CORPORATE GOVERNANCE
A Seminar Paper
Presented to
School of Business
The Faculty of Management Studies
Pokhara University
In Partial Fulfillment
of the Requirements for the Degree
Masters of Business Administration
By
Bijay Karmacharya
Exam Roll No. 11220183
Pokhara
June, 2013
ACKNOWLEDGEMENT
It is a matter of great pleasure for me to acknowledge all the people who helped me for the
successful completion of this Seminar Paper Report on the topic Role of Board of Directors
in Corporate Governance as per the requirement of the 6th trimester of the syllabus
provided by Master of Business Administration, Pokhara University.
First of all, I would like to express my heartfelt gratitude and thanks to Mr. Surya Bahadur
G.C. and Umesh Singh Yadav for encouraging me for the involvement in such a creative
work that helped a lot to enhance our knowledge as a business student and helped me to be a
competent student. Also, I would like to thank all the faculty members of Pokhara University
for providing necessary documents and resources needed during the report.
Thanks are due to authors of books, journals and articles that were consulted in course of the
study. I would also like to thanks all my friends, who helped me through out the report, and
seniors for their valuable help and suggestions during this seminar report writing.
I am solely responsible for the errors in this report and any constructive criticism is warmly
welcomed for the betterment.
Bijay Karmacharya
6thTrimester
MBA
ABSTRACT
The purpose of this seminar paper is to indicate the role of board of directors in corporate
governance. This paper basically focuses on how the role and responsibilities of board of
directors can become critical to a company which is facing various problems due to failure to
implement sound corporate governance within the company. As
various scandals
have been
at
and
ongoing concerns
about
corporate
consequence of
governance,
boards
governance reform
Thus, this paper investigates the roles of BODs on good corporate governance practices.
Good corporate governance depends on board leadership structure, board composition, board
size, director ownership and board roles and responsibilities. The board of directors is the
highest governing authority within the management structure at any publicly traded company.
It is the board's job to select, evaluate, and approve appropriate compensation for the
company's chief executive officer (CEO), evaluate the attractiveness of and pay dividends,
approve the company's financial statements etc. Thus BODs should be totally committed to
the best practices in the area of corporate governance. The board should regularly review and
update corporate governance practices to accommodate developments within the marketplace
in general and the business in particular, and to comply with internationally recognized
governance standards.
LIST OF ABBREVIATIONS
BODs
Board of Directors
CEO
CG
Corporate Governance
FI
Financial Institution
GCG
NRB
OECD
WOCCU
TABLE OF CONTENTS
Acknowledgement
Abstract
List of Abbreviations
Table of Contents
CHAPTER I: INTRODUCTION
1.1 Background .............................................................................................................. 1
1.2 Statement of the Problem ......................................................................................... 6
1.3 Significance of the topic of seminar ........................................................................ 6
1.4 Limitations ............................................................................................................... 7
CHAPTER I
INTRODUCTION
1.1 Background
People often
question
to-day impact
can become
Worldcom,
is
whether corporate
difficult
to observe.
and
Parmalat
scandals.
held
had to
million
pay $168
out
had to
But
when
things
go
was
true
in particular, were
was
of pocket
liable
to
for the
fraud
that occurred:
of the Enron,
Enron directors
of which
by insurance);
of which
and
$18 million
$13
Worldcom
was
of pocket. As
and
governance,
concerning
research.
have and
have been
governance
Because
of
have not
reform
at
and
the focus
ongoing concerns
out
from
in boards,
research
about
of considerable
on
a review
corporate
million
directors
they
investor plaintiffs,
(not covered
The directors
wrong,
corporate
academic
of what
we
boards is timely.
Thus, it is the responsibility of the entire board of directors to ensure that good corporate
governance is in place in the company and that it is continually improved upon by
bringing the best global practices.
