CORPORATE STRATEGY AND GOVERNANCE a must read

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DEPARTMENT OF BUSINESS AND
MANAGEMENT STUDIES
PROGRAMME: MBA STRATEGIC MANAGEMENT AND MSc.
STRATEGIC HUMAN RESOURCE MANAGEMENT
COURSE TITLE: CORPORATE STRATEGY AND GOVERNANCE
COURSE CODE: STMA611
TOTAL CREDITS: 3
BY
Mr. NGANG PEREZ (MAJOR 1)
PAN AFRICAN INSTITUTE FOR DEVELOPMENT
-WEST AFRICA (PAID-WA) BUEA
LECTURE NOTES FOR CORPORATE
STRATEGY AND GOVERNANCE

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LECTURE NOTES FOR CORPORATE STRATEGY AND GOVERNANCE
PROGRAMME: MBA Strategic Management and MSc. Strategic Human
Resource Management
COURSE TITLE: Corporate Strategy and Governance
COURSE CODE: STMA611
TOTAL CREDIT: 3
TOTAL LECTURE HOURS: 15
LECTURER: NGANG Perez (Major 1)
A. COURSE OVERVIEW AND OUTLINE
1. Course Description: This course focuses on the design and implementation of innovative
corporate and businesses unit strategies that create sustainable competitive advantage in
increasingly uncertain and complex environments. Participants will learn how shareholders
(owners) and stakeholders (others with interest) can ensure that managers develop and
implement strategic decisions in the best interests of the shareholders (owners) and not be
primarily self-serving (working for the best interests of managers only, to the detriment of
stakeholders).
2. COURSE OBJECTIVES: By the end of this course, student should be able to:
• Pedagogic Goal: The students are able to develop skills and the capacity
to analyze, evaluate and formulate strategy at the corporate level void of
conflict between the stakeholders
• Pedagogic Objectives
➢ conceptualize and implement appropriate corporate strategies for
enterprises at different situation as the need arises
➢ Students identify and assess the various types of strategies available to
govern the corporation effectively
PAN AFRICAN INSTITUTE FOR DEVELOPMENT-
WEST AFRICA (PAID-WA) BUEA

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➢ Students learn about possible financing options.
• Learning Objectives: By the end of this course, student should be able to:
➢ Students are able to link corporate strategy to corporate performance
➢ Relate the various organizational challenges in companies to poor design
and implementation of corporate strategy.
➢ Students learn the importance of corporate strategy and governance to
industry development as well nation building.
3. COURSE SCHEDULE AND TOPICS
This course will cover the following topics in 5 learning sessions with one session per week as
follows:
Week 1: Session 1/Chapter 1: The Basics of Corporate Strategy and Governance
Topics
• What is Strategy?
• What is Governance?
• Why Corporate Governance?
• The Complexity of Corporate Governance
• The Clash of Interest in Corporate Governance
• Review Questions
Week 2: Session 2/Chapter 2: The Nature of and Purpose of Corporations
Date:
Topics
• The Nature of Corporation
• Firms’ Objectives, Risks and return
• Centralization of Management
• Enterprise Protection
• Liquidity of Ownership
• The Concept of Limited Liability
Week 3: Session 3/Chapter 3: The Board Of Directors In Corporate Governance
Date:
Topics
• Elements of Good Corporate Governance
• The Role of Directors
• Types of Board
• Types of Directors

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• Board Composition
• Board Processes
Week 4: Session 4/Chapter 4: Theories of Corporate Governance and the Environment
Date:
Topics
• Theories of Corporate Governance
✓ Agency Theory (Jensen and Meckling, 1976).
✓ Transaction Cost Theory (Coase 1937)
✓ Stakeholder Theory (Freeman 1984)
✓ Resource Dependence Theory (Pfeﬀer 1972)
• Principles of Environmental Management in Corporate Governance
✓ Legal Principles of Corporate Governance as Basis for Environmental Management
Week 5: Session 5/Chapter 5: GENERAL REVISION
Date:
Topics
4. General Course Review and Final Exam Preparation
Date:
Topics
• Chapter 1: The Basics of Corporate Strategy and Governance
• Chapter 2: The Nature of and Purpose of Corporations
• Chapter 3: The Board Of Directors In Corporate Governance
• Chapter 4: Theories of Corporate Governance and the Environment
• Chapter 5: General Revision
5. Other Requirements
➢ Required Text Books or Articles
1) Johnson, G. and Scholes, K., (1999), Exploring Corporate Strategy, 5th edn,
Prentice Hall, London.
2) Eldenburg, Leslie, Benjamin E. Hermalin, Michael S. Weisbach, and Marta
Wosi´ nska, (2003) “Governance, Performance Objectives and Organizational
Form: Evidence from Hospitals,” Journal of Corporate Finance
3) Grossman, Sanford and Oliver D. Hart, (1983) “An Analysis of the Principal
Agent Problem,” Econometrica, Vol. 51, 7–46.

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4) Aghion, Philippe and Benjamin E. Hermalin, (1990), “Legal Restrictions on
Private Contracts Can Enhance Efficiency,” Journal of Law, Economics, and
Organization, Vol 6 (2), 381–409.
➢ Required Web links
1) http://faculty.haas.berkeley.edu/hermalin
2) http://www.mykasnebnotes.com
B. COURSE EVALUATION
• Written Assignment 15%
• Class Attendance 10%
• Discussion and Class Participation 5%
• Final Exams taken on Campus 70% total 100%
C. LECTURE NOTES AND PRESENTATION (Next Page)

