BUSINESS AND LIFE: Corporate Governance and the Board of Directors

Before we begin, we salute all mothers and women who nurture, love, support and guide children.  Your role is critical to the development of a just, peaceful, loving and wholesome society and we pray God’s continued blessings, guidance and protection over you.  We extend “get well wishes” to Honourable Julius Timothy and pray for God’s continued healing and a speedy and full recovery. We extend “Congratulations”, to the Honourable Prime Minister and Mrs Skerrit and pray God’s blessings on their union and wish them a long, happy, healthy and fulfilled life together.

This week we look at Corporate Governance and the Role of the Board of Directors.
In the wake of the international scandals in the mid 1990’s the focus returned on corporate governance and the intensity of the scrutiny and focus grew exponentially following the scandals of Enron, WorldCom, Adelphis, Tyco and others in the early 2000s.  In the Caribbean, our attention grew following the CLICO/BAICO scandal. The focus led to greater attention made to not only the performance of boards but also importantly on individual directors, for as Miller et al (1997) argued “for any company that hasn’t done well, one of the solutions starts with the board”.

That emphasis led to the focus on structure and procedure of boards and many boards began putting policies in place or reviewing existing policies relating to board functioning, largely influenced by revised or new guidelines, best practise or legislation instituted by governments.  These changes, according to Sonnenfeld (2002) were chiefly structural and have not necessarily led an improvement in the effectiveness of boards.

The Board is a body of elected or appointed members who jointly oversee the activities of a company or organisation.  Its activities are determined by the powers, duties and responsibilities delegated to it or conferred on it by an authority outside itself, typically, the company or organisation’s bylaws (Wikipedia).  It is also influenced or determined by legislation or best practice principles.

Sonnenfeld (2002) contends, “It’s time for some fundamentally new thinking about how corporate boards should operate and be evaluated.  We need to consider not only how we structure the work of a board but also how we manage the social system a board actually is.  We’ll be fighting the wrong war if we simply tighten procedural rules for boards and ignore their more pressing need – to be strong, high functioning work groups whose members trust and challenge one another and engage directly with senior managers on critical issues facing corporations”.  This point is affirmed by Nadler (2004) who argues that the key to better corporate governance lies in the working relationships between boards and managers, in the social dynamics of board interaction, and in the competence, integrity and constructive involvement of individual directors.  He states, “Patently this is not the stuff of legislation”.

Corporate governance is defined by Baysinger and Hoskisson (1990) (quoted in Henry, 2004) as “the integrated set of internal and external controls that harmonise manager-shareholder (agency) conflicts of interests, resulting from the separation of ownership and control”.  The OECD (1999) sees corporate governance as involving “a set of relationships between a company’s management, its board, its shareholders and stakeholders”.  This latter definition focuses on relationship rather than structure and appears more in line with the sentiments expressed by Sonnenfeld and Nadler.

The UK Corporate Governance Code details the board’s role as to:
1.    Provide entrepreneurial leadership of the company within a framework of prudent and effective controls which enables risks to be assessed and managed;
2.    Set the company’s strategic aims
3.    Ensure that the necessary financial and human resources are in place for the company to meet its objectives and review management performance
4.    Set the company’s values and standards
5.    Ensure that its obligations to its shareholders and others are understood

Adrian Cadbury, the Chairman of the Cadbury Commission which developed he first version of the UK Corporate Governance Code defines the role of the board as to:
1.    Define the company’s purpose
2.    Agree strategies and plans for achieving that purpose
3.    Establish the company’s policies
4.    Appoint the chief executive
5.    Monitor and assess the performance of the executive team
6.    Assess its own performance

The above and a review of the corporate governance literature in short defines the role of the board as providing direction and leadership, determining the strategic direction of the organisation, approving policies, ensuring compliance to the policies, ensuring an effective risk management system to control and manage risks, recruiting and assessing the performance of the chief executive officer, to appoint management and reviewing the assessments of their performance.

The Board therefore has a fiduciary duty, a duty of loyalty, a duty of care and a duty of supervision to shareholders. This means that the members of the board need to understand their roles and that of management.  The Chairman of the board plays a critical role in providing guidance to the board and in managing the relationships among and between directors, the chief executive officer and corporate secretary.

Until we meet again, may God continue to keep us in the Palm of His Hands.

Valda Frederica Henry, VF Inc.’s CEO and Principal Trainer is a Chartered Financial Analyst (CFA), Certified Global Professional in Human Resources (GPHR), Certified Myers Briggs Type Indicator (MBTI) Practitioner, holds a PhD in Industrial Relations & Business, a Masters in Business Administration and a BSc Management Studies. VF Inc. is a Human Resource & Finance Consultancy firm with a Training and Recruitment arm, and the producer and host of a live TV program “The Cutting Edge of Business”.