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Recently Sweden experienced one of the biggest shake-ups in Swedish boardroom history as four of the country's biggest companies announced new chairmen. The maelstrom was caused from allegations relating to use/misuse of corporate jets.  The boardroom troubles of large Swedish companies is by no means a new occurrence and certainly calls into sharp focus the need to urgently improve corporate governance not only to prevent corporate malpractices but improve performance.

The key role of the board is to ensure that corporate management is continuously and effectively striving for above-average performance, taking account of risk, and that shareholders and other stakeholders are not defrauded or misled. The board, however, is a collective comprised of a number of parties, each with different skills, perspectives and available time for company duties. The question examined is how the responsibilities of those working on and with the board, the composition of the board and the processes by which it operates might be improved to allow the board as a whole to carry out its defined role more effectively.

Three areas of potential improvement will be proposed, of which the first will be dealt with in this instalment of the article:

  • First, the different responsibilities of various types of directors, senior management and auditors should be more clearly defined
  • Second, board composition guidelines and operating procedures should be less concerned with numbers of directors by type (e.g., independent versus executive) and formal meetings and more concerned with the processes by which the non-executive directors work with each other and with the board as a whole, and the quality and competence of each director
  • Finally, financial incentives for managers in improving governance has to be designed to encourage the long-term performance orientation, in a manner, that the board has agreed is most appropriate for its particular situation

Differential Responsibilities

Each of the classes of directors (executive, non-executive), the senior management and the auditors have a different type of role in the governance process.  Turning first to the position of the non-executive directors - they should bring an independent judgement to bear on issues of strategy, performance, resources including key appointments, and standards of conduct. A slightly different perspective that exists is that while non-executive directors are expected to provide an informed and independent judgement on matters that come to the board, it is explicitly recognized that they exercise attention intermittently, not continuously, and that they can properly rely on management and auditors unless there are reasonable grounds for non-reliance.

In carrying out their duties intermittently, non-executives cannot work from a command of detail that is in any way comprable to that of the executives and even the chair.  Thus, rather than being drawn intoa myriad of issues, many of which they will be unable to contribute much to, non-execs should concentrate on keeping the board's primary performance responsibility at the top of the board's agenda.  More specifically, they should constantly be asking and be up to date on the answers to five questions, namely:

  • What are the standards of performance for our company that shareholders can reasonably expect to be achieved?
  • Are these performance standards being met, and if not, why not and what is being done?
  • On major issues affecting the shareholders' investment (e.g., a major acquisition, divestment, or change in capital structure or dividend policy), is there any reason not to accept the recommendation of management, and if so what further advice and/or information is required?  In framing the question this way, the intent is to emphasize that it would be unusual for non-execs to initiate or to tell the management what decision they should take. Rather, it is their job to judge when a management proposal requires more work or modification, and to seek a revised proposal accordingly
  • Are clear and suitable policies in place in the major areas where the discretion of management to act should be limited in the interests of the shareholders or other stakeholders?
  • Are processes in place and reportely being followed by management to implement these policies?

The above questions define how non-executive directors might best spend their time, and what data they ought be provided with, and if necessary seek out. is "What are the key functions of a board that require greater emphasis if this concern about performance is to be addressed?".  

The role of executive directors is shaped by their particular responsibilities.  There are typically two kinds of executive directors, a CEO and a functional executive such as director of finance or COO.  This group of executives in turn operates through other managers. The directors rely on management to manage the corporation. The board does not expect to be informed of the details of how the corporation is managed. They would expect to be informed of anything untoward or anything appropriate for consideration by the board.  The directors rely on management:

  • To carry out the day-to-day control of the corporation's business affairs
  • To establish proper internal controls, management information systems and accounting records
  • Reduce to writing if appropriate and communicate policies and strategies adopted by the board
  • Implement the policies and strategies adopted by the board
  • Have a knowledge of, and review detailed figures, contracts and other information about, the corporation's affairs and financial position and summarise such information for the board where appropriate
  • Prepare proposals and submissions for consideration by the board
  • Prepare a budget
  • Attend to personnel matters including hiring and firing of staff and their terms of employment

The audit committee and the auditors require special mention. The best way for a board to be able to focus on performance is for it be be confident that its conformance duties are being properly handled. The audit function is central to this task.  Much needs to be said about audit committees and the role of auditors - which is why this will be part of the next instalment of this article.  

 Nothing concentrates the mind as an urgent and complex problem.  Corporate governance is one such matter.