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WEEK 1:
SESSION 1/CHAPTER 1: THE BASICS OF CORPORATE STRATEGY AND
GOVERNANCE
1.0 Brief Introduction: The modern business world now recognizes the importance of strategic
issues and the contribution of strategic management to business success. While this has many
benefits it also brings many problems. It could be argued that ‘strategy’ (or ‘strategic’) is the
most overused/misused phrase in business today. Everybody seems to have a ‘strategy’ for
everything. By attaching the term ‘strategy’ to an activity, it somehow becomes more important
– “more grand” – but in reality very little actually gets done! To illustrate this, the lecturer recalls
the recent experience of sitting through a seemingly endless meeting, listening to people talking
on-and-on about ‘strategy’ or the need for a strategic view. Finally, someone said something
sensible; ‘… there’s too much strategy and not enough people doing things!’ This blunt comment
is memorable for two reasons. Firstly, it ended a tedious meeting. Secondly, and more
importantly, it illustrated a key point: strategy must lead to action, not be a substitute for it.
Ultimately, all organizations need ‘people doing things’. The goal of strategy is to ensure that
they are doing the right things. These actions need to be coordinated, efficiently executed and
focused on meeting customer need.
1.1 PEDAGOGIC OBJECTIVES
➢ By the end of this session, students should be able to appraise objectively and rationally
the existence and implementation of the various strategies in organizations
1.2 LEARNING OBJECTIVES
➢ By the end of this session, students should demonstrate actual knowledge of what a
corporate strategy is all about. They are expected to establish reasons why Corporate Governance
is imperative and misconceptions that go alongside the concept.
1.3 DEFINITION OF KEY TERMS
(a) Strategy: Strategy is a high level plan of action to achieve one or more goals under conditions
of uncertainty. Strategy is important because the resources available to achieve these goals are
usually limited.
(b) Governance: Governance refers to a number of institutions that serve to regulate how a given
set of individuals manage other individuals’ property (where property can be both tangible—e.g.,
physical assets and money—and intangible—e.g., corporate reputation and human capital).

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1.4 THE BASICS OF CORPORATE STRATEGY AND GOVERNANCE
This first topic of the course shall cover the following subtopics which are (a) what is strategy, (b)
What is Governance, (c) Why Corporate Governance?, (d) The Complexity of Corporate
Governance and (e) The Clash of Interest in Corporate Governance.
1.4.1 What is Strategy?
Over the years, many definitions of ‘strategy’ have been developed and close examination of such
definitions tends to converge on the following – strategy is a high level plan of action to achieve
one or more goals under conditions of uncertainty. Strategy is important because the resources
available to achieve these goals are usually limited. Strategy generally involves setting goals,
determining actions to achieve the goals, and mobilizing resources to execute the actions. A
strategy describes how the ends (goals) will be achieved by the means (resources). Strategy can be
intended or can emerge as a pattern of activity as the organization adapts to its environment or
competes. It involves activities such as strategic planning and strategic thinking.
● Business definition: A business strategy is defining the business we are in. It is concerned with
making major decisions affecting the long-term direction of the business. Major business decisions
are by their very nature strategic, and tend to focus on the internal and external competitive
environment.
Major Characteristics of a Strategy
● Core competencies: The organization must be competitive now and in the future. Therefore,
strategic decisions need to define the basis of sustainable competitive advantage(s). What skills
and resources are needed in order to prosper within our defined markets and how can they be used
to optimum advantage? It is essential that this is considered over the long-term and aims to match
organizational capability with desired goals and the external environment. This process often has
major resource implications, both in terms of investment and rationalization.
● Integrative: Strategy has a wide ranging impact and therefore affects all functional areas within
the organization. Effective strategy is able to co-ordinate the different functions/activities within
the organization in order to achieve common goals. By taking a ‘whole-organization’s’ view of
the corporation, managers should be better able to target resources, eliminate waste and generate
synergy. Synergy occurs when the combined effect of functions/activities is greater than their
individual contribution. It is vital that business leaders articulate a common vision and sense of
purpose, in order to achieve an integrative approach.
● Consistency of approach: Strategy should provide a consistency of approach, and offer a focus
to the organization. Tactical activities may change and be adapted readily in response to market
conditions, but strategic direction should remain constant. The process aims to specify corporate
objectives and establish ways of achieving such objectives. The intent is to react to, and of course

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influence, the competitive environment to the advantage of the organization. Any such advantage
must be sustained over the long-term, but be flexible enough to adapt and develop as required.
Note, a strategy and a corporate/strategic plan are not one and the same. Strategy defines the
general concepts of future competitive advantage and reflects intent, whereas a strategic plan
specifies the selection, sequence, resources, timing and specific objectives required to achieve the
strategy.
1.4.2 What is Governance?
Governance refers to a number of institutions that serve to regulate how a given set of individuals
manage other individuals’ property (where property can be both tangible—e.g., physical assets
and money—and intangible—e.g., corporate reputation and human capital). Governance issues
arise in many settings. For instance, politicians manage state property. A clerk in a store manages
property belonging to the store’s owner. And the management team of a large corporation manage
property belonging to investors or shareholders.
What are some of the concerns when the people managing the property are not the same as the
people who own the property? As long as 1776, Adam Smith offered one concern:
“The directors of [joint stock] companies, however, being the managers rather of other peoples’
money than of their own, it cannot well be expected, that they should watch over it with the same
anxious vigilance [as owners] . . . Negligence and profusion, therefore, must always prevail, more
of less, in the management of the affairs of such a company (Smith, 1776, p. 700).”
Other potential problems are: (Why Corporate Governance?)
1. Theft: The managers can simply takeaway property finance without permission.
2. Misdirected effort: The managers can mismanage the property. For instance, they can
fail to work hard at utilizing the property to generate the largest possible returns. Or they
can utilize the property in ways that are non-optimal for the owners. While such
misdirected effort can be seen as a form of theft it is generally seen in the literature as a
separate problem, known as moral hazard. That is, moral hazard is the problem that
potentially arises when the preferences of the owners with respect to the managers’
actions do not coincide with the managers’ preferences.
3. Misinformation: Usually, the owners retain certain control rights over their property;
that is, the managers’ ability to manage the property is rarely absolute. For instance,
shareholders (owners) of a corporation retain the right to sell their shares (property). The
proper exercise of these retained control rights often depends on the managers’ providing
the owners with accurate information about the property. For instance, shareholders often
rely on management to provide an accurate picture of their company’s status, so that they
know whether or not they wish to sell their shares. If management misleads or
misinforms owners, then owners are likely to keep their shares when they would have
preferred to sell them.

