Essay On Board Of Directors And CEO Roles And Responsibilities.

Part 1

Assessment Criteria:

Demonstration of knowledge of the issues and evidence of wide reading to support your analysis

Demonstration of your ability to apply the knowledge to identify keys issues leading to your recommendations

Evidence of sound reasoning and the exercise of professional judgment to support your recommendations

Development and statement of concise recommendations for presentation to the Chairman and shareholders

Overall structure and professional presentation of the report to the Chairman and shareholders

High quality written communication of concepts and terms in ordinary English as not all shareholders can be assumed to be professionally competent in corporate governance

Required

Assume you have been engaged as a corporate governance consultant to a board of directors of a public company listed on the stock exchange.  Your assignment is to prepare a report to be submitted to the Chairman of the board explaining and analyzing how the company should define and delineate the separate roles, duties and responsibilities of the company’s board of directors from those of the CEO. Your report should contain specific recommendations on the separate roles of directors and the CEO.   The Chairman has specifically indicated that she intends to make your report available to shareholders of the company and that the document will be published on the company’s web site.

Part 2

Assessment Criteria:

Demonstration of knowledge of the issues and evidence of wide reading to support your analysis

Demonstration of your ability to apply the knowledge to identify keys issues leading to your recommendations

Evidence of sound reasoning and the exercise of professional judgement to support your recommendations

Development and statement of concise recommendations for presentation to the AICD

Overall structure and professional presentation of the report to the AICD

High quality written communication of concepts and terms using language for an audience that is assumed to be professionally competent in corporate governance.

Executive Summary

The present business culture wars between government, regulatory bodies and the board of directors are emphasizing the need to define roles and responsibilities in a company. As per the case between Westpac Banking Corp and ANZ Banking Group, the regulators are accused of turning out to be a culture police. The main objective of the report is to assign separate roles, duties and responsibilities to the company directors as well to the Chief Executive Officer (CEO) of the company so as to maintain smooth functioning of the business and its culture along with projecting a brighter image of the company to the stakeholders.

Analysis of Defining and Delineating Separate Roles and Responsibilities

The disputes in assigning and performing roles and responsibilities for board of directors, management professionals and shareholders of the company have resulted in creating a disturbance in the general prosperity of the company. According to the chairman Greg Medcraft of Australian Securities Commission, the directors should not be held criminally responsible for any disobedient culture of the company. Creating a healthy business culture is the responsibility of the CEO of the company who is also directly accountable for the matters related to business. The functioning of corporate governance depends on the board of directors’ structure, techniques, methods, roles and responsibilities. Therefore, the board of directors is considered as a vital part of the corporate governance. Appointment of directors is done by the shareholders who are the policy-makers of the company (Jan & Sangmi, 2016). From the scenario of the case, it is observed that the directors of the companies are showing their concerns about their roles and responsibilities and are not ready for any kind of changes implemented in holding directors accountability for wayward culture of the company. The roles of board of directors should be focused on three main areas. First, the policy-making in which the directors are to make policies which distinguish the responsibilities and roles among the board and other management professionals. Secondly, decision-making by which directors are to make decisions regarding agreements with other organizations and thus delegate the powers of maintaining prosperity in the company to others. Thirdly, the role is not to oversight in which directors are to do the supervision and not to manage the organization (Arnwine, 2002). 

The general duties of the directors include the endorsement of success of the business, to exercise and emancipation the power of the company and to show care and carefulness for the company (Waller, 2012). The responsibilities of directors are to monitor the performance along with affairs of the company, to manage the company properly, to ensure good corporate governance and to describe the structure for authority delegation to management (Aina, 2013). According to the Australian Financial Review (April 2016), Patrick Durkin, directors of boards advised that the defiant culture of the company should be managed by the CEO and not by the directors. The separate roles and responsibilities of the CEO in consideration of the case are to manage the company, and to perform the power as well as strategies given by directors to strengthen the decision making policy, to take responsibility and accountability for decisions, to face the consequences related to the moral and legal act of the company (Ferrell & Ferrell, 2011; Kakabadse, 2006). As stated in the case by founder and director of IBIS World, Phil Ruthven, if right kind of strategies was made to assign the roles and responsibilities for CEO, the problem of passing matters as an excuse to higher authorities will be sorted out.

