Better Companies,Better Societies

Global Corporate Governance ForumGlobal Corporate Governance Forum

Role of Board of Directors in Corporate GovernanceFinancial Media WorkshopChile, January 2010

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Outline of Presentation

What is Corporate Governance?What is Corporate Governance? Building effective Board GovernanceBuilding effective Board Governance The different roles related to the BoardThe different roles related to the Board Some Concluding Thoughts!Some Concluding Thoughts!

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What is Corporate Governance?

Corporate Governance is a mechanism through which boards and boards and directorsdirectors are able to direct, monitor and supervise the conduct and operation of the corporation and its management in a manner that ensures appropriate levels of authority, accountability, stewardship, leadershipleadership, direction and control.

““The importance of The importance of corporate governance corporate governance lies in its contribution lies in its contribution both to business both to business prosperity and to prosperity and to accountability.”accountability.”

Paragraph 1.1, Committee on Corporate Governance:

Final Report Hampel Committee

““Corporate governance is concerned with Corporate governance is concerned with holding the balance between economic and holding the balance between economic and social goals and between individual and social goals and between individual and communal goals…… The aim is to align as communal goals…… The aim is to align as nearly as possible the interests of nearly as possible the interests of individuals, corporations and society.”individuals, corporations and society.”

Sir Adrian CadburyCorporate Governance Overview, 1999

[World Bank Report]

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It’s about Leadership………!

Leadership for efficiency……Leadership for efficiency……↳to compete in the global economy, create jobs

Leadership for probity Leadership for probity (honradez, rectitud)(honradez, rectitud)…..…..

↳because investors require confidence↳to provide assurance of management's integrity

Leadership with responsibility….Leadership with responsibility….↳to take account of broader stakeholder interests

Leadership that is accountable and transparentLeadership that is accountable and transparent↳to build trust in companies and in the economy!!

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Building Effective Board Governance

Defining key board roles Defining key board roles ↳ Board Chairman↳ Chief Executive Officer↳ Board Directors - executive and non-executive

Putting in place board governance arrangementsPutting in place board governance arrangements↳ Board committees to support decision process↳ Supporting functions to regulate processes↳ Board procedures and rules, e.g. conflicts of interest↳ Delegated authorities for management

Ensuring proper oversight and supervisionEnsuring proper oversight and supervision↳ Management reporting and public disclosures↳ Assurance processes and controls

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The Board of Directors is Pivotal

““The board should exercise compelling and relentless The board should exercise compelling and relentless leadershipleadership and should not underestimate the power of and should not underestimate the power of leading by example - evidenced by high levels of visibility leading by example - evidenced by high levels of visibility and integrity, strong communications, and demanding and integrity, strong communications, and demanding expectations. This leadership should be clear to ALL within expectations. This leadership should be clear to ALL within the organization, as well as shareholders the organization, as well as shareholders (accionistas) (accionistas) and other and other stakeholdersstakeholders (grupos de (grupos de interésinterés)).”.”

Boardroom BehavioursBoardroom BehavioursA report prepared for Sir David Walker A report prepared for Sir David Walker

by the Institute of Chartered Secretaries and Administrators , UKby the Institute of Chartered Secretaries and Administrators , UKJune 2009 June 2009

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AuditCommittee

Remuneration Committee

OtherCommittees

Board Committees

Strategy

Board of Directors• Achievement of strategic objectives and value creation

• Fulfil responsibilities and duties in law and prescribed functions

Boa

rd O

pera

tions

Chairman

Board Meetings

Reporting &Disclosure

Internal Controls & Assurance

Executive Committee

Internal Audit External AuditOther Assurance

ProvidersManagement

Combined Assurance Model

GovernanceSystem and

Controls

Corporate Policies & Procedures

Board Governance Instruments

Monitoring and Evaluation Key

Are

as o

f Res

pons

ibili

ty

CEO & Management

Shareholders

Info

rmat

ion

an

d C

om

mu

nic

ati

on

CorporateSecretary

Source: KPMG

Board Governance Framework

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Chairman as Leader of the Board