Corporate governance (CG) is defined as the set of relationship between companys
management, board of directors, shareholders and other stakeholder. It provides the
structure through which the objectives of the company are set and the means of attaining
those objectives and monitoring performance is determined. Corporate governance is a
process, not a state. CG can be defined in two basic ways:
The second set concerns itself with the normative framework: that is, the rules
under which firms are operating
With globalization, vastly increasing the scale of trade and the size and complexity of
corporations and the bureaucracies constructed to attempt to control it, the importance of
corporate governance and internal regulation has been amplified as it becomes
increasingly difficult to regulate externally. Similarly, the role of boards of directors has
been the topic of much attention lately. The role of board of directors is becoming more
involved in assessing and shaping the company policies and practices on wide range of
corporate world. They recognize the importance of good corporate governance as a means
of addressing the interests of Company's shareholders, employees, customers and
community. The Board also ensures that the company maintains good corporate
governance practices. Accordingly, the following guidelines are subject to periodic review
and change by the Board. The corporate governance framework should ensure the strategic
guidance of the company, the effective monitoring of management by the board, and the
boards accountability to the company and the shareholders.
The above objective of CG clearly shows that the subject corporate governance was
incorporated for the welfare of the society or country by binding all the concerned areas
with legal rules and regulations ensuring fairness, transparency, accountability, and
responsibility. The final point it defines is for the improvement and development of the
country. The key concern is the degree of influence which standards of corporate
governance have in promoting the efficient use of scarce resources to the benefit of society
as a whole.
The company acts in a lawful and ethical manner in all their dealings.
All shareholders have the same right to participate in company governance and are
treated fairly by the Board and management.
Accountability
Not only governmental institutions but also the private sector and civil society
organizations must be accountable to the public and to their institutional
stakeholders. In general an organization is accountable to those who will be
affected by its decisions or actions. Accountability cannot be enforced without
transparency and the rule of law.
Responsiveness
Good governance requires that institutions and processes try to serve all take
holders within a reasonable timeframe.
Consensus oriented
There are several actors and as many view points in a given society. Good
governance requires mediation of the different interests in society to reach a broad
consensus in society on what is in the best interest of the whole community and
how this can be achieved. It also requires a broad and long-term perspective on
what is needed for sustainable human development and how to achieve the goals of
such development.
The organizations may use the findings to improve their efficiency and
effectiveness.
1.4 Limitations
The seminar paper considers only one internal mechanisms of corporate governance i.e.
the board of directors. Other internal and external mechanisms of governance have not
been analyzed. This paper mainly focuses on the roles and responsibilities of BODs;
procedures and operation of the BODs or general practices of corporate governance are
not studied. Lastly, this paper is based upon only secondary sources rather than primary
sources.
CHAPTER II
ROLE OF BODs IN CORPORATE GOVERNANCE
The bylaws commonly also specify the number of members of the board, how they are to
be chosen, and when they are to meet. The law places directors in fiduciary relationship
with shareholders. The fundamental responsibility of the individual corporate director is to
represent the interests of the shareholders as a group. This responsibility obligates
directors to act with care in fulfilling their responsibilities, to be loyal to the corporation,
and not to allow personal interests to function to the detriment of the shareholders they
represent. If shareholders ever doubt that a director has properly performed his duties, they
may file a lawsuit.
The board's key purpose is to ensure the company's prosperity by collectively directing the
company's affairs, whilst meeting the appropriate interests of its shareholders and
stakeholders. By law, the board of directors has a duty and responsibility for governing the
corporation. The Board owes its loyalty to the corporation itself whose best interests must
be guide for all its decisions. The board has the responsibility of enhancing the economic
8
Determine the company's vision and mission to guide and set the pace for
its current operations and future development.
Review and evaluate present and future opportunities, threats and risks in
the external environment and current and future strengths, weaknesses and
risks relating to the company.
Determine the business strategies and plans that underpin the corporate
strategy.
