Directors & Board Structure

8/13/2019 Directors & Board Structure

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Directors & BoardDirectors & Board

StructureStructure

Arif Hartono, SE. MHRM. PhD.Arif Hartono, SE. MHRM. PhD.

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Learning ObjectivesLearning Objectives

To be aware of the distinction between unitary &To be aware of the distinction between unitary &

dual boardsdual boards

To have a detailed understanding of the roles,To have a detailed understanding of the roles,

duties, & responsibilities of directorsduties, & responsibilities of directors To understand the rationale for key boardTo understand the rationale for key board

committees & their functionscommittees & their functions

To be able to critically assess the criteria forTo be able to critically assess the criteria for

independence of nonindependence of non--executive (outside) directorsexecutive (outside) directors

To comprehend the role & contribution of nonTo comprehend the role & contribution of non--

executive (outside) directorsexecutive (outside) directors


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Unitary vs Dual BoardUnitary vs Dual Board Unitary BoardUnitary Board is the form of board structureis the form of board structure

that characterized by one single boardthat characterized by one single boardcomprising bothcomprising both executiveexecutive && nonnon--executiveexecutivedirectorsdirectors..

The unitary board is responsible for all aspectsThe unitary board is responsible for all aspectsof the companyof the companys activities, & all the directorss activities, & all the directorsare working to achieve the same ends.are working to achieve the same ends.

The shareholders elect the directors to theThe shareholders elect the directors to theboard at the companyboard at the companys annual generals annual generalmeetingmeeting

Also called asAlso called as OneOne--Tier SystemTier System

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Unitary vs Dual BoardUnitary vs Dual Board

Dual BoardDual Board consists of aconsists of a supervisory boardsupervisory board

andand executive boardexecutive board of managementof management

There is a clear separation between the functions ofThere is a clear separation between the functions of

supervision (monitoring) & management.supervision (monitoring) & management.

The supervisory boardThe supervisory board direction the businessdirection the business

Management boardManagement board running the businessrunning the business

Member of one board cannot be members ofMember of one board cannot be members of

anotheranother

Share holders appoint the members of theShare holders appoint the members of the

supervisory board, whilst the supervisory boardsupervisory board, whilst the supervisory board

appoints the members of the executive board.appoints the members of the executive board.


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Board of DirectorsBoard of Directors

The board leads and controls a companyThe board leads and controls a company

effective board is fundamental to the successeffective board is fundamental to the success

The board is the link between managers &The board is the link between managers &

investorsinvestors essential to a good corporateessential to a good corporate

governance & investor relationsgovernance & investor relations

ChairmanChairman responsible for the running of theresponsible for the running of the

boardboard

CEOCEO responsible for the running of theresponsible for the running of the

businessbusiness

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Role of the BoardRole of the Board

Determining the companyDetermining the companys aim &s aim &

strategies, plans, & policies to achievestrategies, plans, & policies to achieve

those aimsthose aims Monitoring progress in the achievement ofMonitoring progress in the achievement of

those aimsthose aims

Appointing a CEO with appropriateAppointing a CEO with appropriate

leadership qualitiesleadership qualities


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Role of the BoardRole of the Board

High performance boards must achieveHigh performance boards must achieve

three core objectives:three core objectives:

1)1) Provide superior strategic guidance toProvide superior strategic guidance to

ensure the companyensure the companys growth & prosperitys growth & prosperity

2)2) Ensure accountability of the company to itsEnsure accountability of the company to its

stakeholdersstakeholders3)3) Ensure that a highly qualified executiveEnsure that a highly qualified executive

team is managing the company.team is managing the company.

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Role, Duties & ResponsibilitiesRole, Duties & Responsibilities

The role of the board is to provide entrepreneurialThe role of the board is to provide entrepreneurialleadership of the company within a framework of prudentleadership of the company within a framework of prudent& effective controls which enable risk to be assessed and& effective controls which enable risk to be assessed andmanagedmanaged

Directors should make decisions in an objective way & theDirectors should make decisions in an objective way & thecompanycompanys best interestss best interests

The board should have regular meetings, with an agenda,The board should have regular meetings, with an agenda,& there should be a formal schedule of matters over& there should be a formal schedule of matters overwhich the boards has the right to make decisonswhich the boards has the right to make decisons

There should be appropriate reporting procedures definedThere should be appropriate reporting procedures definedfor the board & its subfor the board & its sub--committees.committees.


