Accounting Principles for Non-Executive Directors (Law Practitioner Series)


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This principle of mutual control, thus, justifes the principle of collective responsibility of the members of the management board. Furthermore, the members of the management board can not be members of the supervisory board. The supervisory board nominates, controls, advices and dismisses the management board.

In this context, the supervisory board controls the management board not the company in issues related to compliance with the law and bylaws and the business strategies as well. The supervisory board is normally chosen by the shareholders but in large companies employees could select up to one half of the seats in the board.


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Another important characteristic of the monitoring board is that it provides an important space for networking and the participation of stakeholders in the company. Paul L. Davies has commented on this issue in the following terms:. Appointments to the supervisory board were a method of establishing and maintaining links between the company and other financial and non-financial institutions whose co-operation was important for the company's success. This might be view as an early form of stakeholding, where the stakeholders are defined as those who have a long-term interest in the economic success of the company.

Additionally, Committees audit, remuneration and nomination are now playing a more important role in the supervisory board structure, without affecting the collective responsibility of the supervisory board as whole.

The Board is a central institution in the corporate governance structure. But having a main place in company's government, what should be a board's role? In this part, the purpose is to describe the different roles that the board of directors should perform for the company. Initially, and before jumping to the analysis of the different roles it is important to mention some general considerations. First, the board is multitasking in nature. It is an organ which is in charge of a varied set of activities.

Nevertheless, the purpose of this document is not to analyze each activity in detail but to describe the core functions performed by this body. Second, the analysis brings together the one-tier board and the two-tier board systems. Although the structure of the two systems is different, the roles can be examined together.

In this context, the analysis of roles is not a defense of any of the systems but an attempt to gather the common features and to gain a common understanding of the main concepts. Third, the different activities are regulated in a very widespread manner.

It is possible to find some of the activities in laws; others are in the constitution of the company or in special codes of corporate governance adopted by the company; or some of them are just part of the practice of an industry or company in particular. However, in this document the approach will be more conceptual than normative. Next, three different roles will be explained having in mind their relevance from the normative point of view and corporate governance practice. The roles are: i the decision-making role; ii the supervisory role; and iii the relational role. The decision-making role is based on the idea that the board of directors is the cornerstone of all legal power and authority in the corporation.

This level of authority makes the corporation boards the most important decision-making body within the company. Normally, in corporations with disperse shareholding directors are not very active when performing these activities; instead it is assumed that they behave in a more passive manner.

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Constraints of time and lack of information would not allow directors to formulate much of the strategic decisions and policy. On the other hand, in companies where shareholdings are concentrated in large-blocks, directors are subject to the influence of the major shareholder.

The reason is that the controlling shareholder will always have access to the top management because he controls the board or through other mechanisms. This could dilute the decision making role of the board in practice. Nevertheless, it is very important to stress that from a legal point of view and corporate governance practice the authority for strategic management is a board's task. Therefore, board members are responsible and accountable for the fulfillment of the decision-making role.

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THE ROLES OF THE BOARD OF DIRECTORS: THE UNRESOLVED RIDDLE

It does not matter that board members are subject to influence and pressure either by management or major shareholders, they are at the top of the strategic decision-making role and they will be judged accordingly. Finally, it is worth mentioning that this is one of the roles performed by the board in the one-tier structure. Under the two-tier structure, the supervisory board is not in contact with the decision-making role which is left completely to the management board, except when naming the members of the latter.

The traditional duty of a corporate board of directors was to manage the corporation. The oversight function has been described as follows in the Corporate Director's Guidebook:. The oversight function concern ongoing monitoring of the corporation's business and affairs and, in particular, attention to corporate business performance, plan and strategies, risk assessment and management, compliance with legal obligations and corporate policies, and the quality of financial and other reports to shareholders, as well as attention to matters suggesting a need for inquiry or investigation.

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At the base of the monitoring role, it is possible to find that the main objective is to avoid conducts like self-dealing, negligence, and lack of professionalism on the part of management of the company. If we consider the variety and importance of the activities just mentioned this role requires for directors to be very active in the company.

