Art of Directorship

Kim Chawsu
Managing Partner
Katalysts Investment Group
Art of Directorship 1
Types of Directors
Director - a person appointed to serve on the board of an organization, such as
an institution or business.
Inside director - a director who, in addition to serving on the board, has a
meaningful connection to the organization
Outside director - a director who, other than serving on the board, has no
meaningful connections to the organization
Executive director - an inside director who is also an executive with the
organization. The term is also used, in a completely different sense, to refer to a
CEO
Non-executive director - a director who is not an executive with the organization
Shadow or de facto director - an individual who is not a named director but who
nevertheless directs or controls the organization
Nominee director - an individual who is appointed by a shareholder, creditor or
interest group (whether contractually or by resolution at a company meeting) and
who has a continuing loyalty to the appointor/s or other interest in the
appointing company
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Duties: Examples
governing the organization by establishing broad policies and setting
out strategic objectives;
selecting, appointing, supporting and reviewing the performance of
the chief executive
terminating the chief executive;
ensuring the availability of adequate financial resources;
approving annual budgets;
accounting to the stakeholders for the organization's performance;
setting the salaries, compensation and benefits of senior
management

Art of Directorship 5
Duties.ICAEW
The Companies Act 2006 sets out the seven general statutory duties of a director. These are listed below with some additional
commentary.
1. To act within powers (regulation 16). This requires a director to comply with the companys constitution and decisions made
under the constitution and to exercise the powers only for the reasons for which they were given.
2. To act in a way the director considers (in good faith) is most likely to promote the success of the company for the benefit of its
members as a whole (or, if relevant, other purposes specified in the constitution). (regulation 20-24). In performing this duty, a
director must have regard to all relevant matters, but the following are specifically identified in legislation:
the likely consequences of any decision in the long term;
the interests of the company's employees;
the need to foster the company's business relationships with suppliers, customers and others; the impact of the company's operations on the
community and the environment;
the desirability of the company maintaining a reputation for high standard business conduct; and the need to act fairly as between members of
the company.
3. To exercise independent judgment, that is, not to subordinate the directors power to the will of others. This does not prevent
directors from relying on advice, so long as they exercise their own judgement on whether or not to follow it.
4. To exercise reasonable care, skill and diligence (regulation 25). This requires a director to be diligent, careful and well informed
about the company's affairs. If a director has particular knowledge, skill or experience relevant to his function (for instance, is a
qualified accountant and acting as a finance director), expectations regarding what is reasonable will be judged accordingly
(regulation 25).

Art of Directorship 6
Duties.ICAEW
The Companies Act 2006 sets out the seven general statutory duties of a director. These
are listed below with some additional commentary.
1. To avoid conflicts (or possible conflicts) between the interests of the director and
those of the company (regulation 30-36). The prohibition will not apply if the company
consents (and consent meets the necessary formal requirements).
2. Not to accept benefits from third parties (ie a person other than the company) by
reason of being a director or doing anything as director (regulation 31). The company
may authorise acceptance (subject to its constitution), for instance to enable a
director to benefit from reasonable corporate hospitality; and
3. To declare any interest in a proposed transaction or arrangement (regulation 32-36).
The declaration must be made before the transaction is entered into and the
prohibition applies to indirect interests as well as direct interests.
In addition to these duties, a director has duties:
1. to consider or act in the interests of creditors (particularly in times of threatened
insolvency) (regulation 26)
2. to maintain confidentiality of the companys affairs (a duty which to a large extent
follows from the general duties outlined above).
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What are Directors responsibilities?
Duty Test for Whether Duty is Met Remedy

Loyalty fair process (approval by non injunction or damages

interested directors) or else burden
on directors to show entire fairness
Care business judgment rule none, except in very extreme cases.
In U.S., charter can eliminate
liability outside directors for breach
Disclosure disclose all material information corrective disclosure or damages
when seeking shareholder
approval, or when a conflict of
interest exists
Fiduciary no clear test; careful scrutiny of injunction or damages
decision process

Art of Directorship 8
 Board Effectiveness: What Should be Considered?
Board Structure &
Composition
Proper committees are in place
(e.g., audit, remuneration,
nomination)
Board size is optimal
Boards to include appropriate
mix of executive, non-executive
and independent directors
Board possesses the optimal mix
skills
What common challenges exist in each Category?
9
Board Effectiveness
Board Roles &
Director Duties
Boards role is clearly defined vis-
-vis management
Board understands its oversight
duties (esp. Risk & Control) and
has appropriate processes in
place
Directors understand duties and
responsibilities to the company
and shareholders
Art of Directorship
Board Functions &
Behaviors
Board discussions are candid with full
vetting of issues.
Board challenges management
effectively on issues.
Board working procedures are
effective (e.g., meeting proceedings,
frequency, formality)
Board conducts routine self-
evaluations of performance
Board offers routine training to
directors
Common Board Challenges Observed

Shareholders
Board acts as a Paper board Composed of family & insiders Lack of Financial & Risk literacy
Informal working procedures Board of Directors Narrow focus on financials only

Audit Other
Risk (Nom, Remun.,etc)
No or ineffective sub-committees Uninformed board poor Mgt information
No clear division btwn Board & Mgt
Management
Operations
Internal External
Audit Audit
Financial & Admin Management

Risk Management

Internal Control
What Type of Board Do You Have?

