Better Companies,

Better Societies
Global Corporate Governance Forum

Role of Board of Directors in Corporate Governance

Financial Media Workshop
Chile, January 2010
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Outline of Presentation

What is Corporate Governance?

Building effective Board Governance
The different roles related to the Board
Some Concluding Thoughts!

What is Corporate Governance?

The importance of
corporate governance
lies in its contribution
both to business
prosperity and to
accountability.
Paragraph 1.1, Committee on
Corporate Governance:
Final Report Hampel Committee

Corporate governance is concerned with

holding the balance between economic and
social goals and between individual and
communal goals The aim is to align as
nearly as possible the interests of
individuals, corporations and society.
Sir Adrian Cadbury
Corporate Governance Overview, 1999
[World Bank Report]

Corporate Governance is a mechanism through which boards and

directors 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, leadership,
leadership
direction and control.

Its about Leadership!

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

Leadership for probity (honradez, rectitud)..

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

Leadership with responsibility.

to take account of broader stakeholder interests

Leadership that is accountable and transparent

to build trust in companies and in the economy!!

Building Effective Board Governance

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

Putting 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 supervision

Management reporting and public disclosures
Assurance processes and controls

The Board of Directors is Pivotal

The board should exercise compelling and relentless
leadership and should not underestimate the power of
leading by example - evidenced by high levels of visibility
and integrity, strong communications, and demanding
expectations. This leadership should be clear to ALL within
the organization, as well as shareholders (accionistas) and other
stakeholders (grupos de inters)
inters).
Boardroom Behaviours
A report prepared for Sir David Walker
by the Institute of Chartered Secretaries and Administrators , UK
June 2009

Board Governance Framework

Board of Directors

Board
Meetings
Corporate
Secretary
Reporting &
Disclosure

Governance
System and
Controls

Board Operations

Chairman

Strategy
Corporate Policies & Procedures
Board Governance Instruments
Monitoring and Evaluation

Board Committees
Audit
Committee

Key Areas of Responsibility

Achievement of strategic objectives and value creation

Fulfil responsibilities and duties in law and prescribed functions

Remuneration
Committee

Information and Communication

Shareholders

CEO & Management

Other
Committees

Executive
Committee

Internal Controls
& Assurance

Combined Assurance Model

Internal Audit

External Audit

Other Assurance
Providers

Management
Source: KPMG

Chairman as Leader of the Board

Primary role
Provide overall leadership to the board

Function

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

CEO as Leader of the Company

Primary role
Lead the management team, reporting to the board

Function

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 companys long-term sustainability

Board Structure and Composition

Balancing executive and non-exec. participation
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

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
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 company

In other words, for ALL shareholders, not special interests

The legal framework and company charters should not permit

practices (such as pre-meetings and instructions on how to vote
by shareholders whose votes placed a director on the board)
wherein shareholders may limit the ability of directors to exercise
their duties to act in the best interest of the company and all
shareholders.
Paragraph 90, OECDs White Paper on
Corporate Governance in Latin America

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Benefits of Effective Board Committees

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 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 limitations

Generally, no executive powers
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Instruments to Enhance Effectiveness

Board 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 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 plan

Meetings and budget cycle, annual reporting

Code of ethics or statement of business principles

Defines corporate values and conduct of staff and directors
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Role of Corporate Secretary

Resolves organizational
matters for board meetings
Explains the procedural
requirements of laws, the
charter, and bylaws of the
company
Oversees, conducts
induction trainings for
newly elected directors
Supervises and coordinates board papers &
presentations

Key link between company

and non-executive directors
Works closely with
Chairman and CEO on
board agenda
Arranges the annual
shareholders meeting
and other special
meetings

Ensures compliance with

Takes the minutes of the board procedures
board meetings

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Board Role in Financial Oversight

Duty to maintain proper accounting records

Periodic reporting of financial position, performance
Establishing, monitoring proper internal controls
Ensuring proper external controls and audit
Skills, knowledge required by directors

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Boards Role in Risk Management

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

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

Strategic

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

People

Management leadership weak

Inadequate succession planning
Loss of key executives
Poor employee motivation
Internal communication weaknesses

Marketplace

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

Ethical

Failure to enact high standards of ethics

Obtaining contracts unethically
Stakeholder concerns on products/business
probity poor community relations

Suppliers/Outsourcers

Over-dependence on suppliers/outsourcers
Failure to manage cost/quality of outsourced
service
Supply chain problems
Joint ventures, strategic alliances not working

Financial

Cash flow/going concern problems

Treasury operations risk
Susceptibility to fraud/accounting irregularities

Legal/Compliance

Failure to protect intellectual property

Health, safety, environmental issues
Litigation risk
Breach of competition, corporate,
employee, tax laws

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Restoring Integrity and Trust

Boards must re-establish and enforce the standard that
risks are to be undertaken for the benefit of their
constituents, not for the personal gain of management.
George Vojta
Chairman of the Advisory Board of the Yale School of Management Millstein Center for
Corporate Governanance and Performance and Former Vice-Chairman, Bankers Trust Corp.

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Six Critical Questions for Directors!

Do I believe I have all the information?

Have I the necessary skills to make this decision?
Do I have any conflict in this matter?
Objectively, is this a rational business decision?
Can I explain this in a transparent manner?
Is it a responsible discharge of my duties?

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MCIS GUIDING PRINCIPLES

Thank You!

Build Trust and Credibility!

Respect for the Individual
Create a Culture of
Openness and Honesty
Set the Tone at the Top

Philip Armstrong
Global Corporate Governance Forum
Telephone +1 202 458 9114

parmstrong@ifc.org
www.gcgf.org

Uphold the Law!

Avoid Conflicts of Interest
Set Metrics and Report
Results Accurately
Do the Right Thing!
Promote Substance over
Form
Be Loyal to your Company,
your Family, yourself

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