LECTURE 2: THE ROLE OF SENIOR MANAGEMENT IN CORPORATE GOVERNANCE

Dr. Rob Melville Cass Business School May 2007

OVERVIEW OF PRESENTATION
Board structures Non-executive (independent) directors Audit committees Remunerations committees Nominations committees Non-executive directors Tone at the top

BOARD STRUCTURES

ROLES
Chairman (CM): ideally independent (NED). Task is to manage the board, not run the organisations operations Chief Executive Officer (CEO): Task is to manage 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

UNITARY BOARDS
A single board comprising executive (those with direct responsibility for operations) and nonexecutive (independent, with no management responsibilities within the organisation) Elected by shareholders

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

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

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

EASTERN EUROPE
Russia

Dual board

SOUTH EAST ASIA

Japan: dual South Korea: unitary Malaysia: unitary Peoples Republic of China: dual

AFRICA

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-speaking to the French model, and the Portuguese-speaking to the Portuguese version of governance

Kami Rwegasira, Corporate Governance, Vol 8 No. 3, July 2000

UNITARY VERSUS DUAL

the supervisory board is unable to monitor the activities of management supervisory boards usually meet infrequently, and do not receive sufficient management information 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)

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 long view Lack of employee representation on unitary boards may adversely affect employee relations

NON-EXECUTIVE DIRECTORS

NONEXECUTIVE DIRECTORS (NEDs)

Also known as independent directors No direct management responsibility for operations May be senior managers from other similar enterprises Best practice is for chairman and other key roles to be NED Some governance codes have specific descriptions of the role NEDs should take

BOARD SUBCOMMITTEES

MAIN BOARD SUB-COMMITTEES

Audit committee Remuneration committee Nominations committee

Good The CEO sees the board as providing positive and constructive advice and guidance Information is freely and comprehensively provided 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 are separated All board members are able and prepared to address important issues without the threat of removal Independent directors have the ability to request and obtain the information they need Independent directors are able to make contributions to strategic direction as appropriate

GOOD AND BAD PRACTICES

Bad The CEO sees the board as an unnecessary bureaucratic burden Information flow to directors from management is poor CEO sets rigid agendas, and discourages debate and interjection Senior management do not facilitate open debates to discuss serious issues Directors are subordinate to the wishes of the CEO Directors are unwilling to confront important issues due to a fear of being replaced or sidelined Strategic information is provided solely by executive directors Timely interventions to avoid strategic errors are discouraged

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