Low Involvement High Involvement

The Passive The Certifying The Engaged The Intervening The Operating
Board Board Board Board Board

At discretion of Certifies to SHs Provides insight, Intensely Makes key

the CEO that CEO meets advice & involved in decisions that
expectations support to decision-making mgmt. then
Limited activity
mgmt. around key implements
& participation Takes corrective
issues
action only as Understands its Fills gaps in
Limited
ultima ratio responsibility to Frequent & mgmt.
accountability
oversee mgmt. intense experience
Understands
Ratifies mgmt. meetings, often
role of ind. Guides & judges
preferences on short notice
directors the CEO
Informed about Has right skills
CEOs mix to add value
performance
Define roles and Source: HBR, David A. Nadler, Building
Better Boards
Establishes a responsibility of
succession plan board
Art vs. mgmt.
of Directorship 11
The Role of the Board

Accountability Policy Formulation

Accountability to the Company, regulators, Creating vision and values

External focus
legislators and to stakeholders Developing corporate climate and
Protection of shareholder rights culture
Adequate transparency and disclosures - Monitoring the external environment
Financial and non-financial information Approving policy framework

Role of the
Board

Oversight and Control Strategy and Stewardship

Internal control and risk management Strategic thinking Setting Company
Financial management and reporting direction and risk appetite
Internal/External audit CEO/Executive selection and evaluation
Internal focus

Compliance Succession planning

Oversight of management performance

Short term Long term

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 The Role of the Board

Oversight Value Creation

Risk Risk management Strategy
oversight formulation

Financial Control/monitor Internal/external audit Approval of investments, mergers

Oversight performance policies and acquisitions

Ethics/Duties Create code of conduct (e.g. Protection of

values,behavior, conflict resolution) shareholder rights

Human Evaluation of management Compensation Approval of HR Succession

Resources performance guidelines policies planning

Organization Basic organizational design (e.g. dominant axis of management,

relations between holdings and subsidiaries)

Board Board roles, Board policies, Information needs Board calendar,

Structures committees proceedings Reporting lines Meeting agendas

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Board Balancing Act

Expectations of the society

Drive for shareholder value
for corporate responsibility

Micromanagement
Mode of CEO exit Detachment

Risk taking Tight financial control

Local cultural framework in

Global economic framework
globalizing markets

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 Best Practice vs. Reality

In Theory, the board is to: In practice:

Approve long-term strategy Set elsewhere

Discuss key issues Swept under the rug
Identify risks Not evaluated
Set KPIs Treated as secrets
Act on behalf of all SHs Individual SHs
Balance interests of StHs Individual SHs
Maximize LT SH value Maximize own gains

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 What role does Board play vs. Management?
Mgt Performs; Mgt Performs; Board Board Performs;
No Board Involement Oversees (and Approves) No Mgt Involvement

1 5 10
1.Board vs. Management
Setting Strategy
Shareholders
2.How do we
Resolving define Corporate
Administrative Matters Governance?

3. Managing Risks Board of Directors

4. Hiring Staff

5. Nominating Directors
Management
6. Preparing & Disclosing Financials

7. Making Investment & Operational Decisions

8. Setting Senior Executive Compensation

 Board - Audit Investment
No. Authori ty AGM General Committee Committee CEO Management
A. General Corporate Authorities

A.1 Ame ndme nts to a uthori ze d s ha re ca pi ta l x

De ci di ng on ma jor a cqui s i ti ons a nd di ve s ture s of othe r
A.2 x
e nti ti e s
A.4 Publ i c offe ri ng of s ha re s for BoP x
A.5 Obta i ni ng de bt fi na nci ng x (>$) x (<$)
Sample Authority Matrix
A.8 Sha re a cqui s i ti on a nd e qui ty pa rti ci pa ti on i n othe r e nti ti e s i nform x
A.10 Approva l of a nnua l re port a nd a ccounts
Shareholders
x re comme nd
A.11 x
De ci s i ons on di vi de nds a nd ne t profi t a l l oca ti ons i nform
How do we define Corporate Governance?
A.13 x
Ame ndme nts to BoP's Arti cl e s of As s oci a ti on or By-La ws

