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Functions of The Board

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Phuntsho Choden
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Functions of The Board

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Phuntsho Choden
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© © All Rights Reserved
Available Formats
Download as PDF or read online on Scribd
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timer, Frederick 1998), “Stiety Boardroom: improving governance to enhance company ‘erformance” Information Australia, in association with The Sydney Instste, Mtbourne 3 Functions of the Board 31. Given tht our main governance concern is with respect, 1 the impact ef boards on conporate performance, the next, ‘question dealt wth bythe Independent Working Party was "What are the key functions ofa board that requie greater emphasis Hf this eonce about performance 1s (0 be ade sessed 532 Agconting to what aight be called the traonal moe ‘of corporate goveraace, be board of directors manages the exporation’s busines a8 frmolates busines policy. Share Fer elect the members cf the board for tig purpose, retaining lor bemselves the ight decide ony the most Fundaental issue, such 3¢ mar changes io eaplal strc ture Ofies of the corporation an effect as agents or elgates ofthe board, ther eset role Being to carry out oad decisions. In this mode, dhe toard hak distnetive postion, Iis tated sa separate company organ rather han ‘telf an aget othe corocate enti. For management pur Posts, its the corporate ent. 33 The tana model i reflected to a degen the la, “Thus, typical arilesof association sta tha “te busines of the company shall be manage bythe dectoes™. Australian ase law as had quite bitsy on he relationship between management nd sharcholdrs, bu inevtbly "management tears he boardinthis costes. Tha, eases which ager thi Shvcholdts cant, as such, make management decisions, soso onthe as hat monagenet decision are maby the board Porto he AWA cae, thee was very litle discussion in Ausalian cas law ofthe division of fonctions between ‘the bout and munagemet, as opposed to the division be- ‘een management” geneicaly and the shasta, In this chapler we discus: + Qallenges othe ational mode both in Australia and ‘+ Our proposal foc a new primary futon of aboard, ume ensuring that compte managemen: coatinie ‘us sving foe above-average performancs king 2. count of risk and withou defrauding or Misleading Stareholer. new view of board functions which analyses the ta: Sonal tof funtion in ight SE our proposed pinay finetion ‘Challenges tothe Traditional Model 34 Several decades ago, serious stants of corporat ars in te toiled States recognised that in he types! large publicly held compratin, itis the essetives aber than the ‘ourd who “manage the corporation, inthe sense of making Individual basness decisions: “Underthe system of etre wich has developed in this ory among lage, ste companies, ects are wale to manage eepaeaens in any narow ierpreatin of he ‘wad dete do and eanne ‘ee Smeaton in the seme of operating them” Baker 1945) 35 Reflecting this insight, many American corporate fw Sstaues have been altered to provide thatthe business of ‘ona “ral be mage by outer he destion othe boat (or example, Deaware Geseral Corporations Law pangrah 141), ‘This implies tha wile oat does ne ssanage by making pull busines decisions, «makes busines ali, ab terefore “manages” he corporation a this roar sens. But even thir isin has been questioned by Unite States researcher. [thas been ai thatthe pica oardno-more makes business policy than it manages the bosiness"(Cary and Eisenbers 1988). Acoring Gordon, ‘heii or no evidence that boards of ge cemeatons inate desisions on bread policy and many boards in age ‘companies are amost completly passive, even wih spect to approul of proposals pt forward by management. The approval function i usually exercised bythe ef executive in conjuntion With ether his mmedine subordinates, an ‘ceeutve o rance commie ofthe board oF fw inthe tia devon cing as bis nformal advisers (Gordon 966) Subsequent tes (eg Mace 1971, Loach & Melver 1989) ave cond the ear Bn 36 Justice Rogers the AWA judgement recognised thatthe fanecons ofthe board the re public compuay were eter -deseraed by the United State esearch than the US te ment in artic ofssciton tha the diectors “manage” the ‘ins, He wrote ssoringy say compares eda ae oo big to be supervised an diintered by 9 oad of Directors ese relation to ‘mates of high poly. The we overnight of de stv oF ich sonpanies resides With the corporate bursary. Senige tanga and, in the case of mammath ‘corporations, erenpenons loner down te corporat ae, erase subsininl conkol or the avibes of sich ‘corporations volving iaponant desis sa mach money, itis something of an aeclvonsm to expect toe-exertne 05, meting once odo cont anything eth ‘or than denne on esions of policy ad theca of ‘eal ge corporsion. nly majorpicy. Tis neces ‘eu t,t exeoaion oli, senor management i inthe ive seneot he word, exercising powers deson s Paco te Boot snd of mangement which in ess complex days sed to be ‘seed forthe Board of Director" (AWA p.165-167) 137 Tote exent that his