2.4: Role of the Board of Directors (2023)

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    learning successes

    learning goals

    At the end of this section, you can:

    • Describe the oversight functions performed by boards.
    • Assign an independent board member.
    • Compare the arguments for and against independent directors.
    • Describe how boards can become diverse.

    Functions of a Board of Directors

    A board of directors is a group of people elected to represent the shareholders, and these directors are ultimately responsible for running the company. Every corporation is required by law to establish a board of directors. Non-profit organizations and many private companies also usually establish a board of directors, although they are not required by law to do so.

    The Board of Directors is responsible for protecting the interests of shareholders, defining management policies, overseeing the company or organization and making decisions on important matters. The board of directors acts as steward of the shareholders. The Board of Directors also has other responsibilities, such as: This includes setting the company's goals, creating dividend and stock option policies, hiring and firing chief executive officers (CEOs) and ensuring that the company has the necessary resources to perform well .

    Basic structure of a board of directors

    The bylaws of a company or organization determine the structure, responsibilities and authorities of a board of directors. The bylaws also establish how many board members there are, how members are elected and how often board members meet.

    The board must represent the interests of shareholders and management, so it is best for the board to include both internal and external members. There is usually an internal director and an external director. The in-house director is a board member who participates in the day-to-day management of the company and represents the interests of shareholders, directors and employees. The external advisor represents the interests of those who work outside the company. The CEO usually serves as chairman of the company's board of directors.

    2.4: Role of the Board of Directors (2)

    Figure 2.2corporate meeting room (Crédito da imagem: Fairfax County Chamber of Commerce “495 Express Lanes Board Room”/flickr, CC BY 2.0)

    International structure of a board of directors

    The structure of a board of directors varies more outside the United States. In Asia and the European Union, there are generally supervisory boards and executive boards. The board of directors is made up of company members elected by employees and shareholders. In most cases, top management is the CEO of the company or an administrative officer. The Board of Supervisors oversees day-to-day operations and acts like a typical US board of directors. The chairman of the board of directors varies, but the board is always chaired by someone other than the prominent executive.

    Supervision: corporate governance

    corporate governanceIt is a discipline that focuses on how a company conducts its business and the various controls put in place to ensure proper procedures and ethical behavior.

    While many companies and managers operate with a fair and honest philosophy, others will seek the temporary benefits of actions that fall outside ethical conduct. Businesses don't always obey the law. You may have seen or read in the news about false earnings reports, withholding financial information, or huge bonuses paid to top executives shortly after a company goes bankrupt.

    In an infamous example, the insurance giantAIGpaid for a luxury trip to California for key company officials immediately after the company declared bankruptcy. She applied for and received US government financial assistance in the 2008 bailout.2

    At other times, a company may cross the line between legal and illegal and break the law to increase profits. Due to the potential for human self-interest and greed, governments have enacted laws and regulations that require a company to take certain actions or restrict its activities to ensure fair competition and ethical behavior.

    Congress generally enacts laws and regulations in response to major economic events or other highly visible events. After the Great Market Crash of 1929, the US government enacted a new set of rules and regulations governing the issuance and trading of securities, theSecurities Act of 1933it's atStock Exchange Act of 1934. The government also created themSecurities and Exchange Commission (SEC)monitor these laws and regulations.

    New laws required companies to provide specific financial information to current and potential owners and required the SEC to approve initial sales of securities to the public. More recently, the US government enacted new legislation in 2002 following a series of serious ethical failures by some companies. This is one of the most radical lawsLey Sarbanes-Oxley (SOX), which requires, among other things:

    • that heCEOjChief Financial Officer (CFO)must certify the impartiality and accuracy of the company's financial reports
    • That the company implements and maintains an effective internal control framework responsible for reporting financial results
    • Have the effectiveness of controls for the last fiscal year confirmed by the company and an external audit firm

    In addition, SOX created thePublic Company Accounting Supervisory Board, which highlights the prohibited activities of auditors. It also established an obligation for the SEC to issue new decisions that demonstrate compliance with the law.

    Supervision of the Fiscal Council and Corporate Governance

    Due to widespread control failures at Wells Fargo Bank and recent regulatory action, the boards of public companies and financial institutions were directed to improve oversight andcorporate governance. Boards no longer focus on the needs of the most important key people, but consider broader issues of ethics, values ​​and corporate culture. Boards of Directors now oversee the establishment of oversight systems and can assume direct responsibility for senior management.

