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The Board of Directors

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					Corporate Governance Players:
The Board of Directors
Directors
   All corporate powers are exercised by, or
    under the authority of, the board of
    directors.
   When individual investors serve as the
    directors of businesses, they represent the
    interests of the other owners.
   Directors are required to be competent to
    make sound decisions
Who Are Directors?
   According to the 2001 Korn/Ferry annual board of
    directors study, two thirds of directors say that the
    CEO/Chairman has the most influence in
    identifying new directors.
   The study also states that a person must possess 10
    to 20 years of experience in a business leadership
    role, be a current COO or CEO of a large
    company, or be one of the top 15 executives at a
    very large corporation to be considered a viable
    candidate for director
Election of Directors
   The election of directors takes place at the annual
    meeting of shareholders.
   The shareholders elect directors, who will be
    legally charged with representing their interests
   Normally, the number of nominees is identical to
    the number of vacant seats of directors. If not, the
    directors can change the bylaws to create the
    proper number of openings.
The Functions of Directors
   In general, the board of directors have four
    broad functions:
       To fire, evaluate, and fire top management
       To vote on major operating proposals
       To vote on major financial decisions
       To offer expert advice to management
The Legal Duties of Directors
   The fiduciary duty
   The duty of loyalty and the duty of fair
    dealing
   The duty of care
   The duty not to entrench
   The duty of supervision
The fiduciary Duty
   Directors need to be trustworthy in acting in
    the best interests of those whom the director
    represents.
   Directors must clearly understand the
    corporation objectives and enhance the
    shareholder gains.
The duty of loyalty and the duty
of fair dealing
   The basic principle of this duty of loyalty is that
    the director should not use his or her corporate
    position to make a personal profit or gian other
    personal advantages
   The duty of fair dealing can be viewed as a
    component of the duty of loyalty, requiring that all
    transactions with the corporation be handled in a
    forthright and open manner that is fair to the
    interests of the corporation.
The duty of care
   It’s incumbent on directors to act carefully
    in carrying out their responsibilities
   The directors must exercise their duties with
    the care that an ordinarily prudent person
    would be reasonably expected
The duty not to entrench
   CEO or board members need to be replaced
    if the corporation doesn’t perform well
   Many CEOs and board members are
    entrenched since they don’t get replaced
    even they do very bad
The duty of supervision
   The duty of supervision addresses what directors
    should know about the operations of management,
    how they should come to know it, and what they
    should do when there is anb issue or problem
    requiring attention
   The most important task associated with the duty
    of supervision is the regular meeting of the board
    to discuss the performance of the organization and
    to ask penetrating questions of management
Board Committees
   A board of directors normally conducts its
    business through a well-organized committee
    structure that partitions the work of the board and
    allows directors to make maximum use of their
    expertise
   Most boards have the following standing
    committees in some form:
       Executive committee
       Compensation committee
       Audit committee
       Nominating and governance committee
The Executive Committee
   The executive committee can be used in three
    distinct ways:
    •   It may provide a backup mechanism that acts for the
        board when time or circumstances make it difficult to
        bring the entire board together
    •   It may be composed of the chairs of the other standing
        committees and may be the means for coordinating
        their activities
    •   It may be a senior board to which all issues are
        presented before going to the whole board
The Compensation Committee
   The compensation committee deals with
    compensation and benefits of executives
   The committee obviously should be
    composed of outside directors
   The committee usually employs outside
    compensation advisers
The Audit Committee
   The audit committee is a critical committee and
    must, by SEC regulation, be composed of
    independent directors
   The committee works closely with the external
    auditing firm and meets quarterly with its
    representatives to review the company’s 10-Q
    form
   The audit committee’s functions include into
    oversight of financial controls and ensure that
    financial statements are accurately prepared.
The Nominating and Governance
Committee
   The nominating committee identifies and
    recruits new members of the board when
    openings occur, with staff report provided
    by CEO.
   In many companies, the committee has
    begun to manage the process of evaluation
    of individual board members, as well as the
    board as a whole
Problems with Boards
   CEO duality
       CEO is also the chairman of the board. This
        problem may affect the monitoring and
        function of the board
   Outside directors
       Even many outside directors are recruited by
        the CEO, so they don’t want to challenge and
        conflict with CEO
Problems with Boards
   Directors don’t have enough vested interests
    in the firm. This problem would affect the
    directors’ incentives to monitor the CEO
   Some directors may not have enough
    expertise required to understand fully and to
    approve the major operating and financial
    decisions of the firm
Proportion of Insiders on the
Board
              Dow 30     S &P 500
             Companies   Companies
  Minimum       8%          9%

   Average     17%         17%

  Maximum      38%         43%
Director Compensation
             Dow 30     S &P 500
            Companies   Companies
  Minimum     $8000      $20,000

  Average    $61,233     $37,409

  Maximum   $125,000    $100,000

				
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