is seen as unsatisfctory by crics ‘of comorste governance, tere ae only two options: have ‘iets spend considerably more ime onthe board ae tes, o& redefine the fanetons ofthe board to ter reflect ‘oneal reality. While many commentators cal fore: {ors to spend more than the typial 25 or o days per year on beard maters (45 to $0 days inthe case of non-executive hairs) (KomiFery 1988, 1992, 1998), no-one proposes that Speoding significantly more ime would be appropiate. As non-excutves spend increasing ime athe company, hey ‘become mare like ain exeetves, Moreover, ines of ‘esponsily become confused as people inthe erganisation have aiffcalty in disingvishing 2 directors coment of question rom a perceived instruction, Mest import, the Aretor wh spends too muck time aa company loss he ‘ery objectivity for which be or he appointed. Thus, he Todependent Working Party chose the second option reef: ‘ng he fonctions ofthe board o beter elect performance [38 Ie would be a fandamental mistake to infer that boards ‘which do not make business decisions and which donot Intateand atively review al maters of poi, are guilty of erection of duty. The growing “expectation gap” beeen ‘he tadiioal mode! andthe realy of eorporate goverance ‘san inevitable result ofthe growth in sie and complexity of operations and the inkerent initations ofthe bosrd strc {ure The die o which a board ean bome involved inthe specifics of policy and decision making decrease the size andes ofthe corporate enterprise increases, For exan- le, dirctors ofa single factory engineering compat (i ‘luding non-executive directors) ean become closely volved nmanagernent mates. Thay ca isthe shop Noe nspet Fant machinery Ino closely st proton facilis und Fumes fhe Board » ‘work conditions. Contras this with an enterprise of the size nd diversity of General Electric or BHP. Here the board ean trexpetedto dono more than deal with very seus mates involving high-level decisions. Inevitably, most ofthe mal- ters pt efor such a board willbe mater of overall per- formance al high plc 4.9 Whit, then can board esisicaly be expected todo? ‘Overseas several atemnpls have been made wo answer the ‘question, We note, in partial, the formulation by the ‘American Law Inst nits Principles of Corporate Cov- ‘rnance: Anats and Recommendations 1992, according to whit +The management of he business of publi Held com sany should be condote by, or under te supervision of, Fincpal senior executives designated by the bow, and the deegues of those persons. + Thetoart’s function ar as fllows L Selet regularly evaluate, fx the compensation of, am, vubere appropriate, replace the principal sear execu 2. Oversce the conduct ofthe corporation's business 10 ‘evaluate whether the busines istbeing proper} managed. 3. Review and, where appropiate, approve the carpors- tion's financial bjectves and major copoat plans and 4 Review and, where appropri, approve majo changes Jn, apd determinations of ther major questions of choiee respecting the appropriate auditing and accounting ein ‘pls and practios to be used in he preparation of the ‘corporation's nancial sateen 2 Pantin of te Boar ‘5. Pesto such other functions as are presibed by aw, ‘or assigned tothe board by the caret the corporation. 310 Inthe United Kingdom, th Cadbery peti somewhat tbat about the expected involvement inden of he board of «large company. Is language sigests © more setivist board fle than in the United States. For example (Cadbusy’sset that the bod “leads apd conte com sy, an “retin fll and effecsiveconirol oer the company snd monitors executive management” (Cady 1993), Mae receatly, the Hampel Repor, chacgd with reviewing he Cadbury Coe in the UK, recognised the apeapiteness a times of a fess activist oe, since governance required the application of broad principles f particular sitions Hence, the depree of involvement of the bod in dts and ay-o-day mater wor necessarily reflect itn sz, com: plexi, and possty curent performance and iss facing {he frm (Hampel 1998). In Ausab, ails of sociation sill cout be interpreted to imply that the board manages the company. tems of formal legal eonsions, we SpE 9 ‘belong way from the American Law Instat’ approach. weve tne AWA cise hs made it posible taser hat the fenton of “managing” allocated to the board in typical tls doesnot require te band ofa ge company toate {obusiness decision-making, nor probably even othe ative development of busines pote, ‘But the board clearly has functions, not yt adequely defined inthe areas of plicy, processes, morioring and mje decision making, sich 3 !ppointng or removing the che! encutive, 211 tn his wacenain ate of afi, he Independent Work ing Paty has spent considerable time seeking to rode a ‘ractcal description of what a boor, seeking te focus oo ‘erfermance wile not neglecting its conformance role might beexpected odo. sins ofthe Boge a Striving for Above-average Performance 3.12 Statements suchas that of the American Law Insite, hile beter capturing reality than those in tional = suage, ae nevertheless quite vague. They do not provide ‘auch guidance aso what aboard is coal suppose oo, how iis tospend is time or wt tas moet germane toi

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