Primary role Primary role ↳ Provide overall leadership to the board

FunctionFunction↳ Principal link between board and CEO/management team↳ Responsible for board agenda and work plan↳ Work with board committee chairmen↳ Involved in selection and induction of new directors↳ Counsel individual directors on their performance↳ Participate in discussions with investors, key stakeholders

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CEO as Leader of the Company

Primary role Primary role ↳ Lead the management team, reporting to the board

FunctionFunction↳ Work closely with board chairman↳ Responsible for performance of management team↳ Formulate corporate strategy, annual business plan and budget↳ Responsible for corporate and financial objectives↳ Formulate major corporate policies↳ Ensure continuous improvement in services and products ↳ Manage relations with investors, major customers, regulators↳ Responsible for company’s long-term sustainability

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Board Structure and Composition

Balancing executive and non-exec. participation Balancing executive and non-exec. participation Ensuring an effective selection process Ensuring an effective selection process

↳ Key personal and professional attributes↳ Skills aligned to strategy and business↳ Also fill board committee requirements, where appropriate

Some general guidelines Some general guidelines ↳ Must have time to devote to responsibilities↳ Must exercise judgment in best interests of company↳ Must be informed about the business and its markets↳ Must avoid interest conflicts between personal and business↳ Must treat board information confidentially↳ Should act objectively and be receptive to other perspectives↳ Should prepare adequately for meetings, regular attendance

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Common Legal Principles of Directorship

Exercise reasonable standard of care Exercise reasonable standard of care ↳ Special business acumen or expertise not necessarily required↳ Not necessarily liable for errors of judgment↳ Given events following financial crisis, will this change?

Duty to act in best interests of the companyDuty to act in best interests of the company↳ In other words, for ALL shareholders, not special interests

““The legal framework and company charters should not permit The legal framework and company charters should not permit practices (such as “pre-meetings” and instructions on how to vote practices (such as “pre-meetings” and instructions on how to vote by shareholders whose votes placed a director on the board) by shareholders whose votes placed a director on the board) wherein shareholders may limit the ability of directors to exercise wherein shareholders may limit the ability of directors to exercise their duties to act in the best interest of the company and all their duties to act in the best interest of the company and all shareholders.”shareholders.”

Paragraph 90, OECD’s White Paper on Paragraph 90, OECD’s White Paper on Corporate Governance in Latin AmericaCorporate Governance in Latin America

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Benefits of Effective Board Committees

Assist the board in its decision making Assist the board in its decision making ↳ Brings together non-executives and management↳ Allows detailed discussion on management matters↳ But, filters out operational issues that remain with management↳ And, focuses on strategic decisions required of the board

Supports board responsibilities in key areasSupports board responsibilities in key areas↳ Audit, internal controls and risk↳ Executive compensation and management appointments↳ Governance issues and corporate policies ↳ Nomination and selection of non-executive directors↳ Others, e.g. health, safety, environment, etc.

Defined terms of reference and limitationsDefined terms of reference and limitations Generally, no executive powersGenerally, no executive powers

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Instruments to Enhance Effectiveness

Board Charter setting out procedural rulesBoard Charter setting out procedural rules↳ Clarifies leadership roles and core responsibilities↳ Reserves matters specifically reserved to board↳ Sets management delegations and reporting arrangements

Comprehensive induction for new directorsComprehensive induction for new directors↳ Legal and regulatory obligations↳ Financial structure of business, budgets and KPIs↳ Understanding of strategic priorities and current status↳ Familiarize with business operations, e.g. site visits

Annual board work planAnnual board work plan↳ Meetings and budget cycle, annual reporting

Code of ethics or statement of business principlesCode of ethics or statement of business principles↳ Defines corporate values and conduct of staff and directors

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Role of Corporate Secretary

Supervises and co-ordinates board papers &

presentations

Takes the minutes ofboard meetings

Resolves organizational matters for board meetings

Works closely with Chairman and CEO on

board agenda

Arranges the annual shareholders meeting

and other special meetings

Ensures compliance with the board procedures

Oversees, conducts induction trainings for newly elected directors

Explains the procedural requirements of laws, the

charter, and by–laws of the company

Key link between company and non-executive directors

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Board Role in Financial Oversight

