Role and Responsibilities of the Board of Directors

1
Role and Responsibilities of the Board of
Directors

• Fiduciary Duties and Independence of the Board

2
Fiduciary Duties vs.Director Duties
3
Directors Fiduciary Duties

• A legal concept that is pillar in Anglo-American
  corporate governance
• A legal concept that does not exist per se in
  many developed markets
• Shouldnt we be addressing director duties?

4
Director Duties Vary

• Economic environment
• Legal environment
• Cultural environment
• Shareholder base a result of the above

5
Economic Environment

• Role of government
• Sources of capital
• Role of capital markets in economic development

6
Legal Environment

• Regulators, codes and laws
• Courts and enforcement
• Civil vs. criminal actions

7
Cultural Environment

• Perception of capital markets by society
  (population, courts, media, government)
• Proportion of population tied to capital
  markets (retirement, investment)
• Free market vs. planed economy

8
Shareholder Base

• Government agencies
• Public institutional (pension funds)
• Private individual
• Family
• Domestic institutional
• Pension funds, mutual funds, alternative funds
• Foreign institutional
• Pension funds, mutual funds, alternative funds

9
Comparing Shareholder Base

• Anglo-American
• Domestic institutional large
• Private individual large
• Public institutional large
• Foreign institutional limited

• Continental European
• Domestic institutional limited
• Private individual limited
• Public institutional limited
• Foreign institutional large

10
Investor Remedies

• Anglo-American
• Offers remedy to investors who have been wronged
• Numerous investor law suits
• Class action suits action
• Large punitive damages
• Extensive civil director liability
• Limited criminal liability

• Continental European
• Balances interests of the company with other
  interests
• Few investor law suits
• No class actions
• No punitive damages
• Limited civil director liability
• Extensive criminal liability

11
Convergence of Duties ?

• Global investors expectations demands
• Media exposure domestic international
• Competing for funds domestic investors
• Corporate governance codes
• Laws (voting, proxies, etc)

12
Director Independence
13
Why is Independence Important?

• Conflicts of interest hinder judgment and affect
  decision-making
• Judgment and decision-making are what directors
  are asked to do
• Directors must feel free to think, express,
  question and decide in the interest of those they
  represent

14
Box-Ticking vs. Effective Independence

• Current definitions are based on
• Ownership of shares
• Contracts and services rendered
• Relationships
• Family ties
• What about effective independence?
• Independent minded
• Commitment (time and knowledge)

15
Importance of Selection

• Who selects directors?
• How are they selected (pool, resources,
  interviews)?
• Who determines their independence?
• Who elects directors?
• Who evaluates directors?
• Who removes directors?

16
Independence of Directors

• Disclosing conflicts of interest
• Does the Board have clear guidelines of conflicts
  that must be disclosed?
• Who discloses conflicts?
• To whom are conflicts disclosed?
• What happens if conflicts are not disclosed?
• How is independence enforced?
• What if conflicts are disclosed later?
• good faith vs. bad faith
• What is disclosed to the Board and/or to
  shareholders?

17
Board Committees

• What is their purpose?
• What is their power?
• How are members selected, renewed or removed?

18
How Committees Operate

• Process
• Setting the agenda
• Discussion, debate, vote, minutes
• Recommendation, decision, report
• Constraints
• Budgetary and resources
• Access to outsiders management, advisors,
  suppliers, etc.
• What happens to committee findings and
  recommendations?

19
Conclusion Several Models with Converging
Objectives

• Prevent (and react to) wrong-doing by management,
  directors, advisors/suppliers, partners and
  shareholders
• Ensure protection of shareholder interests and
  rights
• Ensure the long term growth of the company