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Question:

Write a report advising a newly established board on what measures it needs to Implement to ensure appropriate conduct by the Board of Directors.
 
 

Answer:

Introduction

Board in general refers to a board of directors or a group of individuals who are responsible for monitoring activities of a profit; no-profit organization or government agencies. Therefore, boards are for monitoring or overseeing whether an organization is abiding its fundamental constitutions as well as government legislations in a systematic way or not. The concern of the following report is to advise varied measures to a newly established board so that the board can properly ensure appropriate conduct by the recruited board of directors. The report will therefore identify the fundamental roles and responsibilities of a board and the possible risks associated with the responsibilities. In order to recognize the responsibilities as well as the frequent risks associated with them, it is essential at the very first to have a clear overview of the particular board that has been newly established.

Overview of the newly established board

As mentioned above, prior to give fruitful advises for ensuring appropriate conduct, it is essential to know the fundamental purpose and concerns of the newly established board. As the same time, it is essential to identify the key members of the board and their inclusive criterion. It has been identified that a Cape-town based start-up financial organization has established new board of ten respective members. The board size of the considered organization is ten and each of the respected members of the board has Finance degrees from top Universities of South Africa and it has been also found out that each of the recruited members of the newly established board have an impressive extent of experience from several reputed financial organizations previously.

 


Thus, it is understandable that the concerned organization has not compromised in selecting the responsible individuals for the board of committee. In this context, it is essential to mention that the organizational aim of the financial enterprise, which has established the new board of directors, is to help customers with innovative investment schemes as well as help with external auditing. Hence, it is understandable enough that the organization deserves efficient individuals, who have not only financial degrees but also a fair amount of experiences in the particular field. It is essential to mention here that according to the concerned financial organization, they have established the new board of members, so that the authority always stays informed about the availability of adequate amount of the financial resources. It has been known that the organization has been facing some difficulties at their initial phase due to lack of financial resources and inappropriate management of the existing financial resources. Hence, the organization decided to establish a new board of directors as the organization is expanding its grandeur lately due to getting satisfactory customer feedback and brand reputation.    

Roles and responsibilities of a board

Prior to advise fruitful measures or initiatives to the newly established board, so that it can function properly, it is essential to look at the fundamental roles and responsibilities of the board members. A board of directors of a financial organization is accountable to hold the following responsibilities –

Establishing controls on financial activities

Accounting as well as taking financial decisions is primarily the responsibility of the management of a financial organization. However, a management cannot accomplish the aforementioned responsibility if there is no convenient framework (Bai, 2013). A board of directors of a financial organization likes the concerned one, is responsible for creating the particular framework. Moreover, it is the mandatory responsibility of the board of directors of a financial enterprise to create policies so that any kind of fraud and error can be prevented timely. A board of directors of ever established and reputed financial organization is supposed to design policies for “separation of duties”, “signature and authorization” and “good-governance policies”. Under the name of good-governance, policies of an organization include conflict-of-interest policy, policy for document retention and “whistleblower policy” (Berger et al., 2016).

Ensuring compliance with the fundamental policies

After establishing financial policies and procedures, it is necessary to verify whether the employees, volunteers and other internal stakeholders are systematically complying with the established policies and fundamental procedures or not (Blowfield & Murray, 2014). In this context, it is essential to mention that the internal stakeholders of an organization are supposed to comply with the policies made by the board of directors by reviewing reports and reading the annual letters of the auditors.

 

Budget approval and reviewing financial reports

Although the fact that an organization’s management is accountable for creating annual budgets and maintain it accordingly to serve for the administrative decisions, the board of directors is responsible for first reviewing and thereafter approving the budget. It is therefore the duty of the board of directors to ensure that the budget is comprehensive as well as realistic according to the performance capability of the organization. At the same time, boards of a financial organization is responsible for reviewing financial reports on half-yearly, quarterly or in annual basis (Boulouta, 2013). For the small and medium-sized organizations like the one that has been considered, financial reports are required to be reviewed quarterly.

Ensuring financial sustainability, creating audit committee and compensating management

Every business organization necessarily requires an audit committee, whose responsibility is to review the financial disclosure of an organization. For financial organizations who themselves provide the service of auditing, it is essential initially to build an audit committee who will look after the financial performance as well as the activities of auditing of the employees. Additionally, it is the responsibility of the board to see whether the organization is acquiring financial sustainability or not (Frias?Aceituno et al., 2013). In order to do that it is necessary compare the current financial performance with the performance of the previous years. The board is also responsible for creating compensations for the senior management as well as for the CEO of an organization.

Maintaining adequate financial reserves and risk management

Board or a board of directors of an organization should look after the existing financial reserves of an organization and is responsible for establishing procedures in order to determine when and for which reasons the financial reserves will be utilized. At the same time, a board of directors is responsible in identifying risks, assessing them and establish strategies to mitigate them, so that an organization does not has to face any difficulties.  

