What is Corporate Governance?

Corporate governance is the system of rules, practices, and processes by which a firm is directed and
controlled. Corporate governance essentially involves balancing the interests of a company's many
stakeholders, such as shareholders, senior management executives, customers, suppliers, financiers, the
government, and the community. Since corporate governance also provides the framework for attaining
a company's objectives, it encompasses practically every sphere of management, from action plans and
internal controls to performance measurement and corporate disclosure.

Roles of the board of directors

The roles of the board of directors include :-

Establish vision, mission and values

Determine the company's vision and mission to guide and set the pace for its current operations and
future development.
Determine the values to be promoted throughout the company.
Determine and review company goals.
Determine company policies
Brefi Group facilitates corporate retreats to help boards review strategy or develop vision, mission and
values statements.

Set strategy and structure

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 strategic options, select those to be pursued, and decide the means to implement and
support them.
Determine the business strategies and plans that underpin the corporate strategy.
Ensure that the company's organisational structure and capability are appropriate for implementing the
chosen strategies.
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PEST and SWOT analyses

Determining strategic options
Strategies and plans

Delegate to management
Delegate authority to management, and monitor and evaluate the implementation of policies, strategies
and business plans.
Determine monitoring criteria to be used by the board.
Ensure that internal controls are effective.
Communicate with senior management.
Exercise accountability to shareholders and be responsible to relevant
stakeholders.

Ensure that communications both to and from shareholders and relevant stakeholders are effective.
Understand and take into account the interests of shareholders and relevant stakeholders.
Monitor relations with shareholders and relevant stakeholders by gathering and evaluation of
appropriate information.
Promote the goodwill and support of shareholders and relevant stakeholders.

Responsibilities of directors
Directors look after the affairs of the company, and are in a position of trust. They might abuse their
position in order to profit at the expense of their company, and, therefore, at the expense of the
shareholders of the company.

Consequently, the law imposes a number of duties, burdens and responsibilities upon directors, to
prevent abuse. Much of company law can be seen as a balance between allowing directors to manage
the company's business so as to make a profit, and preventing them from abusing this freedom.

Directors are responsible for ensuring that proper books of account are kept.

In some circumstances, a director can be required to help pay the debts of his company, even though it is
a separate legal person. For example, directors of a company who try to 'trade out of difficulty' and fail
may be found guilty of 'wrongful trading' and can be made personally liable. Directors are particularly
vulnerable if they have acted in a way which benefits themselves.

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 favour the company.
Directors must act with due skill and care.
Directors must consider the interests of employees of the company.
Brefi Group provides a range of customised director development and training services.

Calling a directors' meeting

A director, or the secretary at the request of a director, may call a directors' meeting. A secretary may not
call a meeting unless requested to do so by a director or the directors. Each director must be given
reasonable notice of the meeting, stating its date, time and place. Commonly, seven days is given but
what is 'reasonable' depends in the last resort on the circumstances

Non-executive directors
Legally speaking, there is no distinction between an executive and non-executive director. Yet there is
inescapably a sense that the non-executive's role can be seen as balancing that of the executive director,
so as to ensure the board as a whole functions effectively. Where the executive director has an intimate
knowledge of the company, the non-executive director may be expected to have a wider perspective of
the world at large.

The chairman of the board

The articles usually provide for the election of a chairman of the board. They empower the directors to
appoint one of their own number as chairman and to determine the period for which he is to hold office.
If no chairman is elected, or the elected chairman is not present within five minutes of the time fixed for
the meeting or is unwilling to preside, those directors in attendance may usually elect one of their
number as chairman of the meeting.

The chairman will usually have a second or casting vote in the case of equality of votes. Unless the
articles confer such a vote upon him, however, a chairman has no casting vote merely by virtue of his
office.

Since the chairman's position is of great importance, it is vital that his election is clearly in accordance
with any special procedure laid down by the articles and that it is unambiguously minuted; this is
especially important to avoid disputes as to his period in office. Usually there is no special procedure for
resignation. As for removal, articles usually empower the board to remove the chairman from office at
any time. Proper and clear minutes are important in order to avoid disputes.

Role of the chairman

The chairman's role includes managing the board's business and acting as its facilitator and guide. This
can include:

Determining board composition and organisation;

Clarifying board and management responsibilities;
Planning and managing board and board committee meetings;
Developing the effectiveness of the board.
Find out more about director development and training.

Shadow directors
In many circumstances, the law applies not only to a director, but to a 'shadow director'. A shadow
director is a person in accordance with whose directions or instructions the directors of a company are
accustomed to act. Under this definition, it is possible that a director, or the whole board, of a holding
company, and the holding company itself, could be treated as a shadow director of a subsidiary.

Professional advisers giving advice in their professional capacity are specifically excluded from the
definition of a shadow director in the companies legislation.

Explain the continuum of board involvement.

Answer: The board of directors' continuum reflects the degree of involvement (from high to low) in the
strategic management process. Boards can range from phantom boards with no real involvement to
catalyst boards with a very high degree of involvement. Passive phantom or rubber stamp boards
typically never initiate or determine strategy unless a crisis occurs. Nominal participation reflects a board
involved to a limited degree in the performance or review of selected key decisions, indicators, or
programs of management. An active board approves, questions, and makes final decisions on mission,
strategy, policies, and objectives. It also has active board committees and performs fiscal and
management audits. The catalyst board takes the leading role in establishing and modifying the mission,
objectives, strategy, and policies. It also has a very active strategy committee.Contrast agency theory and
stewardship theory. Answer: Agency theory states that problems arise in corporations because the
agents (top management)are not willing to bear responsibility for their decisions unless they own a
substantial amount of stock in the corporation. The theory suggests that a majority of a board needs to
be from outside the firm so thattop management is prevented from acting selfishly to the detriment of
the shareholders. Stewardship theory proposed that, because of their long tenure with the corporation,
insiders (senior executives) tend to identify with the corporation and its success. Rather than use the
firm for their own ends, these executives are thus most interested in guaranteeing the continued life and
success of the corporation.Explain the difference between a direct and indirect interlocking directorate.
Answer: A direct interlocking directorate occurs when two firms share a director or when an executive
ofone firm sits on the board of a second firm. An indirect interlock occurs when two corporations have
directors who also serve on the board of a third firm.

Corporate Structure: Corporate Officers

The corporation's officers oversee the business's daily operations, and in their different roles they are
given legal authority to act on the corporation's behalf in almost all lawful business-related activities.
Officers are usually appointed by the corporation's board of directors, and while specific positions may
vary from one corporation to another, typical corporate officers include:

Chief Executive Officer (CEO) or President. The CEO has ultimate responsibility for the corporation's
activities, and signs off on contracts and other legally-binding action on behalf of the corporation. The
CEO reports to the corporation's board of directors.

Chief Operating Officer (COO). Charged with managing the corporation's day-to-day affairs, the COO
usually reports directly to the CEO.

Chief Financial Officer (CFO) or Treasurer. The CFO is responsible (directly or indirectly) for almost all of
the corporation's financial matters.

Secretary. The corporation's Secretary is in charge of maintaining and keeping corporation's records,
documents, and "minutes" from shareholder meetings.