Corporate Governance - Effective Performance Evaluation of the Board

Saleh Hussain

Description

The book deals with practical issues relating to Board's Performance Evaluation supplemented by easy to use checklists as to how to undertake the evaluation.

The book also covers the methodology of evaluating the work of board committees.

The Book talks about emerging practices in Corporate Governance.

Sujets

• Economics
• Business

Informations

• Publié par: eBookIt.com
• Date de parution: 31 mars 2017
• Nombre de lectures: 0
• EAN13: 9789990103892
• Langue: English

Extrait

Corporate Governance
Effective Performance Evaluation of the Board
This book addresses key practical issues, supplemented with easy to implement checklists, of how to evaluate performance of the board of directors in the corporate world
Shiraz Ali

Copyright © 2017 Saleh Hussain. All Rights Reserved.
No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, scanning or otherwise without the permission in writing of the Author.
Published in eBook format by eBookIt.com
http://www.eBookIt.com
ISBN-13: 978-9-9901-0389-2

WORDS OF THANKS

INTRODUCTION
Thanks to the increasing importance of Corporate Governance, the role of board of directors of any company is placed under a lot of emphasis and scrutiny and the choice of any one director is subjected to a disciplined process of selection to ensure suitability to the post.
The selection process is now entrusted to the Board Nomination Committee which undertakes the issue of first putting in place the prerequisites for related experience, qualification and skills of the directors of the Board. The committee gets also involved in giving the board an independent opinion on the re-election of the board members. To do that, the committee must be in a position to evaluate the performance of the members based on predetermined set of key performance indicators “KPIs”.
The board performance evaluating is becoming a regulatory requirement as well as a best practice phenomenon. The regulators would specify the need to undergo the evaluation process of the work of the board collectively and the performance of directors individually. They further specify the frequency of such process to be an annual undertaking.
Devising the appropriate and clear policy of board evaluation is the first step towards achieving and putting in place a roadmap for process. Selection of the methods through which the process of evaluation is conducted is a very important step towards paving grounds for balanced and effective system in the company.
In this book, we will look at the various policies that could be devised for evaluation of the performance of the board, board committees, and directors of the board. The different methods of evaluations will be discussed as well with deliberation on effectiveness of such methods. We will also shed light on the way the evaluation is made and how results are analyzed so that the board can review and make corrective actions to further enhance and improve the work of the board.
We strongly believe that the results of the evaluation will lay solid grounds for better process of directors’ performance evaluation and improve the devising mechanism of the KPIs of the board and individual directors in the company. Board’s various committees will too benefit from such process to ensure that these committees discharge their respective responsibilities in the way they are expected to.
The issue of the role of the Chief Executive Officer “CEO” in the company and as a member of the board will be discussed in details in this book. There is a growing concern in the world of corporate governance on this issue between those supporting the appointment of the CEO as board member and those who see it as conflicting with his executive role as leader of the management. The pros and cons will be deliberated.
In the appendices section of the book, we will give specimen of templates used for the evaluation of the board and committees, so that the interested readers may customize to suit their own policies. We hope that readers and corporate governance practitioners would benefit from this book and will work towards further improvement of practices in their respective companies.
Saleh Hussain
August 2013
CHAPTER 1
THE BOARD OF DIRECTORS

1. THE BOARD OF DIRECTORS
One of the main objectives of running a company is to maximize shareholder value. In order to achieve this objective, the company needs to be managed by a formalized and well established team of individuals; who would operate as per best interest of the company following a set of rules and optimal business practices. Corporate governance means the way in which business and affairs of each institution is directed and managed by their ‘Board of Directors’ (“Board”) and the ‘Management’.

The Board is the apex authority of any company; and is ultimately responsible for all past, present and future activities. The responsibilities and duties of the board as a whole have been defined in a variety of ways.
According to Bank for International Settlements (“BIS”) , “the board has overall responsibility for the bank, including approving and overseeing the implementation of the bank’s strategic objectives, risk strategy, corporate governance and corporate values. The board is also responsible for providing oversight of senior management” (BIS in ‘Principles for Enhancing Corporate Governance’, October 2010, p.7).
Core Principles for Effective Bank Supervision: Principle 14
Banks should have in place internal controls that are adequate for the nature and scale of their business. These should include clear arrangements for delegating authority and responsibility; separation of the functions that involve committing the bank, paying away its funds, and accounting for its assets and liabilities; reconciliation of these processes; safeguarding its assets; and appropriate independent internal or external audit and compliance functions to test adherence to these controls as well as applicable laws and regulations (Basel Committee on Banking Supervision).
Corporate laws identify the responsibilities of the board of directors with respect to corporate governance principles to ensure that there are effective controls over every aspect of risk management.
These controls are the responsibility of the board of directors and deal with organizational structure, accounting procedures, checks and balances and safeguarding of assets and investments. More specifically, these address:
• Organizational structure: definitions of duties and responsibilities including clear delegation of authority (for example, clear loan approval limits), decision making procedures, separation of critical functions (for example, business origination, payments, reconciliation, risk management, accounting, audit and compliance)
• Accounting procedures: reconciliation of accounts, control lists, information for management.
• Checks and balances (or “four eye principles”): segregation of duties, cross checking, dual control of assets and double signatures.
• Safeguarding assets and investments: including physical controls
To achieve a strong control environment, the board of directors and senior management of a bank should understand the underlying risks in their business and are both committed to, and legally responsible for, the control environment (Basel Committee on Banking Supervision).
1.1 Responsibilities of the Board
To promote safe and sound operating practices, it is imperative that the Board assumes its role independent of the influence of the Management. Members of the Board should know their responsibilities and powers in clear terms. Further, it should be ensured that the Board focus on policy making and general direction, oversight and supervision of the affairs and business of the company and does not play any role in the day-to-day operations, as that is the role of the ‘Management’.
The corporate governance framework should ensure the strategic guidance of the company, the effective monitoring of management by the board, and the board’s accountability to the company and the shareholders.
The following gives accounts of Board’s responsibilities as defined by various international bodies and best practices and concludes with the responsibilities identified in the Code of Corporate Governance of Bahrain.
• Board members should act on a fully informed basis, in good faith, with due diligence and care, and in the best interest of the company and the shareholders
• Where board decisions may affect different shareholder groups differently, the board should treat all shareholders fairly
• The board should ensure compliance with applicable law and take into account the interests of stakeholders
• The board should fulfill certain key functions, including:
• Reviewing and guiding corporate strategy, major plans of action, risk policy, annual budgets and business plans; setting performance objectives; monitoring implementation and corporate performance; and overseeing major capital expenditures, acquisitions and divestitures.
• Selecting, compensating, monitoring and, when necessary, replacing key executives and overseeing succession planning.
• Reviewing key executive and board remuneration, and ensuring a formal and transparent board nomination process.
• Monitoring and managing potential conflicts of interest of management, board members and shareholders, including misuse of corporate assets and abuse in related party transactions.
• Ensuring the integrity of the corporation’s accounting and financial reporting systems, including the independent audit, and that appropriate systems of control are in place, in particular, systems for monitoring risk, financial control, and compliance with the law.
• Monitoring the effectiveness of the governance practices under which it operates and making changes as needed.
• Overseeing the process of disclosure and communications.
• The board should be able to exercise objective judgment on corporate affairs independent, in particular, from management.
• Boards should consider assigning a sufficient number of non-executive board members capable of exercising independent judgment to tasks where there is a potential for conflict of interest. Examples of such key responsibilities are financial reporting, nomination and executive and board remuneration.
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