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4. Incompetence: Even if the managers are honest, work hard, and keep the owners
accurately apprised of relevant information, there will still be a problem if the managers
are not the most competent people to be managing the property. Thus, one governance
issue is determining whether the managers in place are the best available managers for
the property or whether they should be replaced.
5. Conflicting objectives: Sometimes governance issues arise because the property owners
are themselves divided over how they would like to see the property used. If some subset
of the owners are also the managers or have greater power over the managers than do the
other owners, then problems can arise. For instance, both shareholders and debtholders
have ownership claims on the returns of the firm. But, barring certain debt covenants, it is
the shareholders who have the greater control over management. Shareholders and
debtholders do not always agree about what the proper strategy of the firm should be;
shareholders are typically more willing to take risks than debtholders. Such conflicts are
known as asset substitution problems.
1.4.3 The Complexity of Corporate Governance
As should be clear by now, governance issues arise anytime owners and managers are distinct
parties. At a local level, the issues faced when someone hires a domestic servant to do work in his
house are the same as those faced by the board of directors of a Fortune 500 company when hiring
a CEO (chief executive officer). On the other hand, there are certainly very salient differences as
well.
Beyond the obvious differences of size, some fundamental differences have to do with the
corporate form itself. First, in most countries, there is a separate body of law, (corporate law), to
govern corporations. Second, a corporation has a different set of instruments with which to deal
with governance issues than domestic servant/master relationship; for example, a Fortune 500
company can issue its CEO stock options as an incentive, whereas the set of contingent forms of
compensation available for a domestic servant are more limited. Third, the corporation is, itself, a
response to governance issues that arise with large and complex organizations.
This last point is worth emphasizing. There are many ways to organize an enterprise. For instance,
a firm could be a sole-proprietorship. Or it could be a partnership, as are many large law firms and
accounting firms. In some instances, it is feasible for the customers to be the owners, as in mutual
banks and insurance firms.
Indeed, for most of recorded history, there were no corporations. Starting in medieval Italy,
however, various organizational forms emerged that foreshadowed the corporate form. The first
joint-stock companies were established in the early 1600s: The (English) East India Company, for
example, was chartered by Elizabeth I in 1600 and the Dutch East India Company converted to
the joint-stock form in 1602 (Baskin and Miranti, 1997).
Why did corporations emerge? Part of the answer is that they proved to be an efficient means of
attracting large amounts of capital for the undertaking of large enterprises (e.g., the development

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of trade to the East Indies). However, that answer is incomplete. After all, the shareholders of the
East India Company could have simply formed a giant partnership. Hence, there must be more to
a corporation beyond its ability to attract capital.
One such additional attraction of the corporate form is the relation between the corporation’s risk,
particularly the risk of default (bankruptcy), and the investor’s risk. As we will explore in details
later, the corporate form of organization offers some attractive means of isolating the investor from
some of the risk imposed by the organization and, conversely, isolates the organization from some
of the risk imposed by the investor. However, this isolation will come at a cost.
Because the corporate form has many idiosyncratic features relative to other organizational forms,
it is worth studying corporate governance as distinct from governance more generally. On the other
hand, as noted, there is considerable commonality among governance issues in many spheres.
Hence, while these lectures will focus on corporate governance, they will certainly touch on some
general aspects of governance as well.
1.4.4 The Clash of Interest in Corporate Governance
Our study of corporate governance begins with the question of why we have corporations. As
mentioned previously, the corporate form of organization provides a means of protecting a
corporation’s owners from some risk that they would otherwise face. It is also true that the
corporate form protects the corporation from some of the risk that could otherwise be passed to it
from its owners.
Having established rationales for corporations, we turn to the financing issue; in particular the
debt-vs.-equity issue. The Modigliani-Miller Theorem tells us that, in a highly stylized world
without taxes, the value of the firm is independent of the division of claims into debt and equity
(Modigliani and Miller, 1958). The possibility of asset substitution and signaling, however, take
us from this stylized world and provide insights into why financing is done the way it is. As we
will see, however, financing decisions can also be affected by the agency problems faced by the
corporation.
Agency refers to situations in which one party, known as the agent, is employed by another party,
known as the principal and the two parties have different preferences concerning what actions the
agent takes and what information he provides. Much of governance is concerned with how the
principal (e.g., shareholders) can align the agent’s (e.g., ceo’s) incentives with their own. One way
to align the principal and agent’s interests is for the principal to monitor the agent. In corporate
governance, monitoring of top management is typically the function of three parties: the board of
directors, the security markets, and existing or potential large shareholders. Hence one issue is how
do these parties monitor and what are the consequences of their monitoring for the corporation.
Monitoring is not only done to align interests, but it is also done to make assessments about the
agent’s (e.g., management’s) ability. This type of monitoring has implications for the hiring and
firing of management and the dynamics of the board of directors’ composition.

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Beyond monitoring, another way the principal can attempt to improve the alignment between her
interests and the agent’s is by providing an incentive contract. Often these contracts are explicit,
and involve tying management’s compensation to the performance of the firm. For example, a
stock-option plan is a means of tying management’s compensation to the performance of the firm’s
stock.
Agents are not necessarily passive. A CEO, for instance, could attempt to entrench himself by
taking the company in ways that tend to make him irreplaceable. Or a CEO could attempt to
bargain for less intrusive monitoring (e.g., by getting the board of directors to agree to put friends
of his on the board).
Although these lectures will primarily consider governance at the corporate level, to the extent
they deal with specific functions, the focus will extend to cover the environment of corporate
governance in Cameroon. Some attention will, however, also be given to other institutions, such
as those in the developed world as well as emerging issues in Corporate governance.
1.5 REVIEW QUESTIONS
1. Define corporate governance and explain its complexity in today’s business environment
(20mks)
2. What is a strategy and what are the major characteristics of a good business strategy (20mks)
3. Why Corporate Governance? (20mks)
4. Much of governance is concerned with how the principal (e.g., shareholders) can align the
agent’s (e.g., ceo’s) incentives with their own. State and explain how principal and agent interest
can be aligned. (20mks)

