The Rights and Responsibilities of the Board of Directors at Individual and Collective Levels - Essay Example

?Question Critically evaluate the rights and responsibilities of the board of directors at individual and collective levels. Rights and Responsibilities of the board of directors at the Individual level As an individual, a director has two vital roles to play (Baxt, & Baxt, 2005): "Agent" : An Agent acts on behalf of the company Trustee : Trustee has the authority to control company assets Playing these roles the director assumes the following rights and responsibilities at the individual level In order to avoid conflicts between the company’s interests and their own personal interests, the director has to act accordingly. Directors must know the way of evading situations that might give rise to conflicts with their personal interests and the company’s interests. This means whether the particular situation is advantageous to the company or not - be it taking advantage of the information he or she can access as a director or use a certain property or opportunity to satisfy his own interests, the director must know on tackling such situations to avoid conflicts. Must have the capability and is responsible for individual decision-making Each director must execute calculated and independent judgment in his or her decision making process. Must be able to exercise concern, meticulousness and dexterity In the duties executed by the directors, the directors have the responsibility of exercising significant concern, dexterity and meticulousness. The aspects of ‘significant concern, dexterity and meticulousness’ are weighed according to what is generally expected from a person performing the role of a director. It is also weighed as per the experience, skill and general knowledge of the individual director (Mallin, 2010). Must never accept benefits from third parties. Benefits from third parties can give rise to conflict of interest and make an impact (or affect) on the company. Therefore, Directors must never accept such benefits. Must declare interest in proposed transaction. If a director has a personal interest in the company’s proposed transaction, then the details of the particular of the interest must be declared to the other directors before the transaction or arrangement takes place. Must act honestly towards the company and must act only within the powers sanctioned to him and use the same only for purposes which would be beneficial to the organisation. Must take charge of all meetings of the Board when a Chairman is not present, and review plans, agendas and information that are sent to the Board for Board meetings and check on the meeting schedules to assure that there is enough time for discussion of all agenda items. Must serve as liaison between the independent Directors and the Chairman of the Board. Must monitor the self evaluations of the Directors in coordination with the Nominating and Corporate Governance Committee. Rights and Responsibilities of the board of directors at the Collective level Primary decision-making body of the company are the board of directors (Hopt & Wymeersch, 1997). The collective responsibility of all aspects of the company is on the board of directors. The various activities of the company that the board of directors are responsible are: To establish and maintain the company’s motto that can otherwise be categorised as vision, mission, and values. To have full and effective control of the company To establish its structure, strategy, and risk profile by identifying and monitoring key risks and making sure that the company has the necessary control systems to manage risk within permissible levels. To ensure compliance by the company with all laws and regulations and must delegate authority to management, and monitor the execution of the company’s plans – strategic, tactical and operational moves. To responsible and accountable to all the stakeholders of the company which include, shareholder, employees, customers, clients, etc. Be transparent while communicating to the shareholders and explain on the details of resolutions that are to be passed at the time of shareholders meetings. To aid directors in obtaining professional advice when needed. To review the size and composition of the board in terms of skills mixture and its diversity to judge on appropriate mix that is required to ensure the board's effectiveness. To identify key performance criteria and areas for the board and management and also keep a check on non-financial aspects concerning the company and ensure that the company conducts itself as a responsible corporate citizen (Mallin, 2010). Question 2: Evaluate the role of the audit committee in a public limited liability company such as a FTSE100 company The integrity of financial reports is monitored by the audit committee and its their main role. This is done in order to make sure that the information given to the board gives an accurate picture of the state of the company at all times (ECGI, 2011). The audit committee carries its role by performing the following tasks of supervising the financial status of the company by evaluating the risk management policies and financial control systems. The audit committee also has to check on the compliance with all law and regulation. It also plays a part in appointing the company’s external auditor. The Committee is also responsible for establishing direct contact with the external auditor and the external chartered accountant. The committee is also required to evaluate the external auditor’s reports. Question 3: Critically assess the roles and responsibilities of stakeholders in corporate governance with special emphasis on institutional shareholders, external auditors, and major creditors and credit rating agencies. Roles and Responsibilities of Stakeholders in Corporate Governance Institutional Shareholders Communication: They are responsible for encouraging regular, systematic contact at senior executive level to exchange information and views on: Performance Board membership Strategy Quality of management (Davies, 2006) Institutional shareholders cannot ask for information that is price sensitive but may ask for on an exceptional condition as the price of a long-term relationship, although this would require that they suspend their ability to deal in the shares. Voting: Institutional shareholders should support Boards by using positively the voting rights and when there is a reason to vote against an issue the reason for such a move should be made known to the Board beforehand. Board Composition: Institutional shareholders must take interest in the composition of Boards of Directors and also aid by supporting the appointment of Remuneration and Audit committee (ECGI, 2011). Emoluments of Directors and Senior Managers