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Corporate Governance and Board of Directors

Increase of public awareness regarding corporate governance has increased since well
publicize governance failure with Enron and WorldCom corporate scandals (Adams and
Hermalin et al., !!"#. $ood corporate governance constitutes characteristic such as
transparenc%, protection and enforceabilit% of rights of its sta&eholders. 'he board of
directors aligns the interest of management and its sta&eholders where the% oversee the
overall management performance and its integrit%, contributing to strateg% decisions and
replacing management when it is necessar% ((aassen, )***#. 'his paper begins with a brief
introductor% regarding what constitutes good corporate governance, followed b% the roles of
its board of directors and to what e+tend do the board of directors have influence over
strateg% ma&ing in a corporation. Evaluation of the different composition of board members
in ,nited -tates and (ala%sia will be made in order to view the possible differences and
similarities between compositions of board members of the two countries.
According to .ondon -toc& E+change governance report (!)#, in order to achieve
good corporate governance, it is important to establish a board that has the appropriate
balance of s&ills, e+perience, independence and &nowledge of the compan% which enable
them to perform their duties and responsibilities effectivel%. According to (aassen ()***#, he
discusses three obligations of the board members. /oard members have three roles which are
service, control and strategic roles in order to guide management to deal with the increasing
competitive and social conditions. -ervice roles entail the boards to focus on activities that
will help to aid the management with its initiation and implementation of strategic decisions.
'he board members monitors management team and represent the interest of its sta&eholders,
therefore corporates board perform controls roles in order to discipline and to align the
interest of management with its sta&eholders. In some e+treme circumstances where the CE0
and e+ecutives fail to maintain the interest of its sta&eholders, the board members are
obligated to replace CE0 and other e+ecutives. 'he control roles include the responsibilit% of
board members to select and hire a new CE0 and the% must continuousl% monitor and
reviews all of its top management decisions. 'he strategic roles include involvement in
aiding the management team to achieve the corporate ob1ectives. 2esponsible corporate board
must re3uire its management teams to produce a uni3ue and durable corporate strateg%,
where the board directors are responsible to review it regularl% to ensure its validit%. 'he
board members must evaluate and share with the management of the potential ris&s of each
strateg% and guide the management to align with the corporate vision and mission.
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4arious practical and theoretical perspectives on corporate governance have
encouraged corporate board members to be more participative in the strateg% ma&ing process.
-ta&eholders group has made a strong point where the% wish the corporation to be more
responsive to sta&eholder rights and wishes. In order to response to those pressures,
increasingl% board members are becoming more involved in compan% strateg% development,
implementation and communication. /oard members are encouraged to participate in the
strateg% ma&ing process because it helps to develop commitment and sense of ownership
among the board members. /esides that when board members have understanding of the
logic regarding the strateg%, the members will have more robust and constructive e+changes
which will aid the management to create a strateg% that will ma+imize its shareholders
wealth. 5revious literature discovers that there is a considerable difference in performance
where boards were able to create an actual impact on strategic decision ma&ing. /oard
members ma% have strategic e+perience or indirect strategic e+perience where the% have
access to information from their social connection with the other directors. 'his can enhance
board capabilit% to contribute to strategic decision ma&ing to improve corporate performance
((aassen, )***#. Hence, in order to maintain sta&eholder6s best interest, boards members
progressivel% influencing strateg% ma&ing decisions.
Corporate governance varies across the nations due to national differences in
structures of ownership and composition of boards of directors (.i, )**7#. According to
board structure and corporate performance stud% in (ala%sia (!!*#, its states that in
(ala%sia, board members have sizable ownership sta&es in the compan% due to high amount
of famil%8owned and managed companies compared to western developed countries such as
,nited states. In (ala%sia the board size is bigger compared to ,- who prefers a smaller
board composition. .arger boards are preferred in some countries as it gives greater
opportunities to access wider range of resources, provide different e+pertise and point of
views which will give greater management oversight (Abidin and 9amal et al.,!!*#.
Contrar% to ,- firms who prefer smaller boards because it enhances communication,
cohesiveness and co8ordination which increase efficienc% (:auzi and .oc&e, !)#. /oth
countries are moving towards a more independent board structure. (ost of the (ala%sians
companies li&e Am/an& practice non8dual leadership structure and most of the boards
members are non8e+ecutive directors (Abdullah, !!7#. ,- one8tier board structures are
converting towards a more independent board structure where there are more non8e+ecutive
directors. 'he Wall -treet ;ournal reported that <! percent of /er&shire Hathawa% Inc.
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board6s members are independent directors . Independent board leadership is receiving more
attention in ,- where CE0 and chairman role are being separated ((aassen, )***#.
/oard of directors is important component of corporate governance where it ensures
effective corporate governance (Abdullah, !!7#. ,nderstanding the roles of directors and the
decision ma&ing process distinguish good corporate governance from the rest. Corporate
governance is redefined due to the changes in e+pectation regarding the roles of corporation
in modern societ%. /oard members are obligated to ensure the strategic direction of the
compan%, enforcing corporate policies, setting the overall directions and monitoring the top
management (Adams and Hermalin et al., !!"#. Corporations all over the world is
transforming into more independent board structure in order to improve board processes and
decision ma&ing which will affect corporation overall performance (:auzi and .oc&e, !)#