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Better Companies,Better Societies

Global Corporate Governance ForumGlobal Corporate Governance Forum

Role of Board of Directors in Corporate GovernanceFinancial Media WorkshopChile, January 2010

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Outline of Presentation

What is Corporate Governance?What is Corporate Governance?Building effective Board GovernanceBuilding effective Board GovernanceThe different roles related to the BoardThe different roles related to the BoardSome Concluding Thoughts!Some Concluding Thoughts!

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Wh at is Corporate Governance?

Corporate Governance is a mechanism through which boards andboards anddirectorsdirectors are able to direct, monitor and supervise the conduct and

operation of the corporation and its management in a manner that ensuresappropriate levels of authority, accountability, stewardship, leadershipleadership ,direction and control.

The importance of The importance of corporate governancecorporate governancelies in its contributionlies in its contributionboth to businessboth to businessprosperity and toprosperity and toaccountability.accountability.

Paragraph 1.1, Committee onCorporate Governance:Final Report Hampel Committee

Corporate governance is concerned withCorporate governance is concerned withholding the balance between economic andholding the balance between economic andsocial goals and between individual andsocial goals and between individual andcommunal goals The aim is to align ascommunal goals The aim is to align asnearly as possible the interests of nearly as possible the interests of individuals, corporations and society.individuals, corporations and society.

Sir Adrian Cadbury Corporate Governance Overview, 1999[World Bank Report]


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I ts about Leaders h ip!

L eadership for efficiencyL eadership for efficiencyto compete in the global economy, create jobs

L eadership for probityL eadership for probity ( (honradez honradez, , rectitud rectitud) )....because investors require confidenceto provide assurance of management's integrity

L eadership with responsibility.L eadership with responsibility.to take account of broader stakeholder interests

L eadership that is accountable and transparentL eadership that is accountable and transparentto build trust in companies and in the economy !!


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B uilding Effective B oard Governance

Defining key board rolesDefining key board rolesBoard ChairmanChief Executive Officer Board Directors - executive and non-executive

P utting in place board governance arrangementsP utting in place board governance arrangementsBoard committees to support decision processSupporting functions to regulate processesBoard procedures and rules, e.g. conflicts of interestDelegated authorities for management

Ensuring proper oversight and supervisionEnsuring proper oversight and supervisionManagement reporting and public disclosures Assurance processes and controls


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T h e B oard of Directors is Pivotal

The board should exercise compelling and relentlessThe board should exercise compelling and relentlessleadershipleadership and should not underestimate the power of and should not underestimate the power of leading by exampleleading by example - - evidenced by high levels of visibilityevidenced by high levels of visibilityand integrity, strong communications, and demandingand integrity, strong communications, and demandingexpectations. This leadership should be clear to ALL withinexpectations. This leadership should be clear to ALL within

the organization, as well as shareholdersthe organization, as well as shareholders ( ( accionistasaccionistas) ) and other and other stakeholdersstakeholders ( ( gruposgrupos dede intersinters) )..

BoardroomBoardroom BehavioursBehaviours A report prepared for Sir David Walker A report prepared for Sir David Walker

by the Institute of Chartered Secretaries and Administrators , UK by the Institute of Chartered Secretaries and Administrators , UK June 2009June 2009


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AuditCommittee

RemunerationCommittee

Other Committees

B oard Committees

Strategy

Board of DirectorsAchievement of strategic objectives and v alue creation

Fulfil responsibilities and duties in law and prescribed functions

B o a r d

O p e r a

t i o n s

Chairman

B oardMeetings

Reporting &Disclosure

Internal Controls& Assurance

ExecutiveCommittee

Internal Audit External Audit Other AssuranceP roviders Management

Combined Assurance Model

Governance

System andControls

Corporate P olicies & P rocedures

Board Governance Instruments

Monitoring and Evaluation K e y

A r e a s o

f R e s p o n s i

b i l i t y

CEO & Management

Shareholders

I n f o r m a

t i o n a n

d C o m m u n

i c a

t i o n

CorporateSecretary

Source: K P MG

B oard Governance Framework


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C h airman as Leader of t h e B oard

P rimary roleP rimary roleP rovide overall leadership to the board

FunctionFunctionP rincipal link between board and CEO/management teamResponsible for board agenda and work planWork with board committee chairmenInvolved in selection and induction of new directorsCounsel individual directors on their performanceP articipate in discussions with investors, key stakeholders


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CEO as Leader of t h e Company

P rimary roleP rimary roleL ead the management team, reporting to the board

FunctionFunctionWork closely with board chairmanResponsible for performance of management teamFormulate corporate strategy, annual business plan and budgetResponsible for corporate and financial objectivesFormulate major corporate policiesEnsure continuous improvement in services and productsManage relations with investors, major customers, regulatorsResponsible for companys long-term sustainability


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B oard Structure and Composition

Balancing executive and nonBalancing executive and non- -exec. participationexec. participationEnsuring an effective selection processEnsuring an effective selection process

Key personal and professional attributesSkills aligned to strategy and business

Also fill board committee requirements, where appropriate

Some general guidelinesSome general guidelinesMust have time to devote to responsibilitiesMust exercise judgment in best interests of companyMust be informed about the business and its markets

Must avoid interest conflicts between personal and businessMust treat board information confidentiallyShould act objectively and be receptive to other perspectivesShould prepare adequately for meetings, regular attendance


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B enefits of Effective B oard Committees

Assist the board in its decision making Assist the board in its decision makingBrings together non-executives and management

Allows detailed discussion on management mattersBut, filters out operational issues that remain with management

And, focuses on strategic decisions required of the board

Supports board responsibilities in key areasSupports board responsibilities in key areas Audit, internal controls and riskExecutive compensation and management appointmentsGovernance issues and corporate policiesNomination and selection of non-executive directorsOthers, e.g. health, safety, environment, etc.

