The Duties and Liabilities of the Board of Directors (FT Press Delivers Elements)
Contents:
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Cross-shareholding are an essential feature of keiretsu and chaebol groups [4]. This constitution is identified by a variety of terms; in English-speaking jurisdictions, it is usually known as the Corporate Charter or the [Memorandum] and Articles of Association. Steve has 24 years experience in the commercial departments of global news content providers, firstly with The Telegraph Media Group where he ran various vertical sector print and digital publications and latterly with The Financial Times, where he is currently the Global Director of Financial Times Career Management FTCM. In the early s, the massive bankruptcies and criminal malfeasance of Enron and Worldcom , as well as lesser corporate scandals such as those involving Adelphia Communications , AOL , Arthur Andersen , Global Crossing , and Tyco led to increased political interest in corporate governance. When this becomes an endemic system feature, the loss of confidence and participation in markets may affect many other stakeholders, and increases the likelihood of political action. He explained that the Directors and Officers Liability Cover is today increasingly becoming the expected norm.
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The Anglo-American "model" tends to emphasize the interests of shareholders. The coordinated or [Multistakeholder Model] associated with Continental Europe and Japan also recognizes the interests of workers, managers, suppliers, customers, and the community.
A related distinction is between market-orientated and network-orientated models of corporate governance. Some continental European countries, including Germany, Austria, and the Netherlands, require a two-tiered Board of Directors as a means of improving corporate governance.
The Securities and Exchange Board of India Committee on Corporate Governance defines corporate governance as the "acceptance by management of the inalienable rights of shareholders as the true owners of the corporation and of their own role as trustees on behalf of the shareholders. Satyam scandal also known as India's Enron wiped off billions of shareholders' wealth and threatened foreign investment in India.
This is the reason that corporate governance in India has taken the centre stage. The so-called "Anglo-American model" of corporate governance emphasizes the interests of shareholders. It relies on a single-tiered Board of Directors that is normally dominated by non-executive directors elected by shareholders.
Because of this, it is also known as "the unitary system". Non-executive directors are expected to outnumber executive directors and hold key posts, including audit and compensation committees. In the United Kingdom, the CEO generally does not also serve as Chairman of the Board, whereas in the US having the dual role has been the norm, despite major misgivings regarding the effect on corporate governance.
In the United States, corporations are directly governed by state laws, while the exchange offering and trading of securities in corporations including shares is governed by federal legislation.
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Many US states have adopted the Model Business Corporation Act , but the dominant state law for publicly traded corporations is Delaware General Corporation Law , which continues to be the place of incorporation for the majority of publicly traded corporations. Recent scholarship from the University of Oxford outlines a new theory of corporate governance, founder centrism, which is premised upon a narrowing in the separation between ownership and control. In traditionally structured firms, high performing executives gain deference, become highly influential, and take on the qualities of concentrated equity owners.
To the extent these leaders embrace founder centrism, their companies will experience efficiency advantages relative to competitors operating within traditional parameters. Corporations are created as legal persons by the laws and regulations of a particular jurisdiction.
These may vary in many respects between countries, but a corporation's legal person status is fundamental to all jurisdictions and is conferred by statute. This allows the entity to hold property in its own right without reference to any particular real person. It also results in the perpetual existence that characterizes the modern corporation. The statutory granting of corporate existence may arise from general purpose legislation which is the general case or from a statute to create a specific corporation, which was the only method prior to the 19th century.
In addition to the statutory laws of the relevant jurisdiction, corporations are subject to common law in some countries, and various laws and regulations affecting business practices. In most jurisdictions, corporations also have a constitution that provides individual rules that govern the corporation and authorize or constrain its decision-makers. This constitution is identified by a variety of terms; in English-speaking jurisdictions, it is usually known as the Corporate Charter or the [Memorandum] and Articles of Association.
The capacity of shareholders to modify the constitution of their corporation can vary substantially. This law made it illegal to bribe government officials and required corporations to maintain adequate accounting controls. It is enforced by the U. Substantial civil and criminal penalties have been levied on corporations and executives convicted of bribery. The UK passed the Bribery Act in This law made it illegal to bribe either government or private citizens or make facilitating payments i. It also required corporations to establish controls to prevent bribery.
