Corporate Governance – Principles, Policies and Practices 3e Chapter 13 Board Leadership - the reality of the boardroom

Board Leadership - the reality of the boardroom - In which we consider: - how people, power and politics affect practice the chairman’s leadership role sources of governance power games directors play - board styles and the culture of the board - the ethical dimension: corporate values and business ethics - corporate codes of ethics and their enforcement - implementing corporate governance below board level.

Board Leadership - the reality of the boardroom People, power and politics affect practice Some authorities assume that: Directors behave rationally Board level discussions are analytical Decisions are reached after a careful consideration of alternatives Experience of governing bodies, suggests that directors’ behaviour is: Influenced by inter-personal relationships Affected by perceptions of position and prestige Involves the processes of power Can be inter-personally political.

Board Leadership - the reality of the boardroom In fact, corporate governance is more about human behaviour than structures and strictures, rules, and regulations. Corporate governance involves the use of power. It is a political process.

The chairman’s leadership role The significance of the chairman Chairman of the Board - not chairman of the company Subject to the constitution, chairman is chosen by directors from among the board members.

The chairman’s leadership role few statutory demands or expectations role varies from the powerful chairman who: acts as a leader of the company influences its strategic direction interacts strongly with the chief executive provides wide ranging leadership of the board to the weak chairman who just runs board meetings.

The chairman’s leadership role The chairman’s role in good corporate governance is crucial. Chairmen are primarily responsible for the working of the board its balance of membership subject to board and shareholders’ approval ensuring that all relevant issues are on the agenda, ensuring that all directors, executive and non-executive alike, are properly informed and enabled and encouraged to play their full part in all board activities.

The chairman’s leadership role Chairmen should be able to stand sufficiently well back from the day-to-day running of the business to ensure that their boards are in full control of the company’s affairs and alert to their obligations to shareholders.” (Cadbury Report)

The chairman’s leadership role Leadership of the board Management of meetings Strategic leadership Linking the board with management Arbitration between board members and others Being the public face of the company.

The chairman’s leadership role “The need for leaders who know how to make a difference in the world has never been greater than it is today… qualities that are fundamental to good leadership (include) judgment that leads to sound decision-making, an entrepreneurial point of view, the ability to listen and communicate effectively, a deep sense of one's values and ethics, and the courage to act, based on those values and ethics. The need extends beyond business to the social, government, and non-profit sectors as well....” Dean Jay Light Harvard Business School

Sources of corporate governance power The formal power of the board is delegated from the shareholders, reinforced by the company’s constitution and company law. However, a board can be influenced in a number of other ways: by a majority or dominant shareholder putting pressure on the board from the threat of a potential take-over by the prospect of litigation through the influence of the auditors from the effects of legislation and regulation from media pressure and other external exhortation by a dominant or charismatic leader and, obviously, through changing business circumstances.

Source of directors’ power Individual directors derive power from: Personality - the charismatic or a dominant individual Knowledge - access to information, skills or experiences not available to the other directors Sanction power Political power Power derived from position Networking power Power derived from contacts and acquaintances of use to the company and useful in board decisions. Power derived from a position of influence in the external society Ownership power Representative power Power delegated from an external power source

Board style and culture Board Style is a function of: Board leadership The chairman’s role, abilities, and performance Board size Board composition - Balance of executive and outside directors Board membership Board culture History, tradition, experience Cultural context Need to balance concern for relationships with concern for achieving board success (task).

Board style and culture The way the board behaves Inter-personal relations between directors Expectations of directors about board meetings Perceptions of directors about their roles Interactions during meetings Traditions, beliefs, corporate culture.

Board style and culture Criteria that influence board culture Board traditions Corporate vision Attitudes to innovation The exercise of control by the board Decision taking by the board Leadership of the board Commitment of directors Adaptability by directors Collaboration between directors Conflict between directors Relationships between directors Communication between directors The significance of status The importance of conformity The extent of trust

Board style and culture Country club Professional board style Rubber stamp board Representative board style   High Concern for the board relationships Low   Low Concern for the board tasks High

The reality of the boardroom Implementing corporate governance Successful corporate governance depends on: the regulations and law of the country concerned (the local culture) the company’s traditions, board leadership, and style (the corporate culture) the leadership ability and competence of the chairman of the board

Ethics and corporate governance Business decisions depend on cooperation, transparency, and honesty Ultimately business decisions are based on trust employers need to be able to trust their employees customers to trust their suppliers societies to trust the companies that operate in their midst The issue concerns morality, the values and beliefs that individuals, companies, and communities have about good and bad, right and wrong; in other words, about acceptable behaviour.