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The roles of Chairman & CEO should preferablyThe roles of Chairman & CEO should preferablybe split to help ensure that no one individual isbe split to help ensure that no one individual istoo powerfultoo powerful

The board should have a balance betweenThe board should have a balance betweenexecutive & nonexecutive & non--executive directorsexecutive directors

All directors should have access to the companyAll directors should have access to the company

secretary & also to take independent professionalsecretary & also to take independent professionaladvice.advice.

Directors should receive appropriate trainingDirectors should receive appropriate trainingwhen they are first appointed to the board of awhen they are first appointed to the board of alisted company.listed company.

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The directorsThe directors duties:duties:

A duty to act within powerA duty to act within power

A duty to promote the success of the companyA duty to promote the success of the company

A duty to exercise independent judgmentA duty to exercise independent judgment A duty to exercise reasonable care, skill, &A duty to exercise reasonable care, skill, &

diligencediligence

A duty to avoid conflict of interestA duty to avoid conflict of interest

A duty not to accept benefits from third partiesA duty not to accept benefits from third parties

A duty to declare an interest on proposedA duty to declare an interest on proposedtransactations or arrangementstransactations or arrangements


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Responsibiity of CEO & ChairmanResponsibiity of CEO & Chairman

CEOCEO has the executive responsibility for thehas the executive responsibility for therunning of the companyrunning of the companys business.s business.

ChairmanChairman has responsibility to the running of thehas responsibility to the running of theboard & for ensuring that the board meetsboard & for ensuring that the board meetsfrequently, that directors have access to all thefrequently, that directors have access to all theinformation they need to make an informedinformation they need to make an informedcontribution at board meeting, & that all directorscontribution at board meeting, & that all directors

are given the opportunity to speak at boardare given the opportunity to speak at boardmeetingmeeting

The two roles should not be combined & carriedThe two roles should not be combined & carriedout by one person, as this would give anout by one person, as this would give anindividual too much power.individual too much power.

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Senior Independent DirectorSenior Independent Director

SID should be one of the independent nonSID should be one of the independent non--

executive directorsexecutive directors

SID provides an additional communicationSID provides an additional communication

channel to shareholderschannel to shareholders

The nonThe non--executive directors should meet withoutexecutive directors should meet without

the chairman present at leat annually in order tothe chairman present at leat annually in order to

appraise the chairmanappraise the chairmans performance, & others performance, & other

occasion as ncessary. At these times, the SIDoccasion as ncessary. At these times, the SID

would lead the meeting.would lead the meeting.


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Company SecretaryCompany Secretary The company secretary has a range ofThe company secretary has a range of

responsibilities includingresponsibilities including facilitating the work offacilitating the work ofthe boardthe board by ensuring that the directors have allby ensuring that the directors have allthe information they need for the main board andthe information they need for the main board andalso for the board subalso for the board sub--committees (commonlycommittees (commonlyaudit, remuneration, nomination), and suchaudit, remuneration, nomination), and suchinformation flows well between the variousinformation flows well between the variousconstituent.constituent.

The company secretary advises the board, via theThe company secretary advises the board, via thechairman, on all governance matters and willchairman, on all governance matters and willassist with the professional development needs ofassist with the professional development needs ofdirectors & induction requirements for newdirectors & induction requirements for newdirectors.directors.

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Board SubBoard Sub--ComittessComittess

Board may appoint various subBoard may appoint various sub--

committees, which should reportcommittees, which should report

regularly to the board (all ofregularly to the board (all ofresponsibilities remain on the board)responsibilities remain on the board)

Purposes:Purposes:

To assist the dispatch of business byTo assist the dispatch of business by

cosidering it in more detailcosidering it in more detail

To increase objectivityTo increase objectivity


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Audit CommitteeAudit Committee

Acting independently from executive, toActing independently from executive, to

ensure that interest of shareholders areensure that interest of shareholders are

properly peotectedproperly peotected

oversightoversight,, assessmentassessment, &, & reviewreview

A usefulA useful bridgebridge between both internal &between both internal &external auditors and the the boardexternal auditors and the the board

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Remuneration ComitteeRemuneration Comittee

Prevent executive directors from setting theirPrevent executive directors from setting theirown remuneration levelsown remuneration levels