Specific Recommendations for Separate Roles of Directors and CEO

For smooth function of a company both directors and CEO should come into common understanding of the business strategies. Though directors and the CEO should function for the success of the company but their roles and responsibilities are to be separated. The role of directors should not only to lead the meetings but should encompass establishing proper communication with the CEO. Directors should avoid the over engagement in the management proceedings and hence pass on the responsibilities of managing company to CEO. Directors should continuously monitor the performance and progress of the CEO in order to develop better strategic plan for the company. As per the scenario presented, directors should make an organizational structure more efficient to limit liability of decline in cultural harmony of the company to CEO (Arnwine, 2002). The director’s active participation in setting board agenda would be fruitful for managing information flow of the company (Gabrielsson, Huse, & Minichilli, 2007). On the other hand, CEO plays a vital role in business operations. CEO should be given an independent authority so as to involve in decision-making process more effective. The roles of CEO should be separated for better corporate governance. The CEO should be allowed to make suggestions to the directors and at the same time disapprove of the wrong decisions imposed to him. Proper communication channel should be initiated for the CEO to make efficient interactions with the directors. The CEO should work more on the objective of the company than the personal interest (Brickle, Coles & Jarrell, 1997). An ethical working environment should be created by the CEO to manage the salvo in the company. The CEO should not show any kind of waywardness to the top management as directors are the ultimate governing entity of the company. The directors as well as the CEO of the company should enhance their relationship for the accomplishment of the organizations’ aims. Self-interests of directors and the CEO should not collide to maintain peace in the company. The preferences of the directors and the CEO should be focused on serving stakeholder’s attention. The directors should not try to influence the behavior of the CEO by using its top management power. CEO of the company should completely work on improvement of the culture of the business to uphold strong and better coordination between the management professionals. The buck stops with the CEO unless there is equal participation of directors. Community and public relations should be highlighted by directors and the CEO in order to project organization’s mission, programs, strategies and positive image to the stakeholders.

Executive Summary

Corporate governance is concerned with efficient decisions taken by the managers that result in positive outcomes, which is beneficial for the stakeholders. The need of good corporate governance is determined to be of paramount substance at present day organizations because of the separation between management and the owners. The protection of the interests of the investors is a feature of a good corporate strategy. If the investors do not get adequate returns of their investment, they will take no more interest in investing (Al- Haddad, Alzurqan & Al_Sufy, 2011). Corporate governance ensures the establishment of control mechanisms, which ascertain that the money of the investors is not invested in wasteful projects (Drobetz, Schillhofer & Zimmerman, 2003).

It is believed that a good corporate governance strategy tremendously contributes to increasing the returns of the company. In the presence of a weak corporate governance strategy, a manager can exploit his/her power to fulfill personal interests at the expense of the investors. It is argued that if the cash flows and opportunities of investment exist in a company, a positive dividend payout ratio will gear up the price of the share. The managers oriented towards growth tend to overinvest and pay less dividends (Gugler, Mueller & Yurtoglu, 2004). In a survey conducted by McKinsey, it is found that if in a nation the law does not protect interests of the shareholders, they prefer to invest in companies that have strong corporate governance (Chen, Chen & Wei, 2009). In most of the advanced economies, the corporate governance strategy involves proper funding of the companies from the investors along with ensuring return of the investors’ profit. A contract between the managers and the investors ensures the ways in which the funds are invested along with specifies about the allocation of profits between the management and investors. To overcome the problem of unanticipated events, certain residual control rights are alienated among the managers and the investors that give rights of decision-making. At the time of funding, the investors generally take all the control rights but because they are not equipped enough to take decisions like managers, so certain portion of residual rights are given to the managers. Now, the role of corporate governance lies in the fact that it sets a limit to the residual control rights of the managers (Shleifer & Vishny, 1997). The Australian Institute of Company Directors (AICD) can make the investors understand the significance of a sound corporate governance strategy in protecting their interests. The investors are not willing to consider the importance of corporate governance in the investment decision because they might be thinking that the governance of companies always gives a chance for exploitation for the managers.