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WEEK 2:
SESSION 2/CHAPTER 2: THE NATURE OF AND PURPOSE OF CORPORATIONS
2.0 Brief Introduction: A corporation is only one way in which a firm can be organized.
Alternatives include sole proprietorships (which could include family firms), and partnerships.
Why, then, do we need the corporate form of organization and what advantages does it offer
over other forms?
➢ By the end of this session, students should be able to understand the concept of
corporations as a form of business in today’s environment.
➢ By the end of this session, students should able to demonstrate actual knowledge of what
is a corporation, understand the economics of corporate governance, shareholders and their attitude
towards risk, the centralization of management and the many complicated issues that surrounds
the twenty fist century business corporations.
2.3 DEFINITION OF KEY TERM
(a) Corporation: As you will see latter, your answer will depend largely on whether you want a
legal answer or an economic answer. The legal answer is simply that a corporation is a business
entity that has been incorporated under the laws of the relevant jurisdiction.
Economically it is form of business. From an economic perspective, what is distinctive about a
corporation over other forms of business organizations is the way in which shareholders, the legal
owners of a corporation, and the corporation are isolated from each other with respect to certain
liabilities.
2.4 THE NATURE OF AND PURPOSE OF CORPORATIONS
This second topic of the course shall cover five subtopics which are (a) the nature of corporation,
(b) The Economics of Corporate Governance, (c) Centralization of Management, (d) International
Infrastructure Comparison (e) Protection of the Enterprise, (f) Asset Partitioning, (g) Liquidity of
Ownership and (h) Limited Liability.
2.4.1 The Nature of Corporation
What a corporation is depends largely on whether you want a legal answer or an economic answer.
The legal answer is simply that a corporation is a business entity that has been incorporated under
the laws of the relevant jurisdiction. For an entity to be incorporated, it must meet certain

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conditions spelled out by the relevant corporate law. For instance, in the state of Cameroon, to be
incorporated a firm must draft articles of incorporation satisfying certain requirements, including
the naming of an initial agent for service of process and setting the total number of shares the
corporation will be authorized to issue. You must also pay the country a 50,000 FRS filing fee
among other things
Economically, a corporation is a business enterprise with its objective that of profit maximization.
From an economic perspective, what is distinctive about a corporation over other forms of business
organizations is the way in which shareholders, the legal owners of a corporation, and the
corporation are isolated from each other with respect to certain liabilities. There are also other
features of a corporation that, although not necessarily distinct to a corporation, are nonetheless
easier to utilize for practical and legal reasons than they are with other forms. These features
include transferability of investor interests, an indefinite life span, and centralized management.
Under some jurisdictions there could be tax advantages as well.
To understand some of the advantages of a corporation, consider a situation in which an inventor
wishes to build a firm or company to market her new invention in Buea. If such a company requires
little capital, so that it is feasible for the inventor either to fund the company out of her pocket or
use retained earnings to quickly grow the company to the desired size, then the inventor has the
option of a sole proprietorship or incorporation. I will go deeper, but before that, what are the
advantages of incorporating?
Taking the example of the small firm mentioned last paragraph, possibly the owner gains some
limited liability protection should the firm be sued (e.g., her invention proves to be hazardous to
consumers’ health). Such added protection reduces the riskiness of her venture. However, whether
or not she gains this protection depends on how tightly she controls the firm and her ownership of
its shares. In a closely held corporation, it is often feasible to “pierce the corporate veil”; that is,
make the shareholders personally responsible for the payment of damages.
On the other hand, consumers, knowing that they have less ability to collect damages if they are
injured, could be less willing to buy from the company or buy only at a lower price. We will discuss
the costs and benefits of limited liability later.
Another advantage is that she can sell shares in the company. Because she can use the proceeds
from such sales to purchase other securities, she can diversify away some or most of her risk. That
is a benefit. The cost is that she will cease to own 100% of the firm, which means her ability to
control the firm will be less. She may have to accept management by others to induce investors to
purchase shares. In addition, because the problems that corporate governance is meant to
ameliorate typically create new problems, separating ownership from control will impose costs on
the firm that will be reflected in the price of the shares she sells; they will sell for less than their
corresponding expected present value were she to maintain a sole proprietorship. These are some
of the complexities in corporate governance as discussed earlier in chapter one.
Nevertheless, if the inventor needs to raise capital to launch her business, then she raises capital
by issuing claims on the future profits of the firm. She could retain sole proprietorship and attempt

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to get her funding from a bank loan or by issuing debt; that is, she can borrow the necessary funds.
Such borrowing, however, exposes her to risk should the firm default on its loans (fail to pay them
back). As a sole proprietorship, her creditors can seek to seize not only the assets of the firm, but
also her personal assets. However, if she had incorporated, then her personal assets could
potentially be protected from creditors
Alternatively, she can raise capital by forming a partnership. Would-be investors provide capital
and share to the company as partners. Partnerships, however, have a number of bad properties Vis-
a`-Vis the isolation of risk between individuals and the firm. First, partnership law may allow an
outside claimant (e.g., a creditor or a winning plaintiff in a law suit) to collect his due (money)
from just a subset of partners if the other partners are unable to pay their share. That is, losses need
not be share proportionately. Moreover, there is typically no limited liability. Further, it is difficult
to trade rights in a partnership, meaning that an investor can have difficulty liquidating his position
or diversifying his portfolio. In addition, each partner has management rights. Management by
committee can be less efficient than centralized, hierarchical management, so such
democratization of management rights could prove costly. A final problem is that, under some
circumstances, a partner can unilaterally impose liabilities on the partnership.
2.4.1.1 The Economics of Corporate Governance
In this section, we will review in details some relevant material from basic economics and relate
it to corporate governance for a better understanding of the concept. This will comprise a
considerable portion of this chapter.
a. The Concept of Economic Cost
In neoclassical economics, the firm is assumed to maximize the expected present value of profits.
What does this mean? In business there is no such thing as charity, any activity in business is
sponsored by the goal of making profit no matter the strategy adopted. See not a company to be
making a loss, when it decides to reduce the price of its products or when it decides to carry out a
corporate social responsibility. It may only be a long term monopolistic strategy or a customer
relationship strategy respectively. As concerns profits, recall that it is the difference between a
firm’s revenue, (what it takes in), and its costs (what she spent to produce). This costs should be
understood to be economic costs; that is, defined by the notion of opportunity costs. Opportunity
costs means that we measure the cost of an activity by the value of what we are forgoing by doing
that activity over the next best alternative. Often, but not always, this definition of cost coincides
with accounting cost. For example, If a firm makes purchase of raw materials worth 1Million frs,
then the opportunity cost is forgoing or saving the 1Million frs which is obviously worth the raw
material. Hope you understand? Sometimes, however, this definition differs from accounting cost.
One example is when there is an expenditure of resources that will be made regardless of what
activity is chosen. For instance, if a firm has signed a six-month unbreakable lease (rent payment),
then its rent payments this month are not an economic cost (they are a sunk expenditure; sometimes