9
c) Delegate to management
Understand and take into account the interests of shareholders and relevant
stakeholders.
e) Other roles
Aligning key executive and board remuneration with the longer term
interests of the company and its shareholders.
The directors must always exercise their powers for a 'proper purpose' that is, in
furtherance of the reason for which they were given those powers by the
shareholders.
Directors must act in good faith in what they honestly believe to be the best
interests of the company, and not for any collateral purpose. This means that,
particularly in the event of a conflict of interest between the company's interests
and their own, the directors must always favor the company.
Fama and Jensen (1983) point to the fact that absence of governance controls
would allow managers to pursue interests that are likely to deviate from that of the
corporate owners. According to the WOCCU report (2005) internal governance
defines the responsibilities and accountability of the general assembly, the board of
directors, management
and
the
staff.
11
appropriate governing structure of the credit union, preserving the continuity of future
credit union operations, creating balance within the organization and remaining
accountable for their actions.
Boards of Directors are widely recognized as an important mechanism for monitoring the
performance of managers and protecting shareholders interests and hence an important
component of internal governance (Fama and Jensen, 1983). Baker (1998) opposed to the
system of electing directors because in their view, the democratic election of the Board
of Directors creates problems in credit unions due to inaccurate representation of owners
and unqualified personnel in decision control. Since directors are elected from the general
membership on a one-person, one vote basis, this rule of governance creates
problems when the individuals elected do not have the expertise to make sound
judgments. The ability of directors to fulfill their role as a monitor or control depends
upon their business acumen or management skills.
According to Rock, Otero & Saltzman (1998) Board Directors are democratically elected
by membership however; they may remain beholden to individual members who
mobilized votes on their behalf. Branch (2005) agrees with Rock et al (1998) on the
election process of board members adding that these members most often act as
Volunteers. Small, young SACCOs are also staffed entirely by volunteers. As they grow,
more sophisticated and risky operations require professional managers and problems
occur when volunteer board members continue to make operational decisions, after
Professional managers have been recruited, instead of focusing on monitoring operations.
According Branch and Baker (1998) it is important that Board members be qualified as
unqualified board members may be unable to make proper decisions.
12
Conceptual Framework
Accountability
Board
Fairness of
Members
Decisions
Business
Cohesiveness
Performance
Transparency
affects
survival
and
replaced with the notion that the boards primary function is to monitor management and
oversee the operation of the corporation.
For the last few years, the corporate governance has been a matter of growing academic
interest in the policy studies. Given the infant stage of securities market development and
gradual transformation of the external sources of corporate finance from bank to market,
Nepal is passing through a transitional phase of institutional and governance reform. The
high concentration of corporate ownership structure and dominance of family business
groups in corporate affairs have become major constraints in exercising good corporate
governance. Nevertheless, a number of governance reforms are underway and some
positive symptoms have been observed in the banks and financial institutions. To ensure a
good corporate governance in Nepal requires a joint effort of the investors (promoters)
who need to be more transparent, responsible and socially accountable; the shareholders
who must actively participate in their corporate affairs to help prevent any fraudulent and
insider practices and; the regulatory authority that should effectively enforce rules and
regulations in order to protect the rights of all stakeholders and create favorable
environment to enhance good corporate governance culture.
The major issues and problems regarding corporate governance practices in Nepal are as
follows:
14
The roles of board of directors in corporate governance in Nepal are as follows :( Directive
6 issued by NRB)
If there is a conflict, director needs to inform the board before assuming office.
Directors should not involve in any activity which is against the interest of the
company (conflict of interest)
Directors of one deposit taking institution cannot act as director of other FI.
Director shall not misuse its position and should deal fairly.
Director should keep up to date and accurate record of accounts and reports
Director should not use or misuse information received from clients for person
benefit
Provides for code of conduct to be followed by the chief executive and other
employees.
