Corporate Governance - Effective Performance Evaluation of the Board

By Saleh Hussain

The book deals with practical issues relating to Board's Performance Evaluation supplemented by easy to use checklists as to how to undertake the evaluation.

The book also covers the methodology of evaluating the work of board committees.

The Book talks about emerging practices in Corporate Governance.

• Language: English
• Publisher: eBookIt.com
• Release date: Mar 31, 2017
• ISBN: 9789990103892

Book preview

2013

CHAPTER 1

THE BOARD OF DIRECTORS

1. THE BOARD OF DIRECTORS

One of the main objectives of running a company is to maximize shareholder value. In order to achieve this objective, the company needs to be managed by a formalized and well established team of individuals; who would operate as per best interest of the company following a set of rules and optimal business practices. Corporate governance means the way in which business and affairs of each institution is directed and managed by their ‘Board of Directors’ (Board) and the ‘Management’.

The Board is the apex authority of any company; and is ultimately responsible for all past, present and future activities. The responsibilities and duties of the board as a whole have been defined in a variety of ways.

According to Bank for International Settlements (BIS), the board has overall responsibility for the bank, including approving and overseeing the implementation of the bank’s strategic objectives, risk strategy, corporate governance and corporate values. The board is also responsible for providing oversight of senior management (BIS in ‘Principles for Enhancing Corporate Governance’, October 2010, p.7).

Core Principles for Effective Bank Supervision: Principle 14

Banks should have in place internal controls that are adequate for the nature and scale of their business. These should include clear arrangements for delegating authority and responsibility; separation of the functions that involve committing the bank, paying away its funds, and accounting for its assets and liabilities; reconciliation of these processes; safeguarding its assets; and appropriate independent internal or external audit and compliance functions to test adherence to these controls as well as applicable laws and regulations (Basel Committee on Banking Supervision).

Corporate laws identify the responsibilities of the board of directors with respect to corporate governance principles to ensure that there are effective controls over every aspect of risk management.

These controls are the responsibility of the board of directors and deal with organizational structure, accounting procedures, checks and balances and safeguarding of assets and investments. More specifically, these address:

• Organizational structure: definitions of duties and responsibilities including clear delegation of authority (for example, clear loan approval limits), decision making procedures, separation of critical functions (for example, business origination, payments, reconciliation, risk management, accounting, audit and compliance)

• Accounting procedures: reconciliation of accounts, control lists, information for management.

• Checks and balances (or four eye principles): segregation of duties, cross checking, dual control of assets and double signatures.

• Safeguarding assets and investments: including physical controls

To achieve a strong control environment, the board of directors and senior management of a bank should understand the underlying risks in their business and are both committed to, and legally responsible for, the control environment (Basel Committee on Banking Supervision).

1.1 Responsibilities of the Board

To promote safe and sound operating practices, it is imperative that the Board assumes its role independent of the influence of the Management. Members of the Board should know their responsibilities and powers in clear terms. Further, it should be ensured that the Board focus on policy making and general direction, oversight and supervision of the affairs and business of the company and does not play any role in the day-to-day operations, as that is the role of the ‘Management’.

The corporate governance framework should ensure the strategic guidance of the company, the effective monitoring of management by the board, and the board’s accountability to the company and the shareholders.

The following gives accounts of Board’s responsibilities as defined by various international bodies and best practices and concludes with the responsibilities identified in the Code of Corporate Governance of Bahrain.

• Board members should act on a fully informed basis, in good faith, with due diligence and care, and in the best interest of the company and the shareholders

• Where board decisions may affect different shareholder groups differently, the board should treat all shareholders fairly

• The board should ensure compliance with applicable law and take into account the interests of stakeholders

• The board should fulfill certain key functions, including:

• Reviewing and guiding corporate strategy, major plans of action, risk policy, annual budgets and business plans; setting performance objectives; monitoring implementation and corporate performance; and overseeing major capital expenditures, acquisitions and divestitures.

• Selecting, compensating, monitoring and, when necessary, replacing key executives and overseeing succession planning.

• Reviewing key executive and board remuneration, and ensuring a formal and transparent board nomination process.

• Monitoring and managing potential conflicts of interest of management, board members and shareholders, including misuse of corporate assets and abuse in related party transactions.

• Ensuring the integrity of the corporation’s accounting and financial reporting systems, including the independent audit, and that appropriate systems of control are in place, in particular, systems for monitoring risk, financial control, and compliance with the law.

• Monitoring the effectiveness of the governance practices under which it operates and making changes as needed.

• Overseeing the process of disclosure and communications.

• The board should be able to exercise objective judgment on corporate affairs independent, in particular, from management.

• Boards should consider assigning a sufficient number of non-executive board members capable of exercising independent judgment to tasks where there is a potential for conflict of interest. Examples of such key responsibilities are financial reporting, nomination and executive and board remuneration.

