Understanding Boards of Directors :
Boards of Directors comprise a collective group of people elected to represent or speak to the shareholders and oversee the management of a corporation.
They are very important assistant guides within the organization and make big decisions that ensure the company operates in the best interests of its stakeholders.
So what are the directors, roles, duties, and the need for independent directors? We cover it all in today's blog.
Types of Directors in a Company
In any company, there are several kinds of directors that exist and encompass the following:
1. Executive directors:
These are among the most outstanding human resource an organization possesses. They are practically and directly involved in core businesses and have intimate knowledge as well as follow through with day-to-day operations.
Most of them are strategically positioned to hold the CEO position or even the CFO within an organization.
They shall be tasked with responsibility regarding the implementation of a specific board strategy and be given the assurance that it works appropriately. They are accountable for an organizational performance report.
2. Non-Executive Directors :
A non-executive director is not involved in the day-to-day operation of the company. They add an element of independence to the board and, using their experience, guide the firm.
They will ensure that part of the considered decisions by the executive team is challenged, and the company will remain accountable.
3. Independent Directors:
Independent directors is one of the forms that non-executive directors may take. They have no association with the company.
This is because they neither have any direct financial interest nor any form of personal relationship that would tend to incline them to their service, colored judgment.
The independent directors will offer unprejudiced opinions, and they will contribute towards sound boardroom decisions, with all shareholders' interests being properly covered.
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Role of the Board of Directors
1. Strategic Over Sight
- Formulation of Mission and Vision:
Mention the company's purpose, goal, long-term objectives etc.
- Approving Strategic Plans:
Discussing and ratifying the plans submitted by the management to achieve the purpose of the company.
2. Financial Control
- Reviewing Financial Performance:
Mindful of periodical financial reports and statements to judge the health of the company.
- Approving Budget:
Discussion and ratification of yearly budget, major expense plans etc.
3. Risk Management
- Identify Risks:
There is an understanding and assessment of the risks facing the company.
- Implementation of Controls:
There are policies and procedures in place concerning managing risks that are appropriate to the organization.
4. Performance Monitoring
- Monitoring Management:
The Chief Executive Officer, and other senior officers are assessed which include developing performance measures.
- Succession planning:
There is adequate preparation in case of unforeseen exit of leaders
5. Ethics and Compliance
- Legal Compliance:
Adherence to all the laws, regulations as well as, industrial standards.
- Maintenance of Ethical Values:
Mandatory ethical practice in the organization and adherence to the code of conduct by the organization.
6. Stakeholder Interaction
- Shareholders' Communication:
Shareholding information and meeting their expectations.
- Interaction with Other Stakeholders:
Employees, Customers, Suppliers, and Community responsiveness while taking any decision.
7. Board of Development
- Appointment to Board:
Identifying people who possess expertise and skills to be on the board.
- Training and Induction :
They shall be indoctrinated to their assignment and the working of the company.
8. Committee Monitoring
- Committee Formation:
Specialized committees (audit, compensation, governance) are formed to concentrate their oversight in specific areas.
- Monitoring Committee Reports:
Tracking the work and advice of these committees.
9. Board Self-Assessment
- Board Performance Review:
Periodical review to know about the effectiveness of the board and to judge the scope of improvement.
- Board Operations Improvement:
Adjustments are done as per feedback to improve the working of the board.
10. Crisis Management
- Responding to Crises:
Capability of dealing with crises that might either harm the image or erode the solidity of the corporation.
- Strategic Judgment:
This is an ability to act when a situation calls for urgency or requires some special information.
These duties and responsibilities enable the board to function effectively for the organization's and other stakeholders' advantage.
Through these duties and roles, the board contributes to the survival and profitability of the firm for the long term.
Legal Duties of the Board of Directors
1. Duty of Care
- Informed Decision:
Decisions should be made based on the relevant information and appropriate critical thinking.
- Active Involvement:
They should attend board meetings regularly, participate in discussion, and see how the corporation does work.
2. Duty of Loyalty
- Conflict of Interest:
A director is expected to make decisions that will benefit the company at his best advantage while not engaging in activities wherein one's personal interest would appear to clash with that of the organization.
- Secrecy:
Directors have to maintain the secrecy of the organisation and cannot exploit such information for their personal benefits.
3. Compliance with Statutes
- Compliance with Statutes:
The directors are duty-bound to ensure that the company complies with the statutes and legislations concerning financial statements and proper corporate governance.
4. Duty of Care
- Act in Good Faith:
Directors have to carry out their duties in good faith.
It must not override the interest of its own welfare by being shrewd and preferring the directors' interests.
5. Accountability
- Reporting to Shareholders:
The report submitted to the shareholders should be correct and on time regarding the company's performance and governance.
By performing these legal duties, the boards safeguard the company's interest and that of the stakeholders and ensure adherence to the norms of law.
Importance of Independent Directors
Independent directors play a very significant role in ensuring the board does not lose its integrity.
In this regard, since they have no connection to the company, it is easier for them to shed their biases and raise questions whenever a decision needs to be posed.
It helps to balance the interests of management with those of shareholders, thus contributing to a healthier governance structure.
Moreover, the independent directors would be there to polish up the corporate image as well as the investors will have more confidence in the company.
Conclusion
In a nutshell, the board of directors is very crucial in taking a company towards success.
Through being aware of what differences exist between types of directors, what roles they play and what responsibilities they carry, one can appreciate just how critical they are in making effective governance possible.
Independent directors are critical in providing objectivity and accountability. A well-managed board is extremely influential in the performance of a company towards sustainable growth and success.
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