(TIỂU LUẬN) BOARD OF DIRECTORS AND RELATED ISSUES BOARD OF DIRECTORS – ROLES AND RESPONSIBILITIES

BOARD OF DIRECTORS – ROLES AND RESPONSIBILITIES: Role and responsibilities of the board:  provide entrepreneurial leadership of the company  represent company view and account to the p

VIETNAM NATIONAL UNIVERSITY HO CHI MINH CITY UNIVERSITY OF ECONOMICS AND LAW FACULTY OF

ACCOUNTING AND AUDITING

Course: Professional Ethics and Corporate Governance

Supervisor: ThS Mai Thi Phuong Thao

LECTURER’S COMMENT

TABLE OF CONTENTS

THE BOARD OF THE DIRECTORS: 6

II BOARD OF DIRECTORS – ROLES AND RESPONSIBILITIES: 7

III BOARD MEETING AND BOARD STRUCTURE: 10

1.Board meeting: 10

1.1 A definition of board meeting 10

1.2 Board agenda items 10

1.3 Time to set up the agenda 11

2 Board structure 11

2.1 Unitary board 12

2.2 Two-tier board 14

3 Composition of the board 15

IV BOARD COMMITTEES 16

1 Board committee structure 16

1.1.Nomination committee 16

1.2.Remuneration committee 16

1.3 Audit committees 17

1.4 Risk committee 17

2 Importance of committees 18

V NON – EXECUTIVE DIRECTORS (NEDS) 18

1.Who is Non-Executive Director ? 18

2 Roles of Non-Executive Director 18

3 Independent NED 20

4 Disadvantages and advantages of NED in Board of Directors 22

VI CEO AND CHAIRMAN 22

1.What is the Chairman and CEO? 23

2 Responsibilities 23

3 Comparisation between CEO and Chairman ‘s Roles 25

4 Let talk about the BrightCo case to understand more about CEO and Chairman 27

VII DIRECTORS’ INDUCTION AND CONTINUING PROFESSIONAL

DEVELOPMENT (CPD) 30

1.Directors’ induction: 30

2 Continuing Professional Development – CPD: 31

VIII DIRECTORS – PERFORMANCE EVALUATION 33

1.Directors - Performance evaluation 33

2 Directors’ remuneration 34

I DEVELOPMENT OF CORPORATE GOVERNANCE REGARDING

TO THE BOARD OF THE DIRECTORS:

There was there reports that contributed to the existing code with regards to the board

of directors

Firstly, it was Cadbury Report in 1992 This report concluded that the board required constant monitoring and assessment The recommendations were:

 there was a need to split the chairman/CEO role

 necessary to ensure the chairman is an independent person of all time of

apointment

Secondly, it was Higgs Report in 2003 This report came about post-Enron and focused

on the role of non-executive directors (NEDs) It is the role of NEDs to represent the needs of shareholders and operate as a cautionary voice on the board It included four things:

 at least half the board should be made up of NEDs

 they should be remunerated appropriately for taking on a functional role

 they should act as a link between the board and shareholders to reduce the agency problem

 they should communicate regularly to important shareholders

In the same year, Tyson Report was published It was developed from Higgs Report and dealt with the recruitment and development of NEDs:

 the need to expand the gene pool of NEDs beyond reciprocal arrangements between top PLCs

 diversity in background, skills and experience enhanced board effectiveness (agency issue)

 diversity improved communication and relationships with stakeholders

including shareholders

 stakeholders on the board improved board understanding of stakeholder issues

In May 2010, the FRC issued a new edition of the Code which will apply to financial years beginning on or after 29 June 2010

This follows a review of the Code carried out during 2009 and consultation on a draft

of the revised Code that ended in March 2010 There were four new principles:

 The chairman's responsibility for leading the board

 The non-executive directors' role in challenging and developing strategy

 The need for the board to have a balance of skills, experience, independence and knowledge of the company

 The need for all directors to have sufficient time to discharge their

responsibilities effectively

II BOARD OF DIRECTORS – ROLES AND RESPONSIBILITIES:

