Paragraph 90, OECDs White Paper on Corporate Governance in Latin America

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Benefits of Effective Board Committees

 Assist the board in its decision making
Brings together non-executives and management Allows detailed discussion on management matters But, filters out operational issues that remain with management And, focuses on strategic decisions required of the board

 Supports board responsibilities in key areas

Audit, internal controls and risk Executive compensation and management appointments Governance issues and corporate policies Nomination and selection of non-executive directors Others, e.g. health, safety, environment, etc.

 Defined terms of reference and limitations  Generally, no executive powers

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Instruments to Enhance Effectiveness

 Board Charter setting out procedural rules
Clarifies leadership roles and core responsibilities Reserves matters specifically reserved to board Sets management delegations and reporting arrangements

 Comprehensive induction for new directors

Legal and regulatory obligations Financial structure of business, budgets and KPIs Understanding of strategic priorities and current status Familiarize with business operations, e.g. site visits

 Annual board work plan

Meetings and budget cycle, annual reporting

 Code of ethics or statement of business principles

Defines corporate values and conduct of staff and directors

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Role of Corporate Secretary

Resolves organizational matters for board meetings Explains the procedural requirements of laws, the charter, and bylaws of the company Key link between company and non-executive directors Works closely with Chairman and CEO on board agenda Arranges the annual shareholders meeting and other special meetings

Oversees, conducts induction trainings for newly elected directors Supervises and coordinates board papers & presentations

Ensures compliance with Takes the minutes of the board procedures board meetings

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Board Role in Financial Oversight

     Duty to maintain proper accounting records Periodic reporting of financial position, performance Establishing, monitoring proper internal controls Ensuring proper external controls and audit Skills, knowledge required by directors

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Boards Role in Risk Management

 The board should know about and evaluate the:
Most significant risks facing the company Possible effects on shareowners Companys management of a crisis Importance of stakeholder confidence in the organization Communications with the investment community

 The board should ensure that:

Sufficient time is devoted to discuss risk strategy Appropriate levels of awareness exist throughout the company Risk-management processes work effectively A clear risk-management policy is published

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Not an easy task - Identified Risks

 Strategic
Unfocused strategy Strategy not aligned with capabilities Complacency arising from past success Unsuccessful acquisition/abortive bid Failure to manage major changes Reputational risk Loss of investors confidence Political/general economic risk

 Ethical
Failure to enact high standards of ethics Obtaining contracts unethically Stakeholder concerns on products/business probity poor community relations

 Suppliers/Outsourcers
Over-dependence on suppliers/outsourcers Failure to manage cost/quality of outsourced service Supply chain problems Joint ventures, strategic alliances not working

 People
Management leadership weak Inadequate succession planning Loss of key executives Poor employee motivation Internal communication weaknesses

 Financial
Cash flow/going concern problems Treasury operations risk Susceptibility to fraud/accounting irregularities

 Marketplace
Failure to respond to market trends Missed opportunities new tech., global markets Weak or obselete brands Over-reliance on a few customers Poor customer satisfaction quality/timeliness

 Legal/Compliance
Failure to protect intellectual property Health, safety, environmental issues Litigation risk Breach of competition, corporate, employee, tax laws

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Restoring Integrity and Trust

Boards must re-establish and enforce the standard that rerisks are to be undertaken for the benefit of their constituents, not for the personal gain of management.
George Vojta
Chairman of the Advisory Board of the Yale School of Management Millstein Center for Corporate Governanance and Performance and Former Vice-Chairman, Bankers Trust Corp.

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Six Critical Questions for Directors!

      Do I believe I have all the information? information? Have I the necessary skills to make this decision? Do I have any conflict in this matter? Objectively, is this a rational business decision? decision? Can I explain this in a transparent manner? Is it a responsible discharge of my duties?

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MCIS GUIDING PRINCIPLES Build Trust and Credibility! Respect for the Individual Create a Culture of Openness and Honesty Set the Tone at the Top Uphold the Law! Avoid Conflicts of Interest Set Metrics and Report Results Accurately Do the Right Thing! Promote Substance over Form Be Loyal to your Company, your Family, yourself

Thank You!
Philip Armstrong
Global Corporate Governance Forum Telephone +1 202 458 9114

parmstrong@ifc.org www.gcgf.org

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