Corporate culture, corporate values, and ethical issues Many boards believe that the corporate culture, corporate values, and ethical issues are properly the responsibility of the board as a whole some create and enforce statements of corporate values and codes of conduct Some delegate responsibility for developing ethics policies and codes to their audit committee Other boards create a corporate governance, ethics or compliance committee of the board Whilst for some boards corporate culture, corporate values, and ethical issues are not considered in the board room.

Corporate codes of ethics A successful ethics policy reflects a company’s core values, stems from its corporate mission, and is consistent with its corporate strategies. Board and top management involvement and commitment are vital for successful, ethics policies are unlikely to succeed.

Ethics policies A successful ethics policy reflects a company’s core values, stems from its corporate mission, and is consistent with its corporate strategies Board and top management involvement and commitment are essential to successful ethics policies

Ethics policies Companies develop ethics policies to: set standards for employee behavior and require employee compliance with those norms seeking to enforce discipline to encourage commitment to good relations with all stakeholders.

Ethics policies A sound ethics policy will: be orientated towards corporate values, rather than organizational discipline seek genuine commitment rather than being a cosmetic exercise recognize the cultural context avoid credibility gaps between ethical codes and actual behaviour link with corporate governance policies and practices have associated ethics management systems, including information and control systems, regular audit, policy review procedures, and social accounting systems demonstrate accountability with regular reports.

Corporate codes of ethics A corporate ethics policy is usually supported by a corporate code of ethics or code of conduct An explicit statement setting out the ethical standards expected of everyone in that organization. Ethical codes can be found at various organizational levels: corporate codes that relate to a single corporate entity professional codes that apply to the members of a profession industry codes that are developed for use in a specific industry group codes that are used within a given set of members, eg in a marketing standards programme.

Corporate codes of ethics Codes of ethics can be used to: define and create the value system in an organization define and set standards of expected behaviour improve individuals ethical awareness and judgment promote high standards of practice set benchmarks for self- evaluation and monitoring by peers and others inform external stakeholders of the values of the organization.

Whistle blowing Informing on situations thought wrong Dangers victimization labelled ‘troublemaker’ loss of career prospects or dismissal claims for slander, defamation wrongful allegation, invasion of privacy Encouragement Company policy to encourage and protect whistle blowers Law UK, the Public Interest Disclosures at Work Act (1998) Sarbanes Oxley Act US listed companies to provide systems for reporting unethical behaviour.

Implementing corporate governance below board level Links between the board and management depend on the underlying corporate governance model In the US rule-based approach the combined chairman/CEO wields power COO and CFO on board reinforces that power board predominantly of outside directors advises CEO, approves CEO strategies and oversees performance.

Implementing corporate governance below board level Links between the board and management depend on the underlying corporate governance model In the UK/Commonwealth principles-based approach (comply or explain) considerable freedom for boards to delegate or retain control between: delegating power to top management, similar to US model or retaining power with the board deciding strategies, and polices and requiring top management to follow those plans.

Implementing corporate governance below board level Links between the board and management depend on the underlying corporate governance model In the Continental European model, the two-tier board structure requires: the management board to carry out the performance-orientated management role the supervisory board. to carry out the conformance responsibility.

Implementing corporate governance below board level Links between the board and management depend on the underlying corporate governance model In the Asian family-centric model the head of the family is typically the head of management as well as leading the board.

Implementing corporate governance below board level The implementation of corporate governance below board level goes to the heart of corporate governance: it is about the reality of power. Who wields what power over the corporate entity and in what way? The ultimate challenge is to achieve compliance with competence.

Board Leadership - the reality of the boardroom We have considered: - how people, power and politics affect practice - the chairman’s leadership role - sources of governance power - games directors play - board styles and the culture of the board - the ethical dimension: corporate values and business ethics - corporate codes of ethics and their enforcement - implementing corporate governance below board level.