Role and responsibilities of the board:

 provide entrepreneurial leadership of the company

 represent company view and account to the public

 decide on a formal schedule of matters to be reserved for board decision

 determine the company's mission and purpose (strategic aims)

 select and appoint the CEO, chairman and other board members

 set the company's values and standards

 ensure that the company's management is performing its job correctly

 establish appropriate internal controls that enable risk to be assessed and managed

 ensure that the necessary financial and human resources are in place for the company to meet its objectives

 ensure that its obligations to its shareholders and other stakeholders are

understood and met

 meet regularly to discharge its duties effectively

 for listed companies:

 appoint appropriate NEDs

 establish remuneration committee

 establish nominations committee

 establish audit committee

 assess its own performance and report it annually to shareholders

 submit themselves for re-election at regular intervals All directors in FTSE 350companies should be put forward for re-election every year

An effective board demonstrates the following capabilities:

 clear strategy aligned to capabilities

 vigorous implementation of strategy

 key performance drivers monitored

 sharp focus on the views of the City and other key stakeholders

 regular evaluation of board performance

Legal Functions of Board of Directors:

 A director performs his duties in good faith and in a manner that he servesfor the best interest of the corporation, and as an ordinary person in a likeposition under certain circumstances.

 Attention at meetings, Reliance on management and professionalinformation and Delegation (to management to operate the business)

 Decision Making – exercise reasonable business judgement

Board of directors:

Some examples of mission statements:

Uy tín: Chỉ tiêu an toàn cao nhất, chất

lượng dịch vụ vượt trội, đảm bảo chỉ số

tin cậy trong dịch vụ, không ngừng nâng

Tinh nhạy: Là kết tinh của sự hợp nhất –

điểm nổi trội, tinh túy trong dây chuyền

cung ứng dịch vụ của từng sân bay sẽ

III BOARD MEETING AND BOARD STRUCTURE:

1.Board meeting:

1.1 A definition of board meeting

A Board Meeting is a formal meeting of the board of directors of an organization andany invited guests, held at definite intervals and as needed to review performance, consider policy issues, address major problems and perform the legal business of the board and presided over by a chairperson of the organization

1.2 Board agenda items

A board agenda is likely to include the following topics:

- Company performance:

The first item on the agenda is usually a rundown of the company’s performance since the last board meeting Talk about whether the company’s performance metrics are moving in the right direction and if the targets have been achieved

Conversations about the company’s performance should be limited to quick

summaries, with full reports available for members to review outside of the meeting Talk about the main pain points or highlights and save the details for follow-up calls

- Future strategies:

After reflecting on what has and hasn’t been working, it’s nice to follow up and

strategize about what to do in the future to promote your organization’s growth The bulk of any good board meeting should consist of discussing what future strategies are going to be implemented and how they’ll be executed by the company

- Key performance indicators (KPIs):

After agreeing on strategies, the board of directors should talk about the key

performance indicators that are assigned to these strategies Creating these action plans comes with identifying concrete metrics that can indicate how effective your strategies are going to be

- Problems and opportunities:

With implementing new roadmaps and strategies across an organization comes new obstacles and challenges Board meetings are a great time to discuss roadblocks and encourage ideas to work around them

- Making plans of action:

Once all of the important details are discussed, the board may then talk about plans of action that will affect the future of the company These plans can be proposed and voted on during the meeting

 In conclusion, the board meeting should satisfy these items:

- Agenda should strike a balance between short and long-term issues and every director should have the opportunity to place items on the agenda

- All the topic should have supportive information, including risk and alternatives identified and be distributed in the right time

1.3 Time to set up the agenda

Board meetings take place at set intervals, often quarterly or biannually They can happen more frequently, depending on how your company works and how often your directors want to meet to review processes and company progress The purpose of board meetings is for the directors to talk about any issues that the company is facing, review the company’s performance and discuss new policies to be enacted

Board meetings shouldn’t be longer than two to three hours Your board members’ time is very valuable, and the meetings should focus on topics at the strategic level, with smaller details left for follow-up syncs and separate meeting times

=> Meeting should be regular or at need and attendance expected

The model of a one-tier board structure is essentially a mirrored image of the liberal norms of the importance of investors and a free-market economy The German two-tier model is in many ways a mirrored image of stakeholder importance,

neo-codetemination and managerialism

The management (operating) board which is responsible for the day-today running of the business, consisting of executives only and led bythe chief executive.