    The role of the audit committee

    a strong independentAudit Committee (CA)it is an important part of any company's corporate governance efforts. The AC is formed by the Board as a separate authorized subcommittee of the Board. He regularly reports to the BOD and assists the Board, taking responsibility for critical company financial matters such as: B. reviewing audit plans and results, approving external auditors, and coordinating internal and external financial audits and review efforts. The Audit Committee provides expertise in all financial and accounting matters of a company and is therefore an integral part of a company's corporate governance efforts.

    Some important functions of the Audit Committee include

    • confirm the accuracy of the company's financial reports;
    • verify the effective functioning of the internal control and risk management systems;
    • ensure compliance with legal and regulatory requirements;
    • review the quality, independence and performance of the external accounting firm; AND
    • Coordinate the activities and deliverables of the internal audit function.

    The role of the Audit Committee has expanded significantly over the years and has become extremely important with the passage of the Sarbanes-Oxley Act. Due to this increased importance and recognition, several Boards of Directors have delegated some of the Audit Committee's responsibilities to separately established committees to provide a balance of duties and ensure that these duties are effectively addressed and efficiently performed. It is known that some of these additional committees include a Compensation Committee, a Disclosure Committee and a Governance Committee, and all have related objectives that must be documented in the charter of each of the individual committees. It is important that the various committees maintain a close working relationship so that the audit committee can help each fulfill its responsibilities to management, the wider board, shareholders and other stakeholders.

    The Audit Committee performs an internal audit to review the organization's corporate governance process and communicate recommendations for changes. The Audit Committee will generally follow and monitor the process in place to implement any necessary changes or improvements. As with any other corporate function, the audit committee's role is strongly influenced by the legal, institutional, financial, cultural and political circumstances affecting the company.

    Importance of improving oversight and governance

    In today's business environment, it is vital that companies do not lose sight of achieving and maintaining strong and effective oversight and governance. This is true despite the litany of other important items on most agencies' busy agendas.

    Maintaining a focus on critical management ethics, as well as the traditional focus on the importance of ethics to the organization as a whole, is not only contemporary in today's world, but good business practice as well. The importance of establishing a comprehensive system of checks and balances cannot be overstated. Starting with the CEO, these checks and balances must progress through senior management and eventually include the board itself. Similar checks and balances should permeate the rest of the entire organization. Appropriate measures to improve oversight and corporate governance can mitigate overall business risks and mitigate future operational issues. Furthermore, such moves can bring the positive effects of generating sustainable operational and financial benefits for a company and its shareholders.

    connection to learning


    PepsiCois a global leader in the food and beverage industry. It was also recognized for its excellent corporate governance. take a look at thosePepsiCo website. Why do you think the company has won and been featured in multiple awards?FortunaYearlyblue ribbon companyready for 2021?

    The importance of independence on boards of directors

    An independent board of directors is made up of individuals who have no material interest in the company other than as directors. They maintain their independence by accepting only remuneration from the company for their BOD services. They also have their own sources of information rather than relying on information provided by senior management. It is considered good corporate governance practice to have independent directors on the boards of public and private companies.

    In most cases, board members have no affiliation with activities or organizations that could lead to thisinterest conflicts. An example of this could be a scenario where a board is considering entering into a partnership or alliance with an organization directly affiliated with one of its members. In such a case, a director may be barred from participating in that decision-making process, particularly where it is clear that doing so would create a potential conflict.

    A board with mostly independent directors can bring experience and objectivity

    • helps ensure that the company is run legally, ethically and in the best interest of shareholders;
    • allows independence and objectivity from senior management representatives and limits situations where a key decision maker may have a vested interest or an ax to grind; AND
    • it allows board members to promote discussions without ulterior motives for personal development or other selfish motives.

    The importance of diversity on boards of directors

    As mentioned above, diversity can be an important attribute for any board of directors. In recent years, corporate leadership has begun to increasingly appreciate the value of diversity on boards of directors. This has led to a significant increase in the overall number of women and people of color in America's boardrooms. However, many economic observers believe that corporate governance practices still have a long way to go in this regard. Strengthening representation has now become a high priority for most companies and organizations around the world.

    Board members face many challenges when it comes to making decisions as effectively and efficiently as possible. Due to such challenges, the potential objective of board diversification competes with other valuable topics and objectives such as: B. improving cybersecurity, improving customer service, identifying and reducing risk, improving community relationships and strategic positioning within a sector. This has put corporate governance practitioners and researchers in a position where they need to "catch up" to properly diversify.


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