Corporate Governance Lectures 5
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Transcript of Corporate Governance Lectures 5
NEDS• 'Non-Executive Director' A
member of a company's board of directors who is not part of the executive team.
NEDS•A non-executive director
(NED) typically does not engage in the day-to-day management of the organization.
NEDS•A key principle of good
corporate governance is that there should be a sufficient number of independent NEDs on the board.
NEDS• to create a suitable
balance of power and prevent the dominance of the board by one individual or by a small number of individuals.
NEDS•Responsibilities are given
to independent directors by the Combined Code, and the external auditors should be independent.
NEDS•Responsibilities are given
to independent directors by the Combined Code, and the external auditors should be independent.
NEDS• In the United States of
America, the New York Exchange listing requirements define an independent NED as one with:
NEDS• Is not an immediate family
member of a person, who is or was in the past 3 years employed by the company as an executive director.
Independence•Phan (2006) defines
independence as consisting of “...the feeling of freedom to express personal views in the boardroom,,,
Independence•and the freedom from undue influence by top management or the controlling shareholders.”
Numbers of neds• In principle, the NEDs
provide a counterweight to the CEO and chairman of the board, and so contribute to a balance of power practice.
Numbers
•The Higgs Report provides that at least ½ of the board, including the chairman should be independent.
Statutory duties
•Such as to disclose with reasonable accuracy, at any time, the financial position of the company (Article 102 CJL), and
Statutory duties
• In accordance with a set of generally accepted accounting principles which must be stated.
•
Statutory duties• If the company is one
which is required to be audited the accounts show a “true and fair view of the profit or loss of the company
Statutory duties• for the period of the state of
the company’s affairs at the end of the period” ... [and which] “shall be approved by the directors...” (Article 104 CJL).
Function of NEDS
•Non-executive directors are appointed to bring five key qualities to the board of directors, namely:
Function of NEDS•Specialist knowledge (Jersey Financial Services Commission (“JFSC”) requirement), and
Higgs Report•The report proposed that NEDs should take an active role in the governance of their company,
Higgs Report•Their role should be clarified in the Combined Code, and should have four board elements:
Higgs Report• Strategy. To contribute to the
development of the company’s strategy and constructively challenge views of the executive directors within a “spirit of partnership and mutual respect.”
Higgs Report•Performance. To monitor
the performance of executive management in meeting their agreed goals and objectives.
Higgs Report• Risk. To satisfy themselves
that the financial information produced by the company is accurate and that the financial controls and systems of risk management are robust.
Higgs Report• People. To have responsibility
for setting the remuneration of executive directors and to have a prime role in both the nomination and removal of senior management and in succession planning.
NEDS •Build a recognition by executives of their contribution in order to promote openness and trust
Effectiveness•Continually develop and
refresh their knowledge and skills to ensure that their contribution to the board remains informed and relevant.
Combined Code•Supports executives in their leadership of the business while monitoring their conduct,
Combined Code•Questions intelligently, debates constructively, challenges rigorously and decides dispassionately,
Combined Code•Promote the highest
standards of corporate governance and seeks compliance with the provision of the Combined Code wherever possible.
Question 2•DISCUSS THE SITUATIONS
IN WHICH NON-EXECUTIVE DIRECTORS ARE LIKELY NOT TO BE INDEPENDENT.
Answer
• Paul Myners (2002) condemned the NEDs for being ineffective. Some NEDs held too many positions in public companies, more than they could possibly serve effectively.
Answer• A NED might tacitly undertake
not to ask difficult questions or take a stand against executives on the board, provided that the NEDs of his own company act in the same way.