Institutional shareholders should encourage disclosure of the principles on which emoluments of the directors are determined. Takeover Bids In takeover situations institutional investors should see the most up-to-date information before committing on a certain course of action. External auditors The external auditor must report on the truth and fairness of the financial statements (Rolfe, 2007). The auditor also has a duty to express opinions on certain other matters and express any reservations. The auditor must look into whether the entity has maintained proper accounting records; check on the entity’s balance sheet with the underlying accounting records and all the details that the auditor finds it necessary for auditing and whether the entity has complied with the relevant legislation’s requirements in respect of the necessary disclosures. Major creditor Creditors have the rights to influence major decisions of the companies and check on poor management through a variety of controls they have when companies default (Shleifer & Vishny, 1997). They also have the right to make some corporate decisions like imposing sanctions such as mergers and acquisitions and impose restrictions on overall level of borrowing of the company. Credit rating agencies Credit rating agency (CRA) has the role and responsibility of assigning credit ratings for issuers of certain types of debt obligations and for this purpose has to take into consideration the issuer's credit worthiness (i.e., its ability to pay back a loan). This rating affects the interest rate applied to the particular security being issued. Question 4: Critically evaluate the roles of the main regulatory bodies (in the UK) in corporate governance. Financial Services Authority (FSA) Financial Services Company is an enterprise that is not a government body though it is a public body this is due to the reason that the features of Finance services Authority are of public nature. It replaced nine former regulatory bodies when it came into existence. It does not have the status of independent agency Its statutory are taken from the financial services Market act which is called as FSMA 2000.This Company has limitations which are based on the guarantee. It is generally appointed for a fixed period of term. It is answerable to the treasury ministers and thus via it to the parliament. Its functioning is independent of the interference of the government. It can manage its own budget which is managed and raised by the funds from the industry it is raised from (NAO, 2007). Financial Reporting Council (FRC) The Financial Reporting Council is the UK’s independent regulator that is responsible for encouraging corporate governance. They do this through the UK Corporate Governance Code. They are responsible for setting standards for corporate reporting evaluate as well as impose accounting and auditing standards (Buck et al., 2011). They also oversee the regulatory activities of the professional accountancy bodies and work on for public interest cases to exercise disciplinary arrangements on cases that involve accountants and actuaries. Financial Ombudsman Service The Financial Ombudsman Service was set up by law (Parliament) as an independent public body. Its job is to aid in settling the disputes between businesses providing financial services and their customers. Their responsibilities are to help in sorting out individual complaints and finding out solutions to the same that consumers and financial businesses haven't been able to resolve. As a matter of fact, they deal with a million enquiries and resolve more than 150,000 disputes. Competition Commission The Competition Commission is a joined committee of members in which there is no interference of the government. Moreover the funds for running this commission are raised by the department of Trade and Industry. It consists of the following members:- Business members 50 members having relevant experience in their fields working part time only Members who are in academics Full time chairman A deputy chairman Question 5: Evaluate the importance of disclosure and transparency and how might these contribute to an effective corporate governance framework. The corporate governance framework works in a systematic way such that it checks on timely and accurate disclosure of all material matters concerning the corporation including the financial situation and performance and governance of the company. A strong disclosure rule promoting transparency will be a vital feature for an effective corporate governance framework as it acts as a fulcrum for the company’s relationship with stakeholders. Disclosure tends to improves public understanding of the structure and activities of the company, its policies with respect to ethical standards, and its relationship with the financial environment and the communities in which it operates. The annual report is considered a vital means of communicating with stakeholders including shareholders. The annual report can be a useful tool in communicating the following corporate issues with the stakeholders in corporate governance (Aras & Crowther,, 2010): The company’s vision, mission and values. Company’s business strategy and the likely risks associated with that strategy. Company’s activities and performance and a forward-looking assessment of the business environment in which the company is performing. Company’s corporate governance principles and the extent to which it has complied with a specific corporate governance code. Summary of activities and projects of special relevance to stakeholders. References Aras, G. & Crowther, D. (2010). A handbook of corporate governance and social responsibility. VT: Gower Publishing. Baxt, B. & Baxt, R. (2005). Duties and responsibilities of directors and officers. NSW: AICD. Buck, T., Thompson, B. & Kirkham, R. (2011). The Ombudsman Enterprise and Administrative Justice. VT: Ashgate Publishing, Ltd.. Davies, A. (2006). Best practice in corporate governance: building reputation and sustainable success. VT: Gower Publishing, Ltd. Hopt, K.J. & Wymeersch, E. (1997). Comparative corporate governance. Berlin: Walter de Gruyter. Mallin, Christine A. (2010) Corporate Governance, 3rd Edition. Oxford: Oxford University Press. ISBN: 978-0-19-956645-7 ECGI (2011). Guidelines on Corporate Governance [online]. Available from: http://www.ecgi.org/codes/documents/cg_guidelines_en.pdf [Accessed 7th April 2011]. NAO (2007). The Financial Services Authority: a review under section 12 of the Financial Services and Markets Act 2000. London: The Stationery Office. Rolfe, T. (2007). CIMA Official Learning System Financial Accounting and Tax Principles. MA: Butterworth-Heinemann. Shleifer, A., and Vishny, R.W. (1997). “A Survey of Corporate Governance.” Journal of Finance L11:737-783. Read More