Provide a formal, transparent procedure for theProvide a formal, transparent procedure for thesetting of executive remuneration levelssetting of executive remuneration levelsincluding the determination of appropriateincluding the determination of appropriatetargets for any performancetargets for any performance--related payrelated payschemesschemes

Should all be independent nonShould all be independent non--executiveexecutivedirectorsdirectors


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Nomination ComitteeNomination Comittee

Preparing best candidates for directorPreparing best candidates for director

positionspositions

Evaluate the existing balance of skills,Evaluate the existing balance of skills,

knowledge & experience on the board, andknowledge & experience on the board, and

utilize this when preparing a candidateutilize this when preparing a candidateprofile for new appointmentsprofile for new appointments

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Risk ComitteeRisk Comittee

Usually larger companies or those withUsually larger companies or those with

significant transaction overseas use risksignificant transaction overseas use risk

committe to reduce the risk of derivativecommitte to reduce the risk of derivative

issuesissues

Sometimes this tasks are covered by theSometimes this tasks are covered by the

audit committeeaudit committee


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NonNon--Executive DirectorsExecutive Directors

RolesRoles

1. As a control or counterweight to executive1. As a control or counterweight to executive

directors to ensure that an individual persondirectors to ensure that an individual person

or group cannot undully influence theor group cannot undully influence the

boardboards decisionss decisions

2. Can make to the overall leadership &2. Can make to the overall leadership &development of the companydevelopment of the company

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NonNon--Executive DirectorsExecutive Directors

The calibre of the nonThe calibre of the non--executiveexecutivemembers of the board is of specialmembers of the board is of specialimportance is setting and maintainingimportance is setting and maintaining

standards of corporate governancestandards of corporate governance

Boards should consider assigning aBoards should consider assigning asufficient number of nonsufficient number of non--executive boardexecutive boardmembers capable of exercisingmembers capable of exercisingindependent judgement to tasks whereindependent judgement to tasks wherethere is a potential for conflict of interest.there is a potential for conflict of interest.


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Independence of NonIndependence of Non--

Executive DirectorsExecutive Directors

IndependenceIndependence: there are no: there are no

relationships or circumstances that mightrelationships or circumstances that might

affect the directoraffect the directors judgements judgement

To ensure objectivity in board decisionsTo ensure objectivity in board decisions

A board is strengthened significantly byA board is strengthened significantly by

having a strong group of nonhaving a strong group of non--executiveexecutivedirectors with no other connection withdirectors with no other connection with

the companythe company

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Contribution of NonContribution of Non--

Executive DirectorsExecutive Directors

The added value may come from a numberThe added value may come from a numberof facets:of facets:

their experince in industry, the city, public life,their experince in industry, the city, public life,or other appropriate backgrounds;or other appropriate backgrounds;

their knowledge of a particular technicaltheir knowledge of a particular technicalprocess/system (e.g. Finance, marketing);process/system (e.g. Finance, marketing);

their reputation;their reputation;

their ability to have an insight into issuestheir ability to have an insight into issuesdiscussed at the board and ask searchingdiscussed at the board and ask searchingquestions.questions.


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Directors EvaluationDirectors Evaluation

Two dimensions of evaluation:Two dimensions of evaluation: The evaluation of the board as a wholeThe evaluation of the board as a whole

The evaluation of indivisual directors serving on theThe evaluation of indivisual directors serving on theboardboard

Approaches:Approaches: A structured questionnaire to evaluate how the board isA structured questionnaire to evaluate how the board is

performing in key areas such as achieving key goalsperforming in key areas such as achieving key goalsthat have been setthat have been set

Informal discussions between the chairman of theInformal discussions between the chairman of theboard & the directors which would cover a wide rangeboard & the directors which would cover a wide rangeof strategic & operational issues (such as how well doof strategic & operational issues (such as how well dothe board dynamics work, & how well do the board subthe board dynamics work, & how well do the board sub--committees work)committees work)

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Directors EvaluationDirectors Evaluation

The evalution of individual directorsThe evalution of individual directors

provides individual directors with theprovides individual directors with the

opportunity to discuss key areas with theopportunity to discuss key areas with thechairman on a onechairman on a one--toto--one basis.one basis.

Directors evaluationDirectors evaluation performanceperformance

criteriacriteria corporate objectivecorporate objective

achievementachievement sharehoderssharehoders interestsinterests

Directors & Board Structure

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