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called a sunk cost). Another difference has to do with imputed costs: Sometimes a resource is used
for which there is no corresponding expenditure. For instance, a firm builds on land it already
owns. Because the building prevents other uses of the land, there is a cost, namely the value of
using that land for one of the other uses. An example of both sunk expenditures and opportunity
costs is the cost of using raw materials in inventory: Suppose, hypothetically, that a firm purchased
raw materials (e.g., copper wiring) at a price of 1000 FRS per unit. Suppose the market for the raw
material has adjusted, so now the price is 1,100 FRS per unit. Observe that the original price (1000
FRS) is now a sunk expenditure, the true (imputed) cost of using the raw materials is the new price
(1,100 FRS) because by using the materials the firm forgoes reselling the material for new price
per unit. Let’s progress a little further! But fear not the mathematical equations, they will only help
you understand the literature which is very necessary for a foundation to corporate governance.
b. Present Value
The notion of opportunity cost which we have just discussed, lies behind the idea of present value:
Suppose a firm can invest (spend) a hundred francs today in exchange for two hundred francs in a
year after. Is this a good investment or not? Well observe that an alternative for the firm is to put
the 100 FRS in the bank and earn interest (r), where (r) is the annual interest. Hence, if it takes this
alternative, it will have 100 FRS + (r) interest in a year. If the amount is greater than 100 + r, then
this a good investment (the return in a year outweighs the cost, which is forgoing 100 + r in a year).
If the amount is less than 100 + r, then this is a bad investment. Observe that if the amount is equal
to 100 + r, then we are indifferent. Equivalently, we can express this as saying that today the value
of a promise of 100 FRS in a year is 100 FRS divided by 1 multiplied by the interest.
Mathematically, this can be expressed as:
Where R = the amount invested
r = the annual interest
More generally, today’s value—the present value—of an amount of money to be received in a year
is 1/(1 + r) per 100 FRS to be received.
What if the 100 FRS were to be received in two years? Well the alternative is to leave the 100 FRS
in the bank for two years. At the end of one year, the firm will have 1 + r 100 FRS. In two years it
will earn another r of interest on the principal (the original 100 FRS) plus it will earn r2
in interest
on the interest it earned in the first year (i.e., it earns interest at the rate r on r dollars = r × r = r2
);
this is known as compounding. Hope its clear? I try to make it simple so that you can understand
what corporate decision making is all about.
Now adding this up, we have 1 + 2r + r2
100 FRS. Observe that amount equals (1 + r)2.
. More
generally, it can readily be shown that a 100 FRS put in the bank today will yield (1 + r)t
(100frs)
in t years. This analysis tells us that an amount of money to be received in t years has a present
value of

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per hundred frs today. In other words, we discount money to be received in t
years by the fraction in expression. We will not go further, this is not a corporate
finance class. However, the lecturer will advise that you revise your lecture
notes on corporate finance because we will later come back to this subsequently.
In business, decisions (corporate governance) are made based on financial calculations
c. Expected Value
Nevertheless, the future is typically unknown when it comes to business and there is, therefore,
uncertainty about future profits. In the language of probability theory, we can describe future
profits as a random variable or we can say that future profits are stochastic (i.e., random).
One way to value a random variable is to calculate its expected value. For random variables that
can take a countable number of values, the expected value is calculated as follows. Assume the
values the random variable X can possibly take can be enumerated as X1, X2, . . . , xN . Let πn be
the probability that the realized value is xn. For example, if X is the random variable “value of a
die after a single cast,” then xn = n, N = 6, and πn (the probability the die shows n dots) is 1/6 for
all n. The expected value of X, denoted EX, is defined to be
So if X is the random variable “value of a die after a single roll or cast,” then its expected value is
One way to interpret the expected value of a random variable is as follows. Consider T realizations
of the random variable (e.g., roll a die T times). The average value, x¯, of these realizations is
defined to be
Where xt is the realization of the random variable on the tth
repetition (e.g., on the tth
throw of the
die). The tth
time however is unknown. But it can be shown that as T gets large, the probability

17
that x¯, is not close to EX vanishes to zero; that is, the average converges to the expected value as
the sample size (i.e., T ) grows large.
This is important because it illustrate to you as strategic managers, the outcomes of the decision
you make. In business you cannot afford strategizing, but what is importance is the outcome of
your actions, which in reality is unknown.
Three important facts about expectation are:
1. If the random variable X can take only one value, ξ (i.e., X is a constant and not
random), then EX = ξ.
2. If X and Y are random variables, then E(X + Y ) = EX + EY ; that is, the expectation of
the sum of random variables equals the sum of the expectations of those random
variables.
3. If a and b are constants, then we can form from the random variable X a new random
variable W = aX + b; that is, the nth possible realization of W , wn, equals axn + b.
For a W formed in this way, EW = aEX + b. This fact can be summarized as the
expectation of an affine transformation of a random variable equals the same affine
transformation of the expectation of the random variable.
We can use the second fact to prove a simplified version of the Modigliani-Miller Theorem
(Modigliani and Miller, 1958).
Theorem 1 (Modigliani-Miller [simplified]) Consider a firm that will liquidate at a future
time and payout a total of R, where R is a non-negative random variable. Assume the firm
has both equity and debt, where the total face value of the debt is D. Then the value of the
firm today, which is the sum of the value of the equity and the value of the debt, is the same,
namely ER, regardless of the value of D; that is, the division of claims between debt and
equity is irrelevant to the value of the firm.
We will not go deeper, however the lecturer encourages all students to make further studies in
this line enquiry
2.4.1.2 Attitudes toward Risk
Consider two games of chance better known as gambling. In reality, business is gambling (but
in Cameroon gambling is illegal, however the state encourages Cameroonian citizens to play
Pari Foot, PMUC Tiercé and the US DV lottery by allowing such companies to operate and
sometimes buy advertising space on state media broadcaster CRTV) Don’t ask me why? That
is business politics. Back to our example, in game gamble one, you win 1,000,000 FRS if a
fair coin lands heads down and 0 FRS if it lands with the tail. In game gamble two, you win
500,000 FRS if the coin lands heads down and 499,998 FRS if it lands with the tail. Which
gamble would you rather play? The two examples illustrate risk in business decision

