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Title: Chapter 4: Board of Directors Roles and Responsibilities Chapter 5: Board Committee Roles and Respon


1
Chapter 4 Board of Directors Roles and
Responsibilities Chapter 5Board Committee Roles
and Responsibilities
  • L. Murphy Smith
  • Texas AM University

2
Chapter 4 Board of Directors Roles and
Responsibilities
Identify the difference between decision
management and decision control. Understand the
role of the board of directors. Understand that
the board of directors is ultimately responsible
for the business and its affairs. Provide an
overview of what the oversight function
entails. Identify and explain the fiduciary
duties of the board of directors. Gain
awareness of the variety of board models.
Identify the board attributes that affect the
quality of monitoring and oversight. Illustrate
the importance of an independent board of
directors. Become familiar with the best
practices of determining directors
compensation. Identify and describe the
determinants of an effective board of
directors. Become familiar with board
accountability, evaluation, and the legal
obligations and liabilities facing outside
directors of public companies.
3
Chapter 4 Board of Directors Roles and
Responsibilities
  • The board of directors is ultimately responsible
    for the companys business affairs and governance
    as stated in its governing documents, including
    the articles of incorporation, the by laws, and
    shareholder agreements.
  • Many state laws require a corporation to form a
    board of directors to represent shareholders and
    make decisions on their behalf.
  • The success of the board of directors depends on
    the composition, structure, resources, diligence,
    and authority of the entire board, as well as
    their working relationships with other
    participants of corporate governance, including
    management, external auditors, internal auditors,
    legal counsel, professional advisors, regulators,
    standard-setting bodies, and investors.
  • Teamwork DQ 2 and 5.

4
Chapter 4 Board of Directors Roles and
Responsibilities
(1) Represent shareholders and create shareholder
value. (2) Align the interests of management with
those of shareholders while protecting the
interests of other stakeholders (customers,
creditors, suppliers). (3) Define the companys
mission and goals. (4) Establish or approve
strategic plans and decisions to achieve these
goals. (5) Appoint senior executives to manage
the company in accordance with the established
strategies, plans, policies, and procedures. (6)
Oversee the companys performance by setting
objectives, establishing short-term and long-term
strategies to achieve these objectives, and
assessing the performance of senior executives in
fulfilling their responsibilities without
micromanaging. (7) Approve major business
transactions and corporate plans, decisions, and
actions according to the bylaws. (8) Develop and
approve executive compensation, pension,
post-retirement benefits plan, and other
long-term benefits, including stock ownership and
stock options. (9) Review financial reports,
including audited annual financial statements,
quarterly reviewed financial statements, and
other important financial disclosures such as
management discussion and analysis (MDA)
earnings releases and reports filed with
regulators (SEC) or disseminated to the
public. (10) Review managements report on the
effectiveness of internal control over financial
reporting.
5
Chapter 4 Board of Directors Roles and
Responsibilities
(11) Provide counsel to the companys senior
executives, especially the CEO, on material
strategic decisions and risk management. (12)
Ensure the companys compliance with applicable
laws, rules, and regulations. (13) Approve the
companys major operating, investing, and
financial activities. (14) Set the tone at the
top by promoting legal and ethical conduct
throughout the company. (15) Evaluate the
performance of the board, its committees (e.g.,
audit, compensation, and nominating), and the
members of each committee. (16) Hold the board,
its committees, and directors accountable for the
fulfillment of the assigned fiduciary duties and
oversight functions. (17) Approve dividends,
financing, capital changes, and other
extraordinary corporate matters. (18) Oversee the
sustainability of the company in creating
long-term shareholder value and protecting
interests of other stakeholders. Teamwork DQ 10
6
Chapter 4 Board of Directors Roles and
Responsibilities
  • Fiduciary duty means that, as shareholders
    guardians, directors must be trustworthy, acting
    in the best interest of shareholders, and
    investors in turn have confidence in the
    directors actions.
  • MANDATED BY LAW AND SPECIFIED IN COMPANIES
    CHARTERS AND BYLAWS
  • The corporate governance literature presents the
    following fiduciary duties of boards of
    directors
  • Duty of due care
  • Duty of loyalty
  • Duty of Good Faith
  • Duty to Promote Success
  • Duty to Exercise Diligence, Independent
    Judgment, and Skill
  • Duty to Avoid Conflict of Interests
  • Fiduciary Duties and Business Judgment Rules.