It seems that the investors think that higher sales growth is not always possible due to good corporate governance. However, the investors should be made apparent the fact that a good governance strategy will increase the profit and the value of a firm. The company that has good corporate governance is also able to pay a higher amount of cash to the shareholders. Good corporate governance is also associated with effective compensation to the executives and directors, in the form of options in stock (Brown & Caylor, 2004). The investors especially the small investors may be of the view that governance strategies believe in giving benefits to directors and executives in a way or the other. They should be made realized of the positive effects caused to investors too because of a sound governance.

A good corporate governance strategy also helps in making long-term flows of international investment and enhances economic performance of a nation. Proper corporate governance also helps in the effective division of equity shares among the outsider investors and the insider ones. The external investors can gain a control over the activities of the management and insider investors. The stockholders also get a right to interfere in the top-level decision-making because of the policies laid at the governance strategy. The philosophy of core corporate governance addresses two tribulations. One is regarding vertical governance amid the secluded shareholders and the managers. The other one is concerned with horizontal governance amid a secluded shareholder and a controlling shareholder. The challenge that is needed to be addressed by the policy-makers is to make a strategy of governance in such a way so that both the controlling and other stakeholders remain in a win-win situation (Bocean & Barbu, 2007).

The existing conflicts among the managers and the shareholders seem to be another reason due to which the investors do not consider corporate governance as important in decision-making. The increasing trends of scandals have been raising questions on the effectiveness of corporate governance (Kang, Cheng & Gray, 2007).

The theories and examples suggest that good corporate governance is very essential for proper functioning of a company. Investors get their rights protected by means of a sound governance strategy and the chances of exploitation by a manager get diluted. However, the corporate scandals are reducing the belief in the governance strategies. The reduction in sales growth, as well as increase in compensation of directors and executives are few other features of a governance strategy that have faded away the belief in corporate governance. The AICD must undertake campaigns to educate the investors about the need of sound corporate governance. The main focus should be to give live examples of companies that have witnessed a high growth in profit and shareholder’s return due to the presence of good corporate governance. The trust of corporate governance can be gained by giving examples of long-term benefits that firms have gained. In the short run, there may be downfall in the performance of a company despite the presence of governance strategy and that can lead to low return on investment. Subsequently, the management can decide that due to low returns, the dividends should be reinvested. The investors should be taught to create a sense of trust so that the business can reinvest the dividend and yield an enhanced return to the investors in the future.

References

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Barbu, C.M. and Bocean C.G 2007. ‘Corporate governance and firm performance’, Management & Marketing-Craiova, vol. 1, pp.125-131.

Brown, L., D. and Caylor, M., L 2004, ‘Corporate governance and firm performance’, Georgia State University, pp. 1-52.

Chen, K.C., Chen, Z. & Wei, K.J 2009, ‘Legal protection of investors, corporate governance, and the cost of equity capital’, Journal of Corporate Finance, vol. 15, no. 3, pp.273-289.

Drobetz, W., Schillhofer, A. & Zimmermann, H 2004. ‘Corporate governance and expected stock returns: evidence from Germany’, European Financial Management, vol. 10, iss. 2, pp.267-293.

Gugler, K., P., Mueller, D.C. & Yurtoglu, B., B., 2003. ‘Corporate governance and the returns on investment’. In EFA 2002, Berlin Meetings Presented Paper, pp.1-53.

Kang, H., Cheng, M. & Gray, S 2007. ‘Corporate governance and board composition: diversity and independence of Australian boards’, Corporate Governance: An International Review, vol. 15, iss. 2, pp.194-207.

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