• Board members should devote sufficient time to their responsibilities.

• In order to fulfill their responsibilities, board members should have access to accurate, relevant and timely information. (OECD Principles of Corporate Governance – 1999)

• Split role of Chairman and Chief Executive Officer. (Kings Committee on Corporate Governance – 1994)

• Board to have formal schedule of matters and to meet regularly. (Cadbury Committee – 1992)

Common Wealth Association’s Principles are summarized as below:

Board should:

• Ensure that corporation will continue as a going concern

• Exercise leadership, enterprise and judgment in directing the business

• Set objectives and strategies of the organization

• Ensure development of key policies and their implementation

• Monitor, evaluate and review the aims, strategies, policies, etc.

• Form committees in key areas and ensure their functionality

• Ensure company’s adherence to laws of the land, regulations and best practices

• Ensure existence of communication web among all stakeholders

• Ensure efficacy of systems, procedures and internal controls

• Ensure working of a right blend of human and material (technological) resources

• Ensure identification and mitigation of all risks

• Set key performance indicators of the business enterprise

• Ensure flexibility of structure, products and delivery to face the challenge of fast coming globalization

The Code of Corporate Governance of Bahrain (CG Code) provides guidance on the role of the board. Principle 1 of the CG Code states:

CG Code – Principle 1: The Company shall be headed by an effective, collegial and informed Board.

It also states that the role and responsibilities of the board include but are not limited to:

• The overall business performance and strategy for the company;

• Causing financial statements to be prepared which accurately disclose the company’s financial position;

• Monitor management performance;

• Convening and preparing agenda for shareholder meetings;

• Monitoring conflicts of interest and preventing abusive related party transactions;

• Assuring equitable treatment of shareholders including minority shareholders; and

Central Bank of Bahrain (CBB) has endorsed the above by incorporating CG code into its rulebook. Thus CBB rulebook’s section HC-1.2.2 of High Level Controls (HC) module re-states the above responsibilities for all conventional bank licensees and adds that the board is also responsible for ‘establishing the objectives of the bank’.

Both the CG Code as well as CBB have emphasized that the Board should, at minimum, be responsible to perform the below roles and responsibilities.

• Duty to Approve and Monitor Company Strategy: The Board should assume overall responsibility of company’s business, risk management, and financial soundness. Thus, the Board should review, approve and monitor the objectives, strategies and overall business plans of the institution; in line with shareholders’ expectations

• Duty to Ensure Legal and Regulatory Compliance: All the members of the Board should undertake and fulfill their duties and responsibilities keeping in view their legal obligations under all the applicable laws and regulations

• Duty to Establish Optimal Management Structure: The Board should clearly define the authorities and key responsibilities of both the Directors and the Senior Management without delegating its policymaking powers to the Management and shall ensure that the Management is in the hands of qualified personnel. In addition, the Board should be responsible for human capital development process (including appointing, training, fixing the remuneration of and where appropriate, replacing senior management, and succession planning)

• Duty to Ensure Optimal Control Environment: The Board should approve and ensure implementation of policies, including but not limited to, in areas of Internal Audit & Control, Compliance, Risk Management, Human Resources, Finance, Treasury Management, Investments, Acquisition/Disposal of fixed assets, Donations/Charities, Prevention of Frauds & Forgeries and any other operational area which the ‘Board’ and the ‘Management’ may deem appropriate from time to time. The Board should also be responsible to review and update existing policies periodically and whenever circumstances justify

• Duty to Oversee Company Performance: The Board should ensure existence of an effective ‘Management Information System’ to remain fully informed of the activities, operating performance and financial condition of the institution, the environment in which it operates, the various risks it is exposed to and to evaluate performance of the Management at regular intervals

• Duty to Implement Corporate Governance: The Board of Directors should show leadership and set the tone at the top. The Board Chairman should place corporate governance issues on the agenda of Board meetings to ensure an efficient and timely treatment of all issues arising out in this respect. The Board should also adopt code of conduct for itself and senior management

1.2 Responsibilities of Board Members

The above section stated responsibilities of the Board collectively; however, since the Board is composed of various members, the best practices require that each member of the Board should be held individually responsible for his/ her activities as Board Member. The Directors are required to exercise their powers and carry out their fiduciary duties with a sense of objective judgment and independence in the best interests of the listed company.

The CG Code (section 1.4) states that each Director (Board Member) should consider himself as representing all shareholders and should act accordingly. Principal responsibilities of Director/ Board Member include the following:

• Duty of Good Faith: The duty of good faith demands that the director is reliable, trustworthy, act with integrity and does not seize corporate opportunities for his own self-interest. It further requires the director to act in the best interest of the company at all times and to avoid any action that causes or can cause any conflict of interest with the company. The shareholders and related stakeholders must be confident that the director will at all times deal with the affairs and