7
Chapter 4 Board of Directors Roles and
Responsibilities
  • Board committees normally function independently
    from each other, are provided with sufficient
    resources and authority, and are evaluated by the
    board of directors.
  • THUS board committee are a subset of the board
    and perform specific functions that assist the
    board in discharging its advisory and oversight
    responsibilities.
  • Public companies usually have the following board
    committees
  • Audit committee
  • Compensation committee
  • Governance committee
  • Nominating committee
  • Disclosure committee
  • Other standing or special committees

8
Chapter 4 Board of Directors Roles and
Responsibilities
  • Board Models
  • One-Tier Board Model - consists of both inside
    (executive) directors and outside (nonexecutive)
    directors. Inside directors are perceived as the
    decision managers and outside directors are
    assumed to have the power and duty to monitor
    those decisions.
  • Two-Tier Board Model - The two-tier board system,
    consisting of a supervisory board and a
    management board, better known as the German
    board model, establishes different authorities
    and responsibilities for members of each board.
  • Modern Board Model - the structure of the modern
    board based on the two components of strategic
    board and oversight board is the natural offshoot
    of the emerging corporate governance reforms.

9
Chapter 4 Board of Directors Roles and
Responsibilities
  • Director Education and Evaluation
  • Corporate governance reforms and best practices
    issued by a number of organizations recommend
    continuous education and evaluation of the board
    of directors.
  • Evaluation of the companys board should be
    performed formally and regularly (at least
    annually) through either self-evaluation,
    independent committee evaluation (audit,
    compensation, nominating), or outside consulting
    evaluations.

10
Chapter 4 Board of Directors Roles and
Responsibilities
  • Effective Corporate Boards
  • (1) Create and open and engaging boardroom
    atmosphere
  • (2) Maximize the value of the boards time
    commitment by establishing clear roles and
    responsibilities within an appropriate structure
  • (3) Determine the information the board needs and
    ensure it is delivered in a timely manner
  • (4) Dedicate time to strategic issues
  • (5) Create a transparent, explicit, and
    accountable executive pay process
  • (6) Actively engage in CEO succession planning
  • (7) Access the strength of the companys
    management talent
  • (8) Monitor the companies enterprise risk
    management system

11
Chapter 4 Board of Directors Roles and
Responsibilities
Director Liability One way to influence
directors ethical conduct and create more
accountability for them is to increase their
legal liability for poor performance and business
misconduct. Directors are not reasonably
expected to have first-hand knowledge of all
company business affairs under their oversight
capacity. Nevertheless, directors are responsible
for ascertaining the validity, reliability, and
quality of information provided to them. In most
circumstances, directors make decisions by
relying on information furnished by
corporate officers, employees, and professionals,
including legal counsel and accountants. Thus,
the effectiveness of their performance depends on
the validity and quality of the information
provided to directors.
12
Chapter 4 Board of Directors Roles and
Responsibilities
Summary The primary responsibilities of the
board of directors are to (1) define the
companys mission and goals (2) establish or
approve strategic plans and decisions to achieve
these goals (3) appoint senior executives to
manage the company in accordance with the
established strategies, plans, policies, and
procedures and (4) oversee managerial plans,
decisions, and actions in achieving sustainable
shareholder value while protecting the interests
of other stakeholders. The business judgment
rule provides directors with broad discretion to
make good faith business decisions and implies
that directors, when making business decisions,
must be reasonably informed. Investors, in
general, are in favor of the separation of the
positions of the CEO and the chairperson of the
board of directors Corporate governance best
practices suggest that companies designate one
director to take the lead at executive sessions
that do not include management.
13
Chapter 4 Board of Directors Roles and
Responsibilities
Summary - Continued Board characteristics,
including composition, authority,
responsibilities, resources, independence, and
compensation, significantly influence its
effectiveness. To be independent, a director
should not have any other relationships with the
company other than his or her directorship that
may compromise the directors objectivity and
loyalty to the companys shareholders. The
evaluation of board performance should be
completed formally and regularly (at least
annually) through either self-evaluation,
independent committee evaluation (audit,
compensation, nominating), or outside consulting
evaluations. Board accountability can be
classified into accountability to shareholders
for protecting their rights and interests,
accountability for the effectiveness of its
operation, and accountability for its involvement
in the companys strategic decisions to ensure
enduring performance and success.
14
Chapter 5 Board Committee Roles and
Responsibilities
Provide an overview of the functions of board
committees. Understand the roles and
responsibilities of board committees. Be aware
of the objectives of establishing board
committees. Become familiar with the duties,
responsibilities, and composition of the audit,
compensation, nominating, governance, and special
committees. Understand the process and emerging
practices for the election of corporate directors.
15
Chapter 5 Board Committee Roles and
Responsibilities
The establishment of board committees can bring
more focus to the boards oversight function by
giving proper authority and responsibilities and
by demanding accountability for these committees.
Listing standards of national stock exchanges
require that listed companies form at least three
board committees that must include audit,
compensation, and nominating committees. Public
companies often, in addition to these three
mandatory committees, have governance and other
committees such as finance, IT, and
disclosure. Average number of directors
9-15
16
Chapter 5 Board Committee Roles and
Responsibilities
  • Audit Committee
  • Lawmakers (SOX), regulators (SEC rules), and
    listing standards of national stock exchanges
    (NYSE, Nasdaq, AMEX) generally require public
    committees to have an audit committee, which must
    be composed of independent directors with no
    personal, financial, or family ties to
    management.
  • Standards Relating to Listed Company Audit
    Committees outline these requirements, which
    relate to
  • Audit committee members to be independent.
  • Audit committee members to select and oversee the
    issuers independent account.
  • Procedural process for handling complaints
    regarding the issuers accounting practice.
  • The authority of the audit committee to engage
    advisors.
  • Funding for the independent auditor and any
    outside advisors engaged by the audit committee.