The supervisory (corporate) board with a wider membership, responsible for the strategic oversight of the organisation and led by thechairman

Decision-making process

The decision-making process is expected to be less time consuming as decisions, which otherwisewould require supervisory board approval, only have

to pass one body

Under a two-tier board structure, the two boards meet separately, so executive discussion around running the business will not be heard

by the higher board members, and vice versa This is unlike the single board meeting that will be held for a unitary board

2.1 Unitary board

The idea of one-tier board started from Anglo-Saxon model of corporate

governance This is a system of supervision and control over the corporation,

functioning in the United States, Canada, Australia and the United Kingdom The mainfeature of this model is to rely on the capital market, as the place of control over the corporation Supervision is exercised mostly by investors who expressed theirs favour

or disapproval for the actions of management by the buying/selling shares of

the company and voting during the general meetings of shareholders In this model, the management shall not be subject to the strict control within the organization due to the high liquidity of the market The relationship between managers and shareholders are short-lived and official

- The boards of most listed companies have between eight and twelve board members, and there are four structures of unitary:

 there are all executive director board

 the majority excecutive director board

 the majority non-executive director board

 the all non-excecutive director board

- Advantages and disadvantages of one-tier board:

 An enhanced superior flow of information The structure and small board size of one tier system enhance excellent circulation of information The board meetings frequently and its housing of the various committees, with a clear majority of experts within the executive and non-executivemembers, helps in promoting individual relationships, in-depth knowledge of the business and aneffective supervisory function of the Board

 Faster decision making and reduced bureaucracy The structure of one-tier board enhancesfaster decision-makings because there is no separate

Shareholders

Employees

supervisory board Thus, the need for separat eapproval of decisions does not arise.

 Issues specific to the unitary board tend to relate to the role of NEDs

- Main role of NED in unitary:

 NED expertise: the implied involvement of NEDs in the running of the company rather than just supervising

 NED empowerment: they are as responsible as the executives and this is better demonstrated by their active involvement at an early stage

 Compromise: less extreme decisions developed prior to the need for

 Relationships: banks have a much closer relationship with German

companies than in the UK They are frequently shareholders, and other shareholders often deposit their shares and the rights associated with them with their banks

This creates a backdrop to creating structures where these parties are actively involved

in company affairs, hence the two-tier structure

Structure of two-tier board:

- Lower tier: management (operating) board

 responsible for day-to-day running of the enterprise

 generally only includes executives

 the CEO co-ordinates activity

- Upper tier: supervisory (corporate) board

 Appoints, supervises and advises members of the management board

 Strategic oversight of the organization

 Includes employee representatives, environmental groups and other

stakeholders' management representatives

 The chairman co-ordinates the work

 Members are elected by shareholders at the annual general meeting (AGM)

 Receives information and reports from the management board

Advantages of a two-tier board:

- Clear separation between those that manage the company and those that own it

or must control it for the benefit of shareholders

- Implicit shareholder involvement in most cases since these structures are used

in countries where insider control is prevalent

- Independence of thought, discussion and decision since board meetings and operation are separate

- Direct power over management through the right to appoint members of the management board

Problems with a two-tier board:

- Dilution of power through stakeholder involvement

- Isolation of supervisory board through non-participation in management

meetings

- Agency problems between the two boards

- Added bureaucracy and slower decision making

- Reliant upon an effective relationship between chairman and CEO

Comparison of One-tier (Unitary) and Two-tier Governance Board Systems

- The size of the board: One of the major differences between these structural board systems is the size The one-tier boards are usually smaller than the two-tier boards regarding members

- Board Meetings: There are more frequent meetings in a one-tier structure than atwo-tier structure

