3.2 Board tasks

Documentgegevens:

N.J.M. van Zijl, datum 05-10-2012

Datum: 05-10-2012
Auteur: N.J.M. van Zijl
JCDI: JCDI:ADS601761:1
Vakgebied(en): Ondernemingsrecht / Algemeen
Ondernemingsrecht / Corporate governance

The view on the duty and roles of management has evolved over time. Berle and Means extract three rules of conduct for unitary boards of directors from company law of the state of Delaware: ‘a decent amount of attention to business, fidelity to the interests of the company and at least reasonable business prudence’ (1932: 221). They also take the view that a director has a fiduciary duty towards everyone involved in the company and towards the ‘mythical corporate entity as a whole’ (1932: 225-226). This applies to executive directors as well as NEDs. However, they mention that this view was not generally accepted in their time.

Pearce and Zahra are more specific and identify three interrelated roles of unitary boards within companies: service, strategy and control (1992: 412-413). The service role comprehends representing the company to the outer world, safeguarding the interests of the company in the community and being the connection between the company and the environment. The strategic role consists of defining and implementing a business concept and mission for the company. Pearce and Zahra recognise four grand strategies: concentration, internal growth, external growth and retrenchment (1992: 419). The control role comes down to selecting senior executives, appraising the performance, supervising executives’ plans and determining the components and size of executive pay.

Bhagat and Black listed six important discrete board tasks (1999: 923-940). The first task is the replacement of the CEO when he proves to be incompetent. The second task is the response to a takeover bid. A board of directors should determine the value of the company and at what price it should be sold. Negotiations with acquirers – or corporate raiders – is part of this task as well. The third task is to approve or disapprove large investments, such as the acquisition of another company. The board should comb the market for potential takeover targets and determine a fair takeover premium. The fourth task is the adoption of takeover defences and is used to guarantee a higher takeover premium for shareholders and to deter potential acquirers. The fifth task is the determination of executive compensation. Although the material impact of executive compensation is rather small, the symbolic implications are significant and therefore important. The sixth task is monitoring to prevent a company from failure, financial fraud and to control the financial reporting process.

In contrast, the OECD Principles of Corporate Governance from 2004 extensively list much more key functions OECD (2004: 24-25).

–: ‘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.
–: Monitoring the effectiveness of the company ’s governance practices and making changes as needed.
–: Selecting, compensating, monitoring and, when necessary, replacing key executives and overseeing succession planning.
–: Aligning key executive and board remuneration with the longer term interests of the company and its shareholders.
–: Ensuring a formal and transparent board nomination and election 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 risk management, financial and operational control, and compliance with the law and relevant standards.
–: Overseeing the process of disclosure and communications. ’

The OECD Principles further mention that by executing these key tasks, the directors should act on a fully informed basis, with care and objective independent judgement, while treating all shareholders equally. Furthermore directors should apply high ethical standards and take into account the interests of the stakeholders. The interests of stakeholders are explicitly mentioned in the document of the OECD, while the board tasks described earlier focus solely on shareholders.

The enhanced and more detailed specification of the board tasks can be largely attributed to the fact that the focus on boards – and corporate governance more in general – has become a prominent issue in the last decades. The worldwide wave of privatisation in the last two decades, reforms of pension funds and private savings growth, the 1980’s takeover wave, deregulation and capital markets integration, the 1998 East Asia crisis and the accounting scandals at the start of this century are some reasons given for the increased interest in corporate governance (Becht et al. 2005: 4-7).

Corporate governance codes and laws have specific formulations of tasks and differ with respect to responsibilities of boards from country to country. Part II of this study elaborates on country-specific formulations of responsibilities and tasks for the United Kingdom, the Netherlands and Sweden. But in the next sections the different economic theories are described, with their different views on board composition, tasks and independence. The next section starts with the agency theory.