The Sarbanes-Oxley Act of was enacted in the wake of a series of high-profile corporate scandals. It established a series of requirements that affect corporate governance in the U. The law required, along with many other elements, that:. Corporate governance principles and codes have been developed in different countries and issued from stock exchanges, corporations, institutional investors, or associations institutes of directors and managers with the support of governments and international organizations.
As a rule, compliance with these governance recommendations is not mandated by law, although the codes linked to stock exchange listing requirements may have a coercive effect. The investor-led organisation International Corporate Governance Network ICGN was set up by individuals centered around the ten largest pension funds in the world The aim is to promote global corporate governance standards. The network is led by investors that manage 18 trillion dollars and members are located in fifty different countries.
ICGN has developed a suite of global guidelines ranging from shareholder rights to business ethics. Strategic challenges for business in the use of corporate responsibility codes, standards, and frameworks. In , the International Finance Corporation and the UN Global Compact released a report, Corporate Governance - the Foundation for Corporate Citizenship and Sustainable Business , linking the environmental, social and governance responsibilities of a company to its financial performance and long-term sustainability.
Most codes are largely voluntary. An issue raised in the U. For example, the guidelines issued by associations of directors, corporate managers and individual companies tend to be wholly voluntary but such documents may have a wider effect by prompting other companies to adopt similar practices. The modern practice of corporate governance has its roots in the 17th-century Dutch Republic. Wright argues in Corporation Nation that the governance of early U. Means pondered on the changing role of the modern corporation in society.
US economic expansion through the emergence of multinational corporations after World War II saw the establishment of the managerial class. Several Harvard Business School management professors studied and wrote about the new class: Myles Mace entrepreneurship , Alfred D. According to Lorsch and MacIver "many large corporations have dominant control over business affairs without sufficient accountability or monitoring by their board of directors". In the s, Eugene Fama and Michael Jensen [60] established the principal—agent problem as a way of understanding corporate governance: In the period from to , corporate directors' duties in the U.
In the first half of the s, the issue of corporate governance in the U. The California Public Employees' Retirement System CalPERS led a wave of institutional shareholder activism something only very rarely seen before , as a way of ensuring that corporate value would not be destroyed by the now traditionally cozy relationships between the CEO and the board of directors for example, by the unrestrained issuance of stock options, not infrequently back-dated.
In the early s, the massive bankruptcies and criminal malfeasance of Enron and Worldcom , as well as lesser corporate scandals such as those involving Adelphia Communications , AOL , Arthur Andersen , Global Crossing , and Tyco led to increased political interest in corporate governance. This was reflected in the passage of the Sarbanes-Oxley Act of In the East Asian Financial Crisis severely affected the economies of Thailand , Indonesia , South Korea , Malaysia , and the Philippines through the exit of foreign capital after property assets collapsed.
The lack of corporate governance mechanisms in these countries highlighted the weaknesses of the institutions in their economies. However, using stock return as a performance measure revealed a weak positive relationship between the efficiency of corporate governance structure and bank performance.
This is a list of countries by average overall rating in corporate governance: Key parties involved in corporate governance include stakeholders such as the board of directors, management and shareholders. External stakeholders such as creditors, auditors, customers, suppliers, government agencies, and the community at large also exert influence. The agency view of the corporation posits that the shareholder forgoes decision rights control and entrusts the manager to act in the shareholders' best joint interests.
Partly as a result of this separation between the two investors and managers, corporate governance mechanisms include a system of controls intended to help align managers' incentives with those of shareholders. Agency concerns risk are necessarily lower for a controlling shareholder. In private for-profit corporations, shareholders elect the board of directors to represent their interests. In the case of nonprofits, stakeholders may have some role in recommending or selecting board members, but typically the board itself decides who will serve on the board as a 'self-perpetuating' board.
Smale wrote in That responsibility cannot be relegated to management. The board has responsibility for: CEO selection and succession; providing feedback to management on the organization's strategy; compensating senior executives; monitoring financial health, performance and risk; and ensuring accountability of the organization to its investors and authorities.
