The Board-Management Relationship

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What lie on who’s part?• The power to operate the company de jure lies to

the board and de facto it lies in the management.• The board is ultimately responsible for the

activities of the company.• The power used by the management of the

company is delegated by the board.• CEO as a leader of the management is

responsible for the use of the power delegated by the board.

• CEO and his management team always need to be accountable to the board.

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Role of the BoardIn this relationship, role of the board can be point out in following way.– To understand and approve the strategy and

plan of the CEO.– To monitor the execution of the plans.– To evaluate the result periodically.– If necessary, to decide whether, when and

how it should intervene.

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Key functions of the Board

• Reviewing and guiding corporate strategy, major plans of action, risk policy, annual budgets and business plans.

• Setting performance objectives.• Monitoring implementation and corporate

performance.• Overseeing major capital expenditures,

acquisitions and divestitures.

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…continued.• Monitoring and managing potential conflicts of interest of

management, board members and shareholders, including misuse of corporate assets and abuse in related party transactions.

• Ensuring the integrity of the corporation’s accounting and financial reporting systems, including the independent audit, and that appropriate systems of control are in place, in particular, systems for risk management, financial and operational control, and compliance with the law and relevant standards.

• Overseeing the process of disclosure and communications.

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The Chairman • Chairman is appointed by the board of director

among the member of the board.• It is the provision of the memorandum and article

of association which determines the status of chairman either executive or non executive.

• In case of executive chairman there is no question of appointing the CEO.

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CG Principles on Chairman• CG principles do not ignore both status of

the chairman i.e. executive and non-executive.

• In case of executive chairman the majority number of independent directors is recommended.

• In case of non-executive chairman minority presence of independent directors is acceptable.

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Role of the Chairman• To lead the board.• To formulate necessary policies for the

achievement of the objectives of the company.• To provide strategic guidelines to the company.• To conduct board meetings.• To chair the general meeting.• To implement the decision of the board and

general meeting.• To answer the question of the shareholders.

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Appointment of the CEO• The power to appointment of the CEO is comes

under the jurisdiction of the Board.• Board can do it in the recommendation of the

nomination committee.• The board of directors can appoint the CEO

among its members (Section 96).• The rights and duties of the CEO shall be as per

the provision of article or memorandum of association or as determined by the board.

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Succession Planning• Board shall prepare the succession

planning of the CEO.• The outgoing CEO can contribute or

influence the succession planning.• Necessary precaution shall be taken for

emergency succession.• It is the board which can decide about the

successor either insider or outsider.

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Benefits of Having Insider • Well known to the decision makers.• Probably managed his/her carrier path

with the top spot in mind.• Predictable in behaviour and attitude.• Groomed to some extent by predecessors.• Possess substantial knowledge of working

environment of the corporation.

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Shortcomings of having Insider

• A narrow perspective than outsider.• Problem of adjustment with external

changes.• Lack of dynamism.• Probability of loosing trained managers.• Conflict with the other probable candidates

during the work.

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Benefits of having Outsider• Independent functioning• Standard in performance• Dynamism• Optimistic• Broader perspective

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Shortcomings of having Outsider

• Lack of understanding.• Uncertainty in competency and leadership.• Problem regarding adjustment.• Absence of good relationship with

stakeholders.• State of conflict.

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Selection• It is the duty of the board to select proper and

competent person for the post of the CEO.• CEO can be hired from three different areas viz.

among the board members themselves, from insiders or from outsiders.

• Nomination committee is recommended for the selection of proper candidate for the CEO.

• The outgoing CEO can also contribute for the selection of new CEO.

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Role of the CEO in selection process

• The out going CEO can make both positive and negative role in selection of the new CEO.

• Some contribute for this by grooming the subordinate for the post.

• Some don’t want to involve in the process.• Because of their personality some CEOs are

often less than spectacular judges of leadership capabilities of others, especially their subordinates.

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Selection of the new candidate shall be based on

• Experience, age and other considerations• Qualification• Personal Attribute

– Character and the emotional quotient– Technical competency in the industry– Administrative skills– Interpersonal skills

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Qualities of Ideal Candidate• Have had demonstrable, meaningful exposure to

general management responsibility.• Have exhibited a specific ability to deal with the

key general management challenges that are currently facing by enterprise.

• Have a strong functional understanding of the industry.

• Have a track record of unequivocal accomplishments in prior positions.

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Rights and Duties of the CEO• Operating the corporation• Strategic planning• Annual operating plans and budgets• Selecting qualified management and

establishing an effective organizational structure

• Identifying and managing risks• Good financial reporting

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Performance evaluation of the CEO

• Board is responsible for the evaluation of CEO.

• Performance evaluation process shall focus the overall result of the company and the achievements for the shareholders/stakeholder.

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Pre-requisites of performance evaluation

• The interest of the CEO and of the company must be aligned.

• There must be mutually agreed-upon goals, standards, and time frames for the result.

• Accurate and timely measures of the key indicators of success.

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Compensation • CEO and Management compensation

must reward strong current performance and simultaneously provide incentives for similar future result.

• The compensation should be structured to avoid paying premiums for average or poor performance.

• Arrangements like golden parachutes shall be avoided.

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Relating Compensation with Performance

• What constitute good performance?• Does management make a difference in

performance?• Does compensation make a difference in

getting good management?• How much, if any, of management’s

compensation should be at risk?

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Component of CEO Compensation

Current– Base salary– Fringe benefit– perquisite– Cash bonuses

Long term– Cash bonuses– Stock options– Stock grants– Stock ownership plans

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What is Strategy?

Strategic is the conduct of drafting, implementing and evaluating cross-functional decisions that will enable an organization to achieve its long-term objectives. It is the process of specifying the organization's mission, vision and objectives, developing policies and plans, often in terms of projects and programs, which are designed to achieve these objectives, and then allocating resources to implement the policies and plans, projects and programs.

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Strategy formulation versus implementation

• Strategic planning process begins from the decisions regarding the company’s goals and objectives.

• CEO formulate the strategies for the attainment of the goals and objectives of the company.

• Plans to execute strategies effectively also need to be made.

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…continued.• Before endorsing the strategies and plans,

board need to scrutiny it either they are matching with the objective of the company or not.

• Probability of execution is other fact which needs care of the board.

• The mutual understanding of the strategies and plans by both board and the CEO can make good environment for execution.

• The assumption upon which the strategies and plans are based also need to tracked to assess the relevance and validity.

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Search for a sustainable competitive advantage

• The board and the CEO always need to remain with their vigil eye for search of sustainable and competitive advantage of the company.

• They always need to be ready to adopt new changes.

• The market and other environment can compel to take step both forward or backward.

• So strategies are always in changing nature.

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Changing nature of Strategies• The first movement in seventies and eighties

focused on– Diversification– Decentralization

• In second half of the last century, concept was changed and pressure for focus was started.

• Development of science and technology basically electronics and information technology changed all existing trend.

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Current Strategic Issue• Restructuring via merger and acquisitions• Knowing the results of the company

became the oversight responsibility of the board.

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When the board should intervene?

• Based on past events• Based on view of future• After loss of confidence.

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Any Questions?

Thank You

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