17
Chapter 5 Board Committee Roles and
Responsibilities
  • Audit Committee Relationships with Others
  • Audit Committee Board of
    Directors
  • Works with other committees, assists board by
    bringing specialization and expertise in the
    areas of financial reporting, internal controls,
    risk management, and audit activities.
  • Audit Committee Management
  • Asks appropriate questions pertaining to the
    companys corporate governance structure,
    internal controls, financial reporting, audit
    activities, risk assessment, codes of ethics, and
    whistleblower programs. Management should provide
    sufficient information.
  • Audit Committee External
    Auditors
  • Directly responsible for hiring, compensating,
    and firing external auditors, as well as
    overseeing their work. External auditors are held
    ultimately accountable to the audit committee and
    should submit their reports of the audit on ICFR
    and the audit of financial reporting to
    management via the audit committee.
  • Audit Committee Internal
    Auditor
  • Should be responsible for hiring, overseeing,
    compensating, and firing the head of the internal
    audit department (CAE), and internal auditors
    should report their audit findings directly to
    the audit committee, being ultimately accountable
    to that committee.

18
Chapter 5 Board Committee Roles and
Responsibilities
  • Audit committee composition is discussed in terms
    of size, independence, qualifications,
    attributes, and resources
  • Audit Committee Size - The size of the committee
    usually ranges from three to six members, whereas
    the SEC rule and listing standards for public
    companies require at least three independent
    members and should be composed for at least three
    months.
  • Audit Committee Independence - The audit
    committee should be composed of independent,
    nonexecutive, outside directors. The emerging
    corporate governance guidelines on audit
    committee independence should assist public
    companies in avoiding potential conflicts of
    interest due to committee members excessive
    contractual or consulting ties to the company or
    its management.

19
Chapter 5 Board Committee Roles and
Responsibilities
  • Member Qualifications - At least one member of
    the audit committee should be designated as a
    financial expert. The companys board of
    directors should apply the SECs definition and
    consider audit committee members experience and
    knowledge in determining which members qualify as
    financial experts and, if none qualify, recruit
    at least one member who meets the required
    qualifications.
  • Audit Committee Authority/Resources - SOX,
    recognizing the increased responsibilities
    assigned to audit committees, authorizes them to
    engage independent counsel and other outside
    advisors as they determined necessary and
    requires the company to provide appropriate
    funding for such advisors.

20
Chapter 5 Board Committee Roles and
Responsibilities
  • Compensation Committee
  • The compensation committee is usually formed to
    determine the compensation and benefits of
    directors and executives.
  • Structure The committee should be composed of
    all independent directors who rotate
    periodically.
  • Responsibilities committees have a set of
    responsibilities which they need to follow
    stricktly.
  • Proxy Statement Disclosure The committee is
    directly responsible for ensuring that all
    aspects of executive compensation are fully and
    fairly disclosed in in the annual proxy
    statement.
  • Committee responsibilities
  • Evaluation of directors.
  • Design and implementation of director
    compensation plans.
  • Evaluation of senior executives.
  • Design and implementation of executive
    compensation plans.

21
Chapter 5 Board Committee Roles and
Responsibilities
Other Committees Corporate governance committee
should be composed of both executive and
nonexecutive directors and be responsible for
developing and monitoring the companys
governance principles, including the roles and
responsibilities of directors and officers.
Nominating committee is usually responsible for
evaluating and nominating a new director to the
board, and it also facilitates the election of
the new director by shareholders. Other Public
companies may form other standing or special
committees to deal with issues requiring
particular expertise, such as the
following Finance committee to oversee financial
activities. Outside directors committee to
maintain board independence. Executive committee
to approve managements decision, plans , and
actions on a behalf of entire board.
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