15
CHAPTER III
SUMMARY, CONCLUSION & RECOMMENDATIONS
3.1 Summary
The board of directors is the highest governing authority within the management structure
at any publicly traded company. It is the board's job to select, evaluate, and approve
appropriate compensation for the company's chief executive officer (CEO), evaluate the
attractiveness of and pay dividends, recommend stock splits, oversee share repurchase
programs, approve the company's financial statements, and recommend or strongly
discourage acquisitions and mergers. BODs should work to ensure the integrity and
sustainability of its business operations. Thus BODs should be totally committed to the
best practices in the area of corporate governance. Knowing the importance of complying
with corporate governance standards, the board should regularly review and update
corporate governance practices to accommodate developments within the marketplace in
general and the business in particular, and to comply with internationally recognized
governance standards.
The Board of Directors is responsible to shareholders for the overall strategy of the
company, its governance and performance. The board guides the Company's business and
affairs. The Chairman and the Managing Director should provide the rest of the Board
members and committees with the company's information in due course. All Board
members should maintain the confidentiality of the company's data, information and
documents. All Board members have the right to obtain any documents or companyspecific information to support them in performing their duties, provided that these
documents should be sent through the Board's Secretary. The Board has the right to seek
external advisers and experts to support and provide the needed consultations, provided
that the approval on requesting those external experts is through the Board itself.
3.2 Conclusions
Corporate governance is the means by which companies are directed, administered and
controlled. It influences how the objectives of the company are set and achieved, how risk
is monitored and assessed, and how performance is optimized. Good corporate governance
enables companies to create value (through entrepreneurialism, innovation, development
16
and exploration) and provides accountability and control systems commensurate with the
risks involved. The role of the Board in creating an environment where a corporation can
succeed is the key to future success of the business. It is incumbent upon the board to
ensure that timely, accurate and complete reports on all relevant aspects of the
organization are issued to all stakeholders. In this regard the Board must put in place the
system of reporting with standards of disclosure that are fully consistent with international
accounting practices. The powers of the corporation are vested in its board of directors
who are answerable to the owners of the company, the shareholders. Companys board of
directors provides the company with direction and advice. It is the responsibility of the
board of directors to ensure that the company fulfills its mission statement.
The board should maintain, and periodically update, organizational rules, by-laws, or other
similar documents setting out its organization, rights, responsibilities and key activities.
To support board performance, it is a good practice for the board to carry out regular
assessments of both the board as a whole and of individual board members. Assistance
from external facilitators in carrying out board assessments can contribute to the
objectivity of the process. As discussed in this document, the primary responsibility for
good corporate governance rests with boards (supported by the control functions) and with
senior management. A good corporate governance practice should provide proper
incentives for the board and management to pursue objectives in the interest of the
company and shareholders and should facilitate effective monitoring.
3.3 Recommendations
Though there are many provisions and act regarding the corporate governance, the NRB
and government have failed to track down bad governance practices on time. Government
is not only the one to be blamed; the institutions and organizations also should be
responsible to maintain good corporate governance. The regulations may not prove to be
successful every time. The business houses and institution must maintain self- discipline,
conduct good corporate governance practices.
For the practice of sound corporate governance the following recommendations are
suggested:
17
BODs must be more responsible for ensuring the institution has effective code of
conduct for good corporate governance in their system and also must ensure that
each member and staffs follow those codes of conduct.
BODs should identify its actual role & responsibilities towards maintaining sound
corporate governance practices.
There is no match between the roles and responsibilities fulfilled by the BODs and
the remuneration paid to them. In order to encourage and motivate them for their
job they should provided handsome salary, bonus and other facilities.
18
REFERENCES
Fischmann, A. (2010). The Roles of Board of Directors in Listed Companies in Brazil.
Corporate governance and the role of non executive directors in large UK companies: An
Empirical study, 2002
Survey
www.icgn.org
www.cgforumnepal.org
www.corpgov.net
of Directors
in Corporate
Governance:
A Conceptual