Week 7 Directors: A Background Faisal AlSager MGT Corporate Governance

Objectives ✤ To be aware of the distinction between unitary and dual boards ✤ To have a background of different important members of the board ✤ To know more about the aspects of the boards worldwide

Board Structures ✤ Mainly, there are two types of board structures: 1. Unitary (one-tier) board: is characterized by one single board comprising both executive and non-executive directors 2. Dual (two-tier) board: consists of a supervisory board and an executive board of managers

Unitary Boards ✤ It’s responsible for all aspects of the company’s activities ✤ Shareholders elect the directors to the board at the company’s annual general meeting ✤ In the US, the UK, and the majority of EU members

Dual Boards ✤ Here, there’s separation between the functions of supervision (monitoring) and that of management ✤ The supervisory board oversees the direction of the business while the management board is responsible for the running of the business ✤ Members of one board cannot be members of another ✤ Shareholders appoint the members of the supervisory board (other than the employee members), and the supervisory board appoints the members of the management board

Role of the Board ✤ The board is responsible for: 1. determining the company’s aims and strategies, plans, and policies to achieve those aims; 2. monitoring progress in the achievement of those aims (both from an overview of company aspect and also in terms of analysis and evaluation of its own performance as a board and as individual directors); 3. appointing a chief executive officer (CEO) with appropriate leadership qualities

Board Main Members 1 ✤ Chief Executive Officer (CEO) ✤ has the executive responsibility for running the company’s business ✤ Chairman has the responsibility for running the board and ensuring ✤ that the board meets frequently, ✤ that directors have access to all the information they need to make an informed contribution at board meeting, and ✤ that all directors are given the opportunity to speak at board meetings ✤ Also, the chairman should hold meetings with non-executive directors

Board Main Members 2 ✤ Senior Independent Director ✤ one of the independent non-executive directors ✤ should be available to shareholders ✤ reviewing the performance of the chairman ✤ lead meetings of non-executive directors to assess the chairman

Board Main Members 3 ✤ Company Secretary ✤ must avoid conflicts of interests ✤ responsible for ensuring that the board have all the necassery information; and that information flows well between constituents ✤ advises the chairman for compliance and governance issues ✤ assist new directors

Today’s Typical Board ✤ Average board size = 17 (± [1 or 2]) ✤ Audit committee is an important force in the board ✤ Most directors come from the same segment of the population: the commercial elite

Size ✤ US companies: size shrunk from 15 in 1988 to 10.9 in 2002 ✤ 25% of S&P 500: size between 8 and 9 ✤ Wave Wireless: 2 (CEO and outsider) ✤ Capital Bancorp is the largest: 23

Inside/Outside Mix ✤ In 1986, S&P 500‘s median number of inside directors was 4 ✤ Now, it’s two with 40% having one only (the CEO) ✤ Splitting CEO and chairman roles is rare; ✤ only less than 30% of corporations do that; ✤ only 9% have a truly independent chairman; ✤ usually the chairman is a former CEO

Diversity ✤ Middle age ✤ In 2005, S&P 500’s boards outside directors were about 15% female ✤ 88% of all boards have at least one female director ✤ 50% have two ✤ 58 companies have no women on board; ✤ 43% of them are technology companies ✤ 73% have at least one minority director

Meeting Frequency/Committees ✤ 2000 meeting frequency median is 7 meetings a year ✤ Most companies have 4-5 committees ✤ Three committees are required: audit, compensation, and nominating ✤ Other popular committees: finance, executive ✤ Small committees: environmental, science and technology, legal/compliance issues ✤ Ad hoc special committees: CEO succession, investigation of potential problems, and other issues

References ✤ Corporate Governance: Mallin, Tina. Oxford. ✤ Corporate Governance (4th Edition): Monks, R. and Minow, N (Publisher: Wiley-Blackwell)