Role_of_Directors

CHAPTER 3: DIRECTORS AND THEIR ROLES Q-1. What is the meaning of Board of directors' Describe the role of Board of Directors. Ans: Board of Directors: The Board of Directors is the individuals elected by a corporation’s shareholder to oversee the management of the corporation. In the words, the group of people responsible for supervising the affairs of a corporation is called Board of Directors. The members of a Board of directors are paid in cash and stock, meet several times each year, and assume legal responsibility for corporate activities. The Board of Directors generally sets broad corporate policy rather than participating in day to day managerial decisions, although selection of the CEO is the board’s responsibility. Members are elected by the firm’s stockholders and may or may not be stockholders themselves. They are also called Directorate. Role of the board of directors Board can help greatly by focusing on four key areas: i. Establish vision, mission and values o Determine the company’s vision and mission to guide and set the pace for its current operations and future development. o Determine the values to be promoted throughout the company. o Determine and review company goals. o Determine company policies. ii. Set strategy and structure o Review and evaluate present and future opportunities, threats and risks in the external environment and current and future strengths, weaknesses and risks relating to the company. o Determine strategic options, select those to be pursued, and decide the means to implement and support them. o Determine the business strategies and plans that underpin the corporate strategy o Ensure that the company’s organizational structure and capability are appropriate for implementing the chosen strategies. iii. Delegate to management o Delegate authority to management, and monitor and evaluate the implementation of policies, strategies and business plans. o Determine monitoring criteria to be used by the board. o Ensure that internal controls are effective o Communicate with senior management iv. Exercise accountability to shareholders and be responsible to relevant stakeholders o Ensure that communications both to and from shareholders and relevant stakeholders are effective. o Understand and take into account the interests of shareholders and relevant stakeholders. o Monitor relations with shareholders and relevant stakeholders by gathering and evaluation of appropriate information. Q-2. What are the duties/functions of Board of Directors' Ans: Duties of Board of Directors: A director has to perform two sets of duties- a) Duty of care: It implies that the director is obliged to exercise adequate diligence in decision making. b) Duty of loyalty: It means a director must have uncompromising loyalty to the organization which he must demonstrate through his actions. The American Law Institute has outlined the following duties/functions of the directors- a) Selection, evaluation and dismissal of CEO are as and when necessary. b) Carrying out the functions defined by the legal framework and ascribed to the Board of Directors as per the norms of the corporation. c) Approving corporate plans and activities. Reviewing the same; which the board and the senior management consider as significant. d) To effect changes in the accounting systems or procedures which in the eyes of the board are very important. e) Keeping an eye on the way the business is run and evaluating the conduct of the same on regular basis. According to the US Business round Table, the duties are- a) Defining the management compensation scheme and review of the company succession plan system. b) Planning, reviewing and approving finance linked objectives and the prime strategies and game plan of the company. c) Counseling and advising the top management. d) Checking adequacy of systemic procedures/methods in compliance of the legal provisions. e) Selecting and giving recommendation to the investors, the list of suitable persons for electing them for the board. Q-3. Describe the supremacy of Board of Directors. Ans: Supremacy of the board can be maintained by the professional dissectors that have to act with in the bounds of the legal & ethical standard. And the standards have to be selected in the performance of their duties. Their duties are outlined below: a) Duty of legitimacy: A director needs to be fully conversant with the basic legal & other rules/regulations governing corporations since he bears personal liability for the offences of the a company. b) Duty of care: Directors have got to perform their roles/functions & tasks with full commitment & competence, & are accountable for the same. They should take care that what they do contributes to the value of the company. c) To maintain independent views & give critical review: Directors are expected to have the awareness & maturity to make own judgments on giving directions & should select prudent control procedures in the best interest of the company. d) Duty of trust: The law requires the directors to hold their trust all the time. The key role of the directors is related to their long term fiduciary duty. e) To uphold the primary loyalty of a director: Right from the time of his appointment, a director’s primary duty is to be loyal to the company which has its legal entity. f) To uphold three values of corporate governance: Accountability, probity & openness are the accredited values in all effective governance. One of the duties of directors is to uphold these three values of governance. g) To own social responsibility: This is one subject which is controversial & viewed differently by different agencies. But it is a significant responsibility, if the company has to survive. h) To keep the interest of the minority owners at heart: This duty is taken as an extension of the duty to uphold the three values of corporate governance. i) To pay attention to task performance & delivering primary roles: Directors come across many dilemmas while making decisions paying attention to task performance will be helpful in performing their roles/making correct decision. j) To learn, develop and communicate: Learning continuously from own action/decisions in discharge of their duty, developing and appraising the members of the organization rigorously on on-going basis and communicating with the stakeholder, both internal and external, constitutes a major duty of the directors. Q-4. Describe the board-management interlay relationship. Ans: There is an interlay relationship between the board and the management which is inevitable for overseeing the management and selects the management cadre of executives who are expected to give the best performance. In case, the executives don’t perform and meet the defined results; the board has the right to replace them. ➢ Theoretically, the management works at the pleasure of the board of directors. But in practice the directors are obliged to the management for information, compensation as well as nomination. ➢ In many cases and most directors are not willing to invest time and energy for overseeing the corporation activities. They are also not willing to give a financial commitment for the success of the corporation. ➢ Directors depend upon the management for accurate, timely and relevant information. ➢ Corporations had the practice of hiring ex- CEOs as members on the board. 5. Who is ultimately responsible for the company' Ans: From the legal angle, it is the board which is ultimately accountable for the company. So, board is the fountain head of power. But in real life, practical issues emerge which have to be attended. the management has the expertise, time and the whole gamut of infrastructure to manage the organization. So, they control and run the organization. In the backdrop of this phenomenon, it is difficult for the board to exercise its own control on the corporation. The management thus occupies the dominant status. 6. Describe the election/nomination/ appointment of directors. Ans: Theoretically, the systematic structure allows the board as an independent body to assess / evaluate each candidate for the position of directors. This system is intended to provide a safeguard against the management candidate getting into the selection list for election. We think that the directors represent the shareholders and that they are elected by the shareholders. But the fact that directors are nominated by the shareholders is not borne out by the realities. It is the nominating committee which recommends the candidates for a director’s position. Once the nominating committee arrives at a decision in respect of a candidate, the committee takes up the case with the full board for the board approval. The candidates, by and large, have to pass thought the full board which interviews them. The candidates are finally elected by shareholders vote. This is what happens in practice. 7. What is the liabilities/compensation to directors' Ans: It is rare that the compensation payable to the directors of company is linked to his performance or performance of business. They receive retainer pay and fees. The pay is not linked to good or bad performance of the business. As such, the existing compensation is not incentive for a director. Many thinkers opine that the board ought to define procedural safeguard to hedge against loss of credibility and encourage improve disclosure, review and give importance to payment by stock opinion. Full and a comprehensive discloser on payment plan can also be reviewed by an independent expert, preferably by an external, time to time. Summery of the review can be also published in the proxy statement. Further the shareholders should closely review the directors’ disclosure and also comment on withholding their votes for directors. They should also put up resolution to ensure that the payment to directors is so designed as to link the shareholders’ interest. 8. Show the process of management. Ans: BOARD OVERSEEING MANAGEMENT ACTIVITIES BOARD OF DIRECTORS AND THE PROCESS OF MANAGEMENT The board, 9. Explain the Anti-take over devices. Ans: The period of 1980s is marked by threats of take over bids. But, by the end of 1980s, majority of the corporations had designed their own strategies, known as ‘shark repellents’. The different protective strategies are- i. Poison pills: A person pill is a strategy by a corporation to discourage a hostile take over by attempting to make the firms stock much too unattractive to the potential acquirer. ii. Crown jewel strategy: In this strategy, the target company sells, or alternatively, locks up its core business. iii. Faire price provision: This strategy involves a raider who wants control of a corporation, has to shell out the same price for all the stocks purchased in place of paying premium for large number of stocks. iv. White knight: A white knight strategy is friendly but it is a third party approach. This involves the third party being in agreement to acquire a sizable part of the shares to help against bid of the raider to control the company. v. Green Mail: This is another method used as an escape from takeover bid. This approach obliged the stockholders to share the consequences of incumbency of the management of the corporation. vi. Pac man device: This involves the target corporation making a bid for the rider/acquirer. The approach implies “I will eat you before you eat me”. vii. Jewish Dentist: This is the oldest example of an anti-takeover approach where the company facing threat of takeover, sold its products mostly to dentist who were Jewish. 10. Describe the role of directors in crisis periods. Ans: In times of crisis like hostile take over or any disastrous suffered by the company, role of directors come into focus. So it is important that the board is active and is inattention when there is a crisis. And at the same time, there is a concern as to what a director should do in case of a crisis arises. Theoretically speaking, directors have flexible power. They can, if they want reshape the company’s mission, provided they owe their primary responsibilities to the shareholders. They have the power to stimulate he CEO to define and redefine long range plans and also dismiss him when the plans and the way plans are carried out don’t meet their expectation. They can also bring home to the corporate management the need for initially higher norms of performance through various strategies like pay raises, bonus, stock option and various incentives. ----------------------- Mission, vision, objectives, Approving Corporate Philosophy and Theory of the Organization Strategic Plan Allocating Capital Long range Objective Appraising Potential/ Performance Manpower plan