Duty to maintain proper accounting recordsDuty to maintain proper accounting records Periodic reporting of financial position, performancePeriodic reporting of financial position, performance Establishing, monitoring proper internal controlsEstablishing, monitoring proper internal controls Ensuring proper external controls and auditEnsuring proper external controls and audit Skills, knowledge required by directorsSkills, knowledge required by directors

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Board’s Role in Risk Management

The board should know about and evaluate the:The board should know about and evaluate the:↳ Most significant risks facing the company↳ Possible effects on shareowners↳ Company’s management of a crisis↳ Importance of stakeholder confidence in the organization↳ Communications with the investment community

The board should ensure that:The board should ensure that:↳ Sufficient time is devoted to discuss risk strategy↳ Appropriate levels of awareness exist throughout the company↳ Risk-management processes work effectively↳ A clear risk-management policy is published

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Not an easy task - Identified Risks StrategicStrategic↳ Unfocused strategy↳ Strategy not aligned with capabilities↳ Complacency arising from past success↳ Unsuccessful acquisition/abortive bid↳ Failure to manage major changes↳ Reputational risk↳ Loss of investors’ confidence↳ Political/general economic risk

PeoplePeople↳ Management leadership weak↳ Inadequate succession planning↳ Loss of key executives↳ Poor employee motivation↳ Internal communication weaknesses

MarketplaceMarketplace↳ Failure to respond to market trends↳ Missed opportunities – new tech., global markets↳ Weak or obselete brands↳ Over-reliance on a few customers↳ Poor customer satisfaction – quality/timeliness

EthicalEthical↳ Failure to enact high standards of ethics↳ Obtaining contracts unethically↳ Stakeholder concerns on products/business

probity – poor community relations

Suppliers/OutsourcersSuppliers/Outsourcers↳ Over-dependence on suppliers/outsourcers ↳ Failure to manage cost/quality of outsourced

service↳ Supply chain problems↳ Joint ventures, strategic alliances not working

FinancialFinancial↳ Cash flow/going concern problems↳ Treasury operations risk↳ Susceptibility to fraud/accounting irregularities

Legal/ComplianceLegal/Compliance↳ Failure to protect intellectual property↳ Health, safety, environmental issues↳ Litigation risk↳ Breach of competition, corporate,

employee, tax laws

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““Boards must re-establish and enforce the standard that Boards must re-establish and enforce the standard that risks are to be undertaken for the benefit of their risks are to be undertaken for the benefit of their constituents, not for the personal gain of management.”constituents, not for the personal gain of management.”

George VojtaChairman of the Advisory Board of the Yale School of Management Millstein Center for

Corporate Governanance and Performance and Former Vice-Chairman, Bankers Trust Corp.

Restoring Integrity and Trust

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Six Critical Questions for Directors!

Do I believe I have all the Do I believe I have all the informationinformation?? Have I the necessary Have I the necessary skillsskills to make this decision? to make this decision? Do I have any Do I have any conflictconflict in this matter? in this matter? Objectively, is this a Objectively, is this a rational business decisionrational business decision?? Can I explain this in a Can I explain this in a transparenttransparent manner? manner? Is it a Is it a responsible discharge responsible discharge of my duties? of my duties?

MCI’S GUIDING PRINCIPLESMCI’S GUIDING PRINCIPLES

Build Trust and Credibility!Build Trust and Credibility!↳Respect for the Individual↳Create a Culture of

Openness and Honesty↳Set the Tone at the Top

Uphold the Law!Uphold the Law!↳Avoid Conflicts of Interest↳Set Metrics and Report

Results Accurately

Do the Right Thing!Do the Right Thing!↳Promote Substance over

Form↳Be Loyal to your Company,

your Family, yourself

Philip ArmstrongPhilip ArmstrongGlobal Corporate Governance ForumGlobal Corporate Governance ForumTelephone +1 202 458 9114Telephone +1 202 458 9114

parmstrong@ifc.orgparmstrong@ifc.orgwww.gcgf.org www.gcgf.org

Thank You!Thank You!

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