 

Possible risks and issues

After having an in-depth idea about the fundamental roles and responsibilities of a board, it is required to see what can be the possible risks as well as issues related with the roles and responsibilities of the board of directors. In order to ensure appropriate conduct, dysfunctional board of directors is required to be prevented at the first place. Some of the frequent risks, which are associated with accomplishing the roles and responsibilities of a board, are –

  • Due to lack of preparation and activeness, several times board of directors fails to conduct risk identification and risk assessment properly. Consequently, an organization suffers from unexpected outcomes and disappointing revenue margin (Knepper et al., 2016).
  • It is a board of directors’ one of the essential duties to supervise and control the activities of the management. Several times, due to biasness, boards of directors overlook the faults of the senior management and the issues between the management and the employees. Consequently, the particular organization suffers from employee attrition and low standard performances from the workforce (Leipziger,). For example, Woolworths eventually encounter biggest employee riot for giving inappropriate treatment and low salary. Subsequently, Woolworths’ reputation was harmed and the CEO resigned.
  • Several times due to autocratic mentality, boards of directors ignored to receive feedbacks from the management, which subsequently decrease the communicational bond and for the directors, it becomes hard to get proper information from the internal stakeholders.
  • On the other hand, several times, the directors of a board or organizational lacks adequate effective skills. Various times, it has been also identified that instead of giving worthwhile contribution to an organization, skills of some directors becomes less relevant with the present strategies and market demands. In such case, an organization can face marketing challenges (Van Grembergen & De Haes, 2017).
  • It is one of the potential duties of the board of directors to vote members and include new individuals in the board. Most of the time organizations face lack of integrity and agreeable approach among the directors. Due to such conditions, it becomes difficult to select an appropriate member for the board as well as reach to a proper decision.
  • Among most of the South African organization, it has been identified that directors are facing personal liability issues, which is considered as the problem occurred by the pressure of corporate governance (Ferrell & Fraedrich, 2015). Organizations like Marsh, Norton Rose South Africa and Chartis South Africa are facing such issues.       

Measures to ensure appropriate conduct

The above sections have given a clear understanding about which frequent issues can harm the functioning of a board of directors. It has been understood that the concerned organization may face lack of integrity and biasness are the two main constraints for effective functioning of the board. Therefore, the considered organization should adopt the following measures –

Carefully choose and employ an inside director and an outside director

In order to ensure effective functioning of a board, the organization at the very first should select experienced as well as efficient inside directors. At the same time, the outside directors, who are generally the president or the owner of the organization should have an accompanying approach to the inside director. In order to do such, frequent meetings between the inside and outside directors are essential. Face-to-face talking helps in sorting out issues as well as convincing each other in an impressive way (Alliance, 2015). The particular procedure will help the organization in avoiding the issue of lack of integrity or less agreeable approach to each other. With the help of the particular measure, the organization can successfully reach to suitable decisions.

 

Judging the skills of individuals prior to implement them

As it has been identified that lack of effective skills has several times created problems for varied organizations like Marsh and Chartis. Thus, prior to employ the members, it will be convenient to test the skills of the director (Ittner & Keusch, 2015). It will help in future to avoid any kind of inappropriate behaviors performance of the directors.

Avoiding personal liability risks and implementing performance evaluation procedures

As the personal liability issue is one of the potential issues, faced by the South African companies, to have a flawless functioning of the board of directors, it will be important to look after whether any of the directors are having liability risks or not. At the same time, yearly performance evaluation will be also required. A performance evaluation on yearly basis will help the directors to see their own faults as well as it will help them to improvise the same (Roman & County, 2013). On the other hand, if the directors will not have to face any liability risks, they could work with motivation and can give their complete dedication.  

Conclusion

The report has indicated that the considered organization should adopt the measures, which will help the board of directors in avoiding personal liability risks and can have the opportunity to identify individual faults. At the same time, the report has also advised that the organization should make a cooperative relationship between the inside director and the outside directors of the organization

 

References

Alliance, T. B. (2015). Board of Directors. AGENDA.

Bai, G. (2013). How do board size and occupational background of directors influence social performance in for-profit and non-profit organizations? Evidence from California hospitals. Journal of business ethics, 118(1), 171-187.

Berger, A. N., Imbierowicz, B., & Rauch, C. (2016). The roles of corporate governance in bank failures during the recent financial crisis. Journal of Money, Credit and Banking, 48(4), 729-770.

Blowfield, M., & Murray, A. (2014). Corporate responsibility. Oxford University Press.

Boulouta, I. (2013). Hidden connections: The link between board gender diversity and corporate social performance. Journal of Business Ethics, 113(2), 185-197.

Ferrell, O. C., & Fraedrich, J. (2015). Business ethics: Ethical decision making & cases. Nelson Education.

Frias?Aceituno, J. V., Rodriguez?Ariza, L., & Garcia?Sanchez, I. M. (2013). The role of the board in the dissemination of integrated corporate social reporting. Corporate Social Responsibility and Environmental Management, 20(4), 219-233.

Ittner, C. D., & Keusch, T. (2015). The Influence of Board of Directors’ Risk Oversight on Risk Management Maturity and Firm Risk-Taking.

Knepper, W. E., Bailey, D. A., Bowman, K. B., Eblin, R. L., & Lane, R. S. (2016). Duty of Loyalty (Vol. 1). Liability of Corporate Officers and Directors.

Leipziger, D. (2015). The corporate responsibility code book. Greenleaf Publishing.

Roman, J., & County, O. M. (2013). Board of Directors.

Van Grembergen, W., & De Haes, S. (2017, January). Introduction to IT Governance and Its Mechanisms Minitrack. In Proceedings of the 50th Hawaii International Conference on System Sciences.

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