A.15 Appoi ntme nt of Boa rd of Di re ctors Me mbe rs x re comme nd

A.16 Appoi ntme nt of Cha i rma n, De puty Cha i rma n
Board of Directorsx
A.17 Approva l of fe e s for Di re ctors x re comme nd
A.20 Appoi ntme nt a nd re mune ra ti on of Externa l Audi tors x re comme nd re comme nd
B. Operational Authorities

B.2 Approvi ng corpora te s tra tegy x

B.4 Re vi s i on or re a l l oca ti on of a nnua l budge t Managementx (>$) x (<$) x (<$)
B.5 Approva l of uni t s pe ci fi c pl a ns a nd budge ts x x
B.12 Approva l to pa rti ci pa te of ne w de ve l opme nt proje cts x (>$) x (<$) x (<$)
B.21 Approvi ng Inve s tme nt Tra ns a cti ons x (>$) x (>$)
B.23 Approvi ng HR pol i ci e s a pprova l s a nd fra me works x
B.26 Appoi ntme nt of othe r non-Se ni or Ma na ge me nt s ta ff x x
B.27 Re mune ra ti on of CEO a nd Se ni or Exe cuti ve s x x
B.33 Cha nge s a nd i nve s tme nts to IT s ys tems x (>$) x (<$) x (<$)
IFC Corporate Governance Success Stories, MENA, 2010
Real Scenarios: Board Role & Operational Decision-Making
How would you handle these situations?
1. The Chairman of the Board of ABC Company requires the CFO to
send him all checks to be signed by him and he must sign off on
all new hire positions.
2. During the year, the CEO circulates numerous written resolutions
for the board directors to endorse key decisions taken by the
Chairman and key executives.
3. The Chairman has asked to modify the company Articles to setup
an Operations Committee which has the power to make key
decisions on behalf of the board it deems necessary, in order to
make more efficient decisions.
4. The Audit Committee of this company met 40 times during the
year, to increase focus on internal audit issues.
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18
Draw a Clear Line Between Board and Mgmt. Duties
For example
How do we define Corporate Governance?
Management: Board:
Develops/recommends strategic Approves strategic direction
direction
Develops/recommends business Approves business plans and
Shareholders
plans and budgets budgets
Develops effective executive board Organizes work of the board
or mgmt. team Board of Directors
Carries out corporate activities to Monitors and guides managerial
achieve corporate strategy and performance
business plans Management

Nose In Hands Out!

 Client Example: Board Roles & Responsibilities
Strategy: Approve and monitor the Companys long-term strategic objectives and management
business plans
Risk Appetite: Set the risk appetite for the Company, including specific targets, caps, or indicators
Monitor Performance: Monitor the overall performance of the Companys progress towards its
strategic objectives and variance from its defined risk appetite.
Risk Management: Oversee and approve the risk management framework
Senior Mgt Appointments: At the recommendation of the Chief Executive Officer, approve the
appointment and dismissal of the Chief Risk Officer and Chief Audit Officer / Internal Auditor.
CEO Appointment: Appoint and, as necessary, dismiss the Chief Executive Officer.
Financial Reporting: Oversee the integrity of the financial statements
External Audit: Oversee the performance, qualifications, and independence of the external auditor
Internal Audit: Oversee the performance of the internal audit function.
Internal Controls: Oversee the internal control framework
HR Policies: Oversee and approve the human resource policies.

Art of Directorship 20
 Client Example: Board Roles & Responsibilities (continued)
Business & Credit Decisions: Make decisions on major business matters and credit
applications as per the defined Authority Matrix.
Executive Remuneration: Determine the remuneration and incentive schemes,
including key performance indicators, for senior executives.
Executive Performance: Evaluate the overall performance of key senior executives.
Succession Plans: Develop succession plans for Chairman and Senior Executives as
needed
Future Board Nominations: Identify and recommend potential Board members for
election.
Board Remuneration: Recommend the Board remuneration policy for shareholder
approval.
Board Evaluation: Evaluate the overall performance and effectiveness of the Board
Corporate Governance: Oversee the Companys corporate governance framework

Art of Directorship 21
 Client Example: Board Roles & Responsibilities (continued)

Companys Core Values: Set the Companys values and standards and ensure that
obligations to shareholders and other stakeholders are understood and met.
Code of Conduct: Ensure stakeholder interests are considered and the Company
conducts its business in a socially responsible manner to the extent practical.
Compliance: Ensure that the Company complies with the requirements of the law and
rules, regulations, directives.

Art of Directorship 22