Defined terms of reference and limitationsDefined terms of reference and limitationsGenerally, no executive powersGenerally, no executive powers


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I nstruments to En h ance Effectiveness

Board Charter setting out procedural rulesBoard Charter setting out procedural rulesClarifies leadership roles and core responsibilitiesReserves matters specifically reserved to boardSets management delegations and reporting arrangements

Comprehensive induction for new directorsComprehensive induction for new directorsL egal and regulatory obligationsFinancial structure of business, budgets and K P IsUnderstanding of strategic priorities and current statusFamiliarize with business operations, e.g. site visits

Annual board work plan Annual board work planMeetings and budget cycle, annual reporting

Code of ethics or statement of business principlesCode of ethics or statement of business principlesDefines corporate values and conduct of staff and directors


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R ole of Corporate Secretary

Supervises and co-ordinates board papers &

presentations

Takes the minutes of board meetings

Resolves organizationalmatters for board meetings

Works closely withChairman and CEO on

board agenda

Arranges the annualshareholders meeting

and other specialmeetings

Ensures compliance withthe board procedures

Oversees, conductsinduction trainings for newly elected directors

Explains the proceduralrequirements of laws, the

charter, and bylaws of thecompany

Key link between companyand non-executive directors


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B oard R ole in Financial Oversig h t

Duty to maintain proper accounting recordsDuty to maintain proper accounting recordsP eriodic reporting of financial position, performanceP eriodic reporting of financial position, performanceEstablishing, monitoring proper internal controlsEstablishing, monitoring proper internal controlsEnsuring proper external controls and auditEnsuring proper external controls and auditSkills, knowledge required by directorsSkills, knowledge required by directors


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B oards R ole in R isk Management

The board should know about and evaluate the:The board should know about and evaluate the:Most significant risks facing the companyP ossible effects on shareownersCompanys management of a crisisImportance of stakeholder confidence in the organization

Communications with the investment community

The board should ensure that: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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N ot an easy task - I dentified R isksStrategicStrategic

Unfocused strategyStrategy not aligned with capabilitiesComplacency arising from past successUnsuccessful acquisition/abortive bidFailure to manage major changesReputational riskL oss of investors confidenceP olitical/general economic risk

P eopleP eopleManagement leadership weakInadequate succession planningL oss of key executivesP oor employee motivationInternal communication weaknesses

MarketplaceMarketplaceFailure to respond to market trends

Missed opportunities new tech., global marketsWeak or obselete brandsOver-reliance on a few customersP oor customer satisfaction quality/timeliness

EthicalEthicalFailure to enact high standards of ethicsObtaining contracts unethicallyStakeholder concerns on products/businessprobity poor community relations

Suppliers/OutsourcersSuppliers/OutsourcersOver-dependence on suppliers/outsourcersFailure to manage cost/quality of outsourcedservice

Supply chain problemsJoint ventures, strategic all iances notworking

FinancialFinancialCash flow/going concern problemsTreasury operations riskSusceptibility to fraud/accountingirregularities

Legal/ComplianceLegal/ComplianceFailure to protect intellectual propertyHealth, safety, environmental issuesL itigation riskBreach of competition, corporate,employee, tax laws


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B

oards must reB

oards must re- -establish and enforce the standard thatestablish and enforce the standard thatrisks are to be undertaken for the benefit of their risks are to be undertaken for the benefit of their constituents, not for the personal gain of management.constituents, not for the personal gain of management.

G eorge VojtaChairman of the Advisory Board of the Yale School of Management Millstein Center for

Corporate G overnanance and Performance and Former Vice-Chairman, Bankers Trust Corp.

R estoring I ntegrity and T rust


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Six Critical Questions for Directors!

Do I believe I have all theDo I believe I have all the informationinformation ??Have I the necessaryHave I the necessary skillsskills to make this decision?to make this decision?Do I have anyDo I have any conflictconflict in this matter?in this matter?Objectively, is this aObjectively, is this a rational business decisionrational business decision ??

Can I explain this in aCan I explain this in a transparenttransparent manner?manner?Is it aIs it a responsible dischargeresponsible discharge of my duties?of my duties?


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M CIS GUIDING PRINCIPLES M CIS GUIDING PRINCIPLES

B uild Trust and Credibility!B uild Trust and Credibility!Respect for the IndividualCreate a Culture of Openness and HonestySet the Tone at the Top

U phold the Law!U phold the Law! Avoid Conflicts of InterestSet Metrics and ReportResults Accurately

Do the Right Thing!Do the Right Thing!P

romote Substance over FormBe L oyal to your Company,your Family, yourself

P hilip ArmstrongP hilip ArmstrongGlobal Corporate Governance ForumGlobal Corporate Governance ForumTelephone +1 202 458 9114Telephone +1 202 458 [email protected]@ifc.orgwww.gcgf.orgwww.gcgf.org

T h ank You!T h ank You!

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