role of senior management in corporate governance

8/22/2019 Role of Senior Management in Corporate Governance

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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

role of senior management in corporate governance

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