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Boards typically have several committees e. All parties to corporate governance have an interest, whether direct or indirect, in the financial performance of the corporation. Directors, workers and management receive salaries, benefits and reputation, while investors expect to receive financial returns.
For lenders, it is specified interest payments, while returns to equity investors arise from dividend distributions or capital gains on their stock. Customers are concerned with the certainty of the provision of goods and services of an appropriate quality; suppliers are concerned with compensation for their goods or services, and possible continued trading relationships.
Until the enactment of Act No. If you take a look at how the Registrar of Companies enforces or monitors the compliance of the Act, I think it requires a lot more and is a bit of a joke at the moment. If you look at the way that the Companies Act is formulated, the primary responsibility of enforcing those liabilities is with the shareholders and you still find that shareholders are either ignorant or too hesitant to enforce their rights.
Most shareholders are generally too reluctant to come forward and have them enforced for several reasons, ignorance and cost. In my opinion, I think 90 per cent of the independent directors are not independent. Once they get on boards, they are basically the puppets of the people who appointed them.
The final point he made came back to enforcement and that is the role of the judiciary. There is no predictability on how the law can be applied. It is obvious that directors have a wide variety of duties and responsibilities and there is a potential for lawsuits from a variety of segments — employees, customers, shareholders and regulators.
In the West, most of the lawsuits are from shareholders who feel the directors have not looked after their interests. In our part of the world, a great majority of the lawsuits come from regulators. In the business world, managing risk is important. And as far as the potential liability that directors face, there are many ways to manage this. The Companies Act of specifically mentions insurance. What we insurers do is that we transfer a significant portion of your risk to us.
It does not mean that you can transfer the entirety of your risk and that once you have an insurance policy, the director can do exactly what he wants and not take care of what he actually has to do. He explained that the Directors and Officers Liability Cover is today increasingly becoming the expected norm. We are also looking for foreign direct investments in Sri Lanka. Foreign companies are taking stakes in local companies and you have foreign directors being appointed.
Covers provided by insurance companies are more or less similar. There are slight variances from one to another but by and large, there are many similarities. It also requires formal board approval. Many companies which have gone down the route of insuring their directors and officers have had to amend their articles and make sure that they are permitted to take on this cover.
The insurance policy covers claims made by courts and out of court settlement itself does not suffice for the insurance company to settle it. There is however an exception to this. If the express concurrence of the insurance company is obtained for an out of court settlement, and most insurance companies would prefer an out of courts settlement, then the insurance company would step in and pay that component.
Legal fees are usually incurred with the mutual consent of the insurer concerned. Punitive fines or penalties of a civil nature are insurable. Take for example, health and safety at work. If an employee is unfortunately killed due to a boiler explosion and the directors are charged because the investigations reveal poor working practices, if there is a civil fine which results, the insurance policy would step in and pay that fine.
This is because it is primarily against public policy. The legal costs however are paid by the insurance company. If the directors are found guilty of criminal negligence then the directors would have to repay the legal costs incurred to the insurance company. Finally, he stated that the insurance policy also specifically excludes liability arising from any act intentionally done or knowing that it breached contract or statute. Putting the provisions to the test Architect of Companies Act Harsha Cabraal commented on some of the points raised by some of the panellists towards the end of the debate, noting that many collapses have been witnessed since the Act came into operation.
Looking at the topics that were discussed, especially concerns about cases, he observed that the provisions have been tested in other parts of the world, especially Canada and Australia but not so much in Sri Lanka. These provisions need to be tested by the courts unfortunately it has not happened. Taking for example the Golden Key scenario, he noted that it could have been a case where all these provisions discussed could have been tested. Now the depositors should have moved to liquidate the company. It is a right royal mess today in the Supreme Court.
Commenting on this issue, former Attorney General Mohan Peiris stated that there are two indictments in the Supreme Court in Colombo in the Golden Key Group of Companies but added that what is surprising are the number of sympathisers from the business world who think that this was a commercial collapse. The legal system means nothing, it is a dead system if the public do not cooperate with that legal system and give it life and I think that is what we need. Our community is dying because we do not have the discipline or conscience to identify what is right and wrong and we compromise — we are willing to sleep with the devil himself in the name of corporate advancement.
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