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LECTURE 2: THE ROLE OF SENIOR
MANAGEMENT IN CORPORATE
GOVERNANCE
Dr. Rob MelvilleCass Business School
May 2007
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OVERVIEW OF PRESENTATION
Board structures
Non-executive (independent) directors
Audit committees
Remunerations committees Nominations committees
Non-executive directors
Tone at the top
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BOARDSTRUCTURES
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ROLES
Chairman (CM): ideally independent (NED).
Task is to manage the board, not run the
organisations operations
Chief Executive Officer (CEO): Task is tomanage the operations of the organisation on
behalf of the board
Usual practice in USA is to have joint CEO/CM,
in UK and many other economies it is
considered to be poor governance practice
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UNITARY BOARDS
A single board comprising executive (those with
direct responsibility for operations) and non-
executive (independent, with no management
responsibilities within the organisation) Elected by shareholders
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DUAL BOARD
Supervisory board responsible for strategic
management
Management board responsible for operating
the organisation Clear separation of management and control
Shareholders elect supervisory board members,
who then appoint management board members
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MOST EFFECTIVE BOARD SIZE
While no exact solution to this question exists, experts
suggest a maximum of 10 in a unitary board; dual boards
should be in proportion
NEDs should be a ratio of two for every executive
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EUROPEAN UNION
Unitary
Belgium
Finland France
Ireland
Italy
Luxembourg
Portugal Spain
Sweden
UK
Two tier
Austria
Bulgaria
Czech Republic Denmark
Germany
Hungary
Netherlands
Poland
Romania
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EASTERN EUROPE
Russia
Dual board
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SOUTH EAST ASIA
Japan: dual
South Korea: unitary
Malaysia: unitary
Peoples Republic of China: dual
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AFRICA
Kami Rwegasira, Corporate Governance, Vol 8 No. 3, July 2000
there are as many influences in the evolution of
corporate governance structures in Africa as there were
colonial powers. This means that most of English-speaking
Africa is aligned to the British model, the French-speakingto the French model, and the Portuguese-speaking to the
Portuguese version of governance
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UNITARY VERSUS DUAL
the supervisory board is unable to monitor the
activities of management
supervisory boards usually meet infrequently,
and do not receive sufficient managementinformation to enable them to have a clear
understanding of day to day events
conflicts of interest may occur, caused by the
differing stakeholders on the senior board (for
example, German supervisory boards include
representatives of the workforce and trade
unions, as well as management)
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UNITARY VERSUS DUAL (CONTD)
Unitary boards increase likelihood of agency
problem, especially if CEO/Chairman are not
separated
Unitary boards may not take a sufficiently longview
Lack of employee representation on unitary
boards may adversely affect employee relations
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NON-EXECUTIVE
DIRECTORS
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NONEXECUTIVE DIRECTORS
(NEDs)
Also known as independent directors
No direct management responsibility for
operations
May be senior managers from other similarenterprises
Best practice is for chairman and other key roles
to be NED Some governance codes have specific
descriptions of the role NEDs should take
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BOARD SUB-COMMITTEES
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MAIN BOARD SUB-COMMITTEES
Audit committee
Remuneration committee
Nominations committee
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GOOD AND BAD
PRACTICES Good The CEO sees the board as providing
positive and constructive advice andguidance
Information is freely and comprehensivelyprovided
Agendas are designed to encourage and
enable open debate All board members are able to make
effective contributions in discussions
The roles of CEO and Chairman areseparated
All board members are able and preparedto address important issues without thethreat of removal
Independent directors have the ability to
request and obtain the information theyneed
Independent directors are able to makecontributions to strategic direction asappropriate
Bad
The CEO sees the board as anunnecessary bureaucratic burden
Information flow to directors frommanagement is poor
CEO sets rigid agendas, and discouragesdebate and interjection
Senior management do not facilitate opendebates to discuss serious issues
Directors are subordinate to the wishes ofthe CEO
Directors are unwilling to confrontimportant issues due to a fear of beingreplaced or sidelined
Strategic information is provided solely by
executive directors Timely interventions to avoid strategicerrors are discouraged
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THE THREE GOLDEN RULES
Separation of CEO and Chairman
Effective and properly independent NEDs
(ideally also chairing the key sub-committees)
An effective and competent audit committee
It is probable that if any more than one of these rules
is not complied with effective corporate governance
cannot be guaranteed