- Shareholders Vs Stakeholders: The one-tier board system is aimed at protecting the rights and interests of the shareholders, while the two-tier structure focuses

on the benefit of all stakeholders

- Orientation: Two-tiered boards are representative in nature with network

orientation, while one-tiered boards are independent and more market oriented

- Directors Emoluments: The board compensation styles of both models are distinct to their governance systems In the USA, executive remuneration is worked out by the board in consultation with remuneration consultants In Germany, the supervisory board determines themanagement board`s

compensation, but under statutory regulation

3 Composition of the board

Executive directors: are directors who also have executive management responsibility

in the company They are normally full-time employees of the company Eg: CEO, CFO

Non-Executive directors (“NEDs”) :are directors who do not have any executive management responsibility in the company (They might be an executive director in a different company):

- NEDs are not employees of the company

- They are not full-time employees

Independent directors: an independent director is an individual who:

- Has no link to a special interest group or stakeholder group

- Has no significant personal interest in the company such as a significant contractual relationship of the company

1 Board committee structure

1.1.Nomination committee

The nomination committee is responsible for leading the board appointment process, considering the requirements of the company and making recommendations to the board This responsibility covers both executive and non-executive directors

Responsibilities of nominations committee:

 To identify candidates to fill vacancies on the board

 Review regularly the structure, size and composition of the board and make recommendations to the board

 Consider the balance between executives and NEDs on the board of directors

 Ensure appropriate management of diversity to board composition

 Provide an appropriate balance of power to reduce domination in executive selection by the CEO/chairman

 Regularly evaluate the balance of skills, knowledge and experience of the board

 Give full consideration to succession planning for directors.

 Be seen to operate independently for the benefit of shareholders

arrangements The design of remuneration policies should be linked to the

achievement of the company’s long-term success, but there is no simple answer that works for every company

The composition of the committee is also important It is essential that no one should

be involved in deciding his or her own remuneration All, or a majority of,

remuneration committee members will be independent directors, and executives are excluded

Responsobility of remuneration committee:

- The committee should agree with the main board a policy for remuneration

- Set detailed remuneration for all executive directors and the chairman,

including pension rights and any compensation payments

- Where there is a performance-related pay scheme, the committee should decide

on the targets for performance Ensure that the executive directors and key management are fairy rewarded for their individual contributation to the overall performance of the company

- The committee should decide on pension arrangement

- Negotiate and agree the remuneration of each individual executive director

- Demonstrate to shareholders that the remuneration of the exe cutive directors and key management is set by individuals with no personal interest in the outcome of the decisions of the committee

1.3 Audit committees

The primary task of the audit committee is to oversee the relationship with external auditors to ensure the quality of the company’s financial statements

Main responsobility of audit committee:

- Monitor the integrity of the company financial statement and any other formal statement relating to the company’s financial performance

- Review the company’s internal financial controls

- Review the company’s internal and risk management system (unless this

responsibility is given to risk committee)

- Make recommendations to the board about the appointment, re- appointment or removal of audit firm

- Approve the remuneration and terms of engagement of the external auditors.

- Review and monitor effectiveness of the audit process.

1.4 Risk committee

Include internal controls and risk management

2 Importance of committees

Board sub-committees are a generally accepted part of board operations

Positives that come out of the creation and use of such structures are:

 Reduces board workload and enables them to improve focus on other issues

 Creates structures that can use inherent expertise to improve decisions in key areas

 Communicates to shareholders that directors take these issues seriously

 Increase in shareholder confidence

 Communicates to stakeholders the importance of remuneration and risk

 Satisfy requirements of the UK Corporate Governance Code (2010) (or other governance requirement

1.Who is Non-Executive Director ?

A Non-Executive Director is a member of a company's Board of Directors who is not apart of the executive team Non-Executive Directors are not employed by the companybut appointed through a letter of appointment A Non-Executive Director typically does not engage in the day-to-day management of the organization, but is involved in policy making and planning exercises

2 Roles of Non-Executive Director

Non-Executive Directors, also known as external directors, independent directors or outside directors, are put in place to challenge the direction and performance of a company as well as its existing team Since Non-Executive Directors do not hold C-level (CEO,CFO,COO,CIO) or managerial positions, they are thought to understand the interests of the company with greater objectivity than the executive directors, who may have an agency problem or conflict of interest between management and

stockholders or other stakeholders

The role of Non-Executive Directors is broad They challenge, question and monitor the CEO and senior management; they bring an independent perspective to decision-