First, directors should understand the business of the corporation. Directors should know about the different strategies, business opportunities, strengths and weaknesses of the frm and the market in which it is involved as well as the different risks the company could face, among other things.

Second, directors should determine a process to monitor all these different issues and establish some policies and parameters for management of the company. Third, directors should monitor management and performance of the company. However, while all these requirements are very logic and coherent in theory things could get very tricky when it is time to apply them. The problem with this role has been described as a trade-off between proximity monitoring and objectivity monitoring. At the end, the monitoring role will depend on the legal requirements and the corporate governance structure of the company.

The monitoring role in companies with disperse shareholdings have been entrusted to independent and professional directors. The idea is that non-executive directors increase the quality of objective monitoring and they could act considering the interest of shareholders as a whole.

In companies where shareholdings are concentrated in large-blocks, large shareholders are able to monitor management independently of the functions of the board.

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Also, the major shareholder will have inside control through the board of directors which is under his control. In this case, the non-executive directors are really important in considering the interest of minority shareholders and the company in the long-term involving the interest of other stakeholders. Finally, it is important to mention that the distinction between executive and non executive directors is relevant in the one-tier structure. In the case of the two-tier structure the supervisory board is completely independent from management and its core activity is to monitor the former.

So while the problem of objectivity monitoring and proximity monitoring exists the existence of non-executive directors is not an issue or it could be proper to say it has been resolved long ago. In recent years, the business community has focused in having more diverse boards. The company, as a legal person, is not at self-sufficient entity. It requires of others to achieve its goals and objectives. As an example, in the internal environment it requires a well motivated workforce to function properly. Also, in the external environment it requires a proper understanding of its market clients and access to funding in the capital markets investors or banks.

For this reason, it is suggested that the company could articulate its internal and external environment by giving active participation to different stakeholders in the board of directors. The relational role could bring the company some of the following benefits: i coordination of its external environment; ii advice and access to information from directors with different backgrounds, skills and networks; iii support, status and legitimacy of the corporation in front of different audiences; and iv understanding of the company's role in the long-run. The idea is not to shift the power in the company to outsiders or employees but to have some important contact points with them for the beneft of the company.

This has been somehow the experience under the two-tier board system through the supervisory board. This document will analyze the roles performed by the board of directors under the US and UK legal systems. The idea is to understand the actors involved in the regulation process, the instruments used to regulate the board of directors and the roles attached to the board. Initially, back in the 's, the role of the board of directors was not considered in practice of great importance in the US corporate governance system.

As a result, there have been important changes in the governance of public companies, especially in the last thirty years. In this context, it has been said that modern corporate governance in US has been driven by three difference forces: i state corporations law; ii federal securities regulation; and iii self-regulatory organizations such as the stock exchanges. Next, this document will explain how these different actors have regulated board's roles.


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    Accounting Principles for Non-Executive Directors (Law Practitioner Series) Accounting Principles for Non-Executive Directors (Law Practitioner Series)
    Accounting Principles for Non-Executive Directors (Law Practitioner Series) Accounting Principles for Non-Executive Directors (Law Practitioner Series)
    Accounting Principles for Non-Executive Directors (Law Practitioner Series) Accounting Principles for Non-Executive Directors (Law Practitioner Series)
    Accounting Principles for Non-Executive Directors (Law Practitioner Series) Accounting Principles for Non-Executive Directors (Law Practitioner Series)
    Accounting Principles for Non-Executive Directors (Law Practitioner Series) Accounting Principles for Non-Executive Directors (Law Practitioner Series)
    Accounting Principles for Non-Executive Directors (Law Practitioner Series) Accounting Principles for Non-Executive Directors (Law Practitioner Series)
    Accounting Principles for Non-Executive Directors (Law Practitioner Series) Accounting Principles for Non-Executive Directors (Law Practitioner Series)
    Accounting Principles for Non-Executive Directors (Law Practitioner Series) Accounting Principles for Non-Executive Directors (Law Practitioner Series)

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