18
undertakings. Recall the law of finance which state, the higher the risk, the higher the return
and the lower the risk, the lower the return. Which gamble would you rather play? It is evident
that most people would elect the second gamble. Note, however, that the second gamble has a
lower expectation, while the first has a higher expectation, which could be translated to high
risk. The reason why most people choose the gamble with the lower expected value is that it
also appears less risky. Hence, when it comes to choosing among risky alternatives, most
individuals are concerned with risk as well as expected value (return).
One way to allow an individual’s preferences over risk to enter into our analysis is to assume
that what matters to an individual is not the amount of money he or she receives per se, but
the happiness or utility he or she derives from that money. A complete review of utility theory
is outside the scope of these lectures. Here, we are primarily concerned with expected utility.
Let U (y) be the amount of utility an individual gets from y dollars; that is, U (·) is utility
function. The function U (·) has the property that, if y > y, then U (y) > U (y ); that is, more
money leads to greater utility. If Y is a random variable that has possible realizations y1, . . .
, yN , where the probability that yn is realized is πn, then the individual’s expected utility is
A standard behavioral assumption is that decision makers are expected-utility maximizers; that
is, if given the choice between two gambles represented by random variables X and Y, a decision
maker with utility function U (·) will choose X if and only if the amount of money that, were to be
paid with certainty, would yield the decision maker the same expected utility as X; that is,
For any gamble X, we define the certainty
equivalent value, denoted CEX
Another way to describe the certainty equivalent value of a gamble is that it is the smallest amount
of money that the decision maker would be willing to accept in exchange for giving up the right
to play the gamble.
A standard assumption about individual decision makers is that their utility functions exhibit
diminishing marginal utility of money. Specifically, when ∆ > 0 it is a common increment, then
the individual has diminishing marginal utility if
And

19
In other words, giving someone an increment of (∆) increases his or her utility by the same or
greater when he or she is starting with less than when he or she is starting with more.
For example, the increase in your happiness going from an income of 50,000 FRS a year to an
income of 100,000 FRS is probably greater than the increase in your happiness going from an
income of 1,000,000 FRS to an income of 1,050,000 FRS. If the inequality in expression above
holds for all x and y pairs, x < y, then the decision maker has strictly diminishing marginal utility
of money
If a decision maker has diminishing marginal utility of money, then for any gamble X,
Moreover, if the decision maker has strictly diminishing marginal utility of money and X is not a
constant (i.e., X is a real gamble), then
Expression (1.6) can be read as saying that an individual with strictly diminishing marginal utility
of money would be willing to sell a true gamble, X, for less than its expected value. Let me ask,
why would he or she do this? The reason is simple. Because a diminishing marginal utility of
money induces a distaste for risk; under such a utility function the value put on smaller payoffs is
disproportionately large given their size, while the value put on larger payoffs is disproportionately
small given their size. A decision maker for whom expression (1.6) holds is said to be risk averse.
Note that risk aversion offers an explanation for the choices that people tend to make with respect
to the two gambles considered in the example above: In gamble one, you win 1,000,000 FRS if a
fair coin lands heads down and 0 FRS if it lands with the tail. In gamble two, you win 500,000
FRS if the coin lands heads down and 499,998 FRS if it lands with the tail. We will not go further
again, this is not a corporate finance lecture, but however it demonstrates the level of risk
associated to the decision that corporate executives make on daily basis for the survival of the
company.
Suppose, for instance, that the utility function were
And it is readily verified that this utility function exhibits strictly decreasing marginal utility of
money. What are the expected utilities offered by the two gamble below? Pay attention to the logic
and don’t be afraid of the mathematics

20
Because gamble two yields the larger expected utility, it will be preferred to gamble one. If, for all
gambles X, CEX = EX, then a decision maker is risk neutral. A risk-neutral decision maker does
not care about the risk inherent in a gamble he or she cares about its expected value only. It can be
shown that there is no loss of generality in taking a risk-neutral decision maker’s utility function
to be the identity function; that is, U (x) = x for a risk-neutral decision maker. While individuals
are typically thought to be risk averse, the security holders of a company are typically thought of
as risk neutral; even though the security holders are, of course, individuals. The reason for this
apparent contradiction is that security holders can typically diversify. Diversifying is, essentially,
following the adage “don’t put all your eggs in one basket,” meaning that you want to spread your
risk around. A complete study of diversification is beyond the scope of these notes, but the Section
below considers a simple example of diversification that illustrates how diversification can make
diversified security holders essentially risk neutral with respect to the behavior of the firms in
which they hold securities.
However some stakeholders cannot readily diversify. For instance, employees—especially
management—typically have considerable human capital invested in the firm; so much so, in fact,
that it is not feasible for them to diversify away that risk. Putting the last two insights together, it
is clear why, in most agency models of governance, the principal (e.g., shareholders) is assumed
to be risk neutral, while the agent (e.g., the CEO) is assumed to be risk averse.
2.4.2. Centralization of Management
Although most of these lectures will be concerned with the adverse consequences of the separation
of ownership and control, it is worthwhile to first ask why such a separation exists; in particular,
why is it advantageous to centralize management in the hands of a few?
As we saw, even if there is no need to attract capital, an entrepreneur will have a motive to sell
claims on her firm’s returns in order to diversify her own portfolio. If she does need to raise capital,
then she will have no choice but to sell claims on her firm’s returns. Either way, there are reasons
for a firm to end up with many claimants (shareholders)
Although all claimants could, in theory, form a giant committee to run the firm, such a practice
would have a number of drawbacks:
1. Coordination and communication among the committee members would impose
considerable cost on the organization. As anyone who has ever tried to schedule a committee
meeting knows, it takes a lot of effort to get even a modest-sized group of people together.
2. Conflict among claimants could be a problem. If some decisions advantage one group of
claimants over another, then it could be hard to reach agreement, which could impose costly
delays on decision making.

21
3. There can be a dilution of expertise. Some people are simply better at running firms than
others. Unless the set of claimants is limited to the best managers, there is the risk that the
expertise of the better managers is diluted by the ill-informed opinions of the worst managers.
4. Related to the last point, the people with expertise in running companies might not be the
people who wish to invest or who have invested in the firm. Hence, there could be “division
of labor” reasons for employing managers.
5. There could be inefficient duplication of effort; multiple individuals could, for instance,
do the same analysis.
6. Conversely, committees or teams can suffer from free riding; that is, each team member
is tempted to take it easy in the hopes that some other team member will do his work.
2.4.3. Protection of the Enterprise
If I go bankrupt, my creditors can seize the shares of stock I own (or have them sold and retain the
proceeds). What they can’t do, however, is to seize the proportion of the assets of the firms in
which I’ve invested and which corresponds to the proportion of my ownership of those firms. That
is, if I own 5% of some company, they can’t seize 5% of that company’s assets.
As Hansmann and Kraakman (2000a,b) argue, this can be an important protection. Moreover, it is
a protection that has three components:
1. As an individual, I cannot pledge the assets of the firm as collateral for personal loans. This
is true whether I am just a shareholder or the CEO.
2. My proportional ownership of the firm does not give my personal creditors a proportional
claim on the assets of the firm.
3. Because the firm is a “judicial person,” it can own property; that is, its property is its own
and partitioned from the property of its shareholders.
The point is that allowing a shareholder to pledge the firm’s assets to collateralize his personal
borrowing is a clear recipe for disaster. No one would invest if such pledging were allowed. Hence,
unless we protect the firm’s assets from the individual’s creditors, there can be no investment.
Without investment, it would often be impossible for firms to raise the capital they need.
What if we limited shareholders to pledging no more than a proportional amount of the firm’s
assets (for example, I owned 25% but pledged 50%)? This too would create problems. First, it
would be difficult to plan if, at any moment, some number of assets could be seized to satisfy
various shareholders’ creditors. Second, it would raise the cost of borrowing by the firm: Suppose
the firm suddenly needed a 100,000 FRS in capital. If none of the shareholders had pledged the
firm’s assets, then there is no risk in this loan: The firm’s return, will be more than enough to cover
the 100,000 FRS; moreover, the firm would still be worth more as an ongoing concern than
liquidated. However, if shareholders had pledged their share of the assets, then whatever risk they
have undertaken now passes to the firm, which would (i) raise its cost of debt because the lender
would demand a higher face value to compensate for this risk and (ii) incur additional costs as the

22
lender would need to assess what the risk pass-through was. Item (ii) could be prohibitively
expensive if there are a large number of shareholders.
Finally, if the company did not own its assets as a separate entity (i.e., a judicial person), then the
company couldn’t pledge those assets as collateral for borrowing (you can’t pledge property to
which you don’t have clear title), which would either preclude it borrowing or raise its cost of
borrowing (uncollateralized loans cost more than collateralized loans).
2.4.3.1 Asset Partitioning
As Hansmann and Kraakman (2000b) point out, asset partitioning issues also arise in contexts
other than those partitioning the private assets of investors and the assets of the firm. For instance,
consider an airline company, ‘hkair’, that decides to go into the car rental business. One option is
for ‘hkair’ to simply make the car rental business a division of ‘hkair’. Another option is to make
the car rental business a separate company whose stock is completely owned by ‘hkair’
(alternatively, make both the airline and the car rental company separate subsidiaries of single
holding company, the ‘hk’ group). Why have separate subsidiaries as such?
The answer is that by partitioning the assets of the car rental business from the airline in this way
(and vice versa), there is no question of the assets of one subsidiary being seized to pay the debts
incurred by the other. For example, suppose the car rental subsidiary is receiving an extended sales
credit by the automobile manufacturers. While the automobile manufacturers likely have a good
sense of the car rental business from their dealing with other car rental firms, they probably are
not up on the airline industry. Hence, they would have to do more checking and analysis before
extending credit to the car rental subsidiary if there were a risk that losses in the airline subsidiary
could lead to the seizure of assets in the car rental subsidiary or would otherwise imperil the car
rental subsidiary’s ability to repay its loans. In essence, subsidiaries function like fire doors in a
building—they keep problems from spreading from one business to another.
a. Liquidity of Ownership
An advantage of asset partitioning between owners’ private assets and those of the firm (assets of
the firm) is that it facilitates the trade of shares. If each owner’s private debts could spill over onto
the firm, then existing owners would want to vet any prospective owner carefully before allowing
him or her to purchase shares. This would be a big burden and would vastly increase the
transactions costs involved in trading shares.
A market with low transactions costs—that is, a liquid market—offers a number of advantages.
First, someone has to bear those transactions costs, so it makes shares less valuable and, thus, the
firm gets less capital from selling shares than it otherwise would. Moreover, it also increases the
risk associated with holding shares. Future events may cause me to want to sell shares (e.g., I lose
my job and need money for necessities). If markets are illiquid, then I risk delays in being able to
sell my shares. To the extent that I may need to cash out immediately, there is a risk that I will
need to be bear, thus compensated for bearing. This compensation will come in the form of lower

23
stock prices. Or, put differently, there is a liquidity premium; I am willing to pay more for liquid
assets than illiquid assets ceteris paribus.
2.4.5. Limited Liability
As noted earlier, limited liability is not essential for corporations to exist. Nonetheless, limited
liability can be a valuable restriction. The most compelling justification for limited liability is the
signaling model of Aghion and Hermalin (1990). In a signaling model, one party, the informed
party, knows payoff-relevant (strategic) information that another party, the uninformed party,
doesn’t know. For instance, the owner or manager of a firm could know more about how likely
the firm is to be successful than a potential lender does. Let’s call a firm that is very likely to be
successful a “good-type” firm and let’s call a firm that is unlikely to be successful a “bad-type”
firm. A potential lender doesn’t know if he is dealing with a good or bad-type firm. Because he
might be dealing with a bad-type firm which is more likely to fail to repay a loan, the lender will
demand a higher interest rate from any random firm than he would if he knew he was dealing with
a good-type firm (i.e., one likely to repay the loan). In an attempt to get a more favorable interest
rate, a good-type firm will seek to signal that she (the firm) is the good type by offering terms that,
should they convince the lender that the firm is good, will result in a lower interest rate than it
would get if it failed to convince the lender. Importantly, these terms have to be such that a bad-
type firm would be unwilling to mimic a good-type firm; that is, to be a successful signal, the terms
a good-type firm offers must be such that a bad-type firm would not want to offer them even if
offering them fooled the lender into thinking it was a good-type firm.
A problem with signaling in this way, however, is that the good-type could have to offer an
excessive amount of collateral in equilibrium. Unfortunately, barring and legal limitation, such as
limited liability, makes a good-type firm be unable do anything. If, however, there is a limited
liability law, so that there is a limit on the amount of collateral that can be pledged, then a more
efficient outcome can be attained: Because, given the law, not offering an excessive amount of
collateral is no longer evidence that a firm is a bad-type firm, a good-type firm can offer less
collateral without being seen to be a bad-type firm.
Finally in terms of corporations, limited liability precludes firms from pledging the assets of their
shareholders as collateral; that is, there is a limit on the amount of collateral that can be pledged,
which could yield more efficient outcomes than would otherwise be possible.
1. Write short notes on the following and explain with use of examples how they are related
to corporate governance.
a. Economic Cost (5mks)
b. Present Value (5mks)
c. Expected Value (5mks)
d. Attitude towards Risk (5mks)

24
2. Consider two games of chance such that, in game gamble one, you win 1,000,000 FRS if a
fair coin lands heads down and 0 FRS if it lands with the tail. In game gamble two, you
win 500,000 FRS if the coin lands heads down and 499,998 FRS if it lands with the tail.
Which gamble would you rather play and why? (20mks)
3. Although all claimants could, in theory, form a giant committee to run the firm, such a
practice would have a number of drawbacks: State and explain the challenges that
shareholders will encounter should they all decide to manage the affairs of their business.
4. If a shareholder owns 5% of a company share, his creditors can’t seize 5% of that
company’s assets. True or False? Justify your strong points with use of examples. (20mks)
5. Asset partitioning in business is an all-time strategic issue to shareholders as well as
lenders. Why have separate subsidiaries even when it’s the same owner operating similar
or different lines of business? (20mks)
6. The signaling model. Explain this concept with use of an example (10mks)

25
WEEK 3:
SESSION 3/ CHAPTER 3 THE BOARD OF DIRECTORS IN CORPORATE
GOVERNANCE
3.0 Brief Introduction: If a country does not have a reputation for strong corporate governance
practices, capital will flow elsewhere. If investors are not confident with the level of disclosure,
capital will flow elsewhere. If a country opts for lax accounting and reporting standards, capital
will flow elsewhere. All enterprises in that country – regardless of how steadfast a particular
company’s practices may be – suffer the consequences. The Board of Directors therefore become
very important in the face of increasing business uncertainty.
By the end of this session, students should be able to get a full comprehension of the way a
company creates value through the configuration and coordination of its board of directors’
activities
By the end of this session, students should be able to get a broad understanding of the elements of
Good Corporate Governance, the role of directors, types of boards and types of directors in the
board of directors. Also, they will be able to show prove of good knowledge of the board
composition and process in the board.
3.3 DEFINITION OF KEY TERMS/CONCEPTS
(a) Board of Directors (BODs): The Board of Directors is a group of corporate officials elected
as or elected to act as representatives of the shareholders to establish corporate management related
policy and make discussions on major company issue. They oversea the activities of a company
which can be either for profit business, nonprofit organization or a government agency.
(b) Shareholders: A shareholder is any person, company or other institution that legally owns one
or more shares of a company’s stock be it public or private organization. Because shareholders are
a company’s owners. They reap the benefits of the company’s success in the form of dividends or
increase stock valuation.
3.4 THE BOARD OF DIRECTORS IN CORPORATE GOVERNANCE
The contribution of directors on the Board of companies is critical for ensuring appropriate
directions with regard to leadership, vision, strategy, policies, monitoring, supervision,
accountability to shareholders and other stakeholders, and to achieving greater levels of

26
performance on a sustained basis as well as adherence to the best practices of corporate
governance.
3.4.1 Elements of Good Corporate Governance
Good governance is not simply about corporate excellence. It is the key to economic and social
transformation. The corporation of today are no longer sheer economic entities. These are the
engines of economic and social transformation. Some of the important elements of good
corporate governance are discussed as under:
3.4.1.1. Role and powers of Board
Good governance is decisively the manifestation of personal beliefs and values which configure
the organizational values, beliefs and actions of its Board. The Board as a main functionary is
primary responsible to ensure value creation for its stakeholders. The absence of clearly designated
role and powers of Board weakens accountability mechanism and threatens the achievement of
organizational goals. Therefore, the foremost requirement of good governance is the clear
identification of powers, roles, responsibilities and accountability of the Board, CEO, and the
Chairman of the Board. The role of the Board should be clearly documented in a Board Charter.
3.4.1.2. Legislation
Clear and unambiguous legislation and regulations are fundamental to effective corporate
governance. Legislation that requires continuing legal interpretation or is difficult to interpret on a
day-to-day basis can be subject to deliberate manipulation or inadvertent misinterpretation.
3.4.1.3. Management Environment
Management environment includes setting-up of clear objectives and appropriate ethical
framework, establishing due processes, providing for transparency and clear enunciation of
responsibility and accountability, implementing sound business planning, encouraging business
risk assessment, having right people and right skill for the jobs, establishing clear boundaries for
acceptable behaviour, establishing performance evaluation measures and evaluating performance
and sufficiently recognizing individual and group contribution.
3.4.1.4. Board skills
To be able to undertake its functions efficiently and effectively, the Board must possess the
necessary blend of qualities, skills, knowledge and experience. Each of the directors should make
quality contribution. A Board should have a mix of the following skills, knowledge and
experience:
→ Operational or technical expertise, commitment to establish leadership;
→ Financial skills;
→ Legal skills; and
→ Knowledge of Government and regulatory requirement.

27
3.4.1.5. Board appointments
To ensure that the most competent people are appointed in the Board, the Board positions should
be filled through the process of extensive search. A well-defined and open procedure must be in
place for reappointments as well as for appointment of new directors. Appointment mechanism
should satisfy all statutory and administrative requirements. High on the priority should be an
understanding of skill requirements of the Board particularly at the time of making a choice for
appointing a new director. All new directors should be provided with a letter of appointment setting
out in detail their duties and responsibilities.
3.4.1.6. Board induction and training
Directors must have a broad understanding of the area of operation of the company‘s business,
corporate strategy and challenges being faced by the Board. Attendance at continuing education
and professional development programs is essential to ensure that directors remain abreast of all
developments, which are or may impact on their corporate governance and other related duties.
3.4.1.7. Board independence
Independent Board is essential for sound corporate governance. This goal may be achieved by
associating sufficient number of independent directors with the Board. Independence of directors
would ensure that there are no actual or perceived conflicts of interest. It also ensures that the
Board is effective in supervising and, where necessary, challenging the activities of management.
The Board needs to be capable of assessing the performance of managers with an objective
perspective. Accordingly, the majority of Board members should be independent of both the
management team and any commercial dealings with the company.
3.4.1.8. Board meetings
Directors must devote sufficient time and give due attention to meet their obligations. Attending
Board meