Board Of Directors Essay ⋆ Business Essay Examples ⋆ EssayEmpire

A board of directors is a group of people elected by the shareholders of a corporation to oversee the management of the corporation. Directors are elected at annual general meetings. At this meeting shareholders have the ultimate power to control both their investment and their board of directors. The board of directors delegates authority for day-to-day operations to a group of managers called officers. The primary duty of directors is to act in the best interest of the company and its shareholders.

There are three types of director: executive director, nonexecutive director, and independent nonexecutive director. An executive director is also an employee of the company, whereas a nonexecutive director is not an employee. The standard practice is for the executive director to have an appointment letter, rather than a contract of employment, and to be paid an agreed fee for services rendered. A nonexecutive director usually provides his or her services part-time and is not expected to be involved in the day-to-day running of the company. There is no legal distinction between executive and nonexecutive directors. Independent nonexecutive directors are nonexecutive directors who are free from any connection with the company that might affect their opinions and behavior. An example of a connection is an executive director who manages the same business in which they serve on the board of directors.

A board of directors normally has three committees: nominating, compensation, and audit. The nominating committee selects new candidates to be reviewed for positions on the board. The compensation committee reviews the executives’ remuneration. The audit committee examines internal audits and reports from independent audit firms.

The United Kingdom’s Financial Reporting Council set up its Combined Code on Corporate Governance in 2003. The code sets out its own view of the role of the board of directors: provide entrepreneurial leadership; set strategy; ensure human and financial resources are available to achieve objectives; review management performance; set the company’s values and standards; and satisfy themselves as to the integrity of financial information and robustness of financial controls and risk management. The code also describes the role of chairman of the board of directors: the chairman leads the board, ensures there is a good relationship between the executive and nonexecutive directors, and bears primary responsibility for communications and liaison with shareholders. The code adds that the roles of chairman and chief executive should not be held by the same person. The chief executive is responsible for the day-to-day management of the company and carries out the decisions of the board. The code also requires there to be a balance between the number of executive and nonexecutive directors so that no individual or small group can dominate the board’s decision making.

The Sarbanes-Oxley Act is a wide-ranging U.S. corporate reform legislation, coauthored by the Democrat in charge of the Senate Banking Committee, Paul Sarbanes, and Republican Congressman Michael Oxley. The act, which became law in July 2002, lays down stringent procedures regarding the accuracy and reliability of corporate disclosures, places restrictions on auditors providing nonaudit services, and obliges top executives to verify their accounts personally. Under the act, companies should establish an audit committee comprised solely of independent board members.

A good board structure will take into account the board’s independence, size, committees and functions, and director development. The combined code states that, in order to qualify as an independent nonexecutive director, an individual must be free of any connections that might lead to conflicts of interest.

The board of an American company may be made up of a large number of nonexecutive directors and only one or two executive directors, whereas a British board has more executive directors. The size of a board can also affect its efficiency. The larger the board, the harder it is to become active and engaged. On the other hand, the board must be large enough to have a range of skills and experience to operate successfully. But directors’ free-riding intentions may be higher when the board becomes larger. It has been pointed out that the law of diminishing returns may be applicable here, as companies with small boards have better financial ratios. The loss of value occurs as boards grow from small to medium size.

How a board works and how well it speaks for its shareholders is a key component of a company’s performance and financial success. The director may be a senior executive of another company. Many directors also serve on more than one board, in addition to other full-time commitments. A common criticism of this arrangement is the claim that these directors are unable to carry out their directors’ duties. The role of directors is largely advisory and does not involve important commercial decision making. When the chairman of the board is also the chief executive officer, the power of directors diminishes.

Bibliography:

William G. Bowen, The Board Book: An Insider’s Guide for Directors and Trustees (W. W. Norton and Company, 2008);
Financial Reporting Council, “The Combined Code on Corporate Governance, June 2008,” www.frc.org.uk/corporate (cited March 2009);
Scott Green, Sarbanes-Oxley and the Board of Directors (John Wiley & Son, 2005);
David Yermack, “Higher Market Valuation of Companies with a Small Board of Directors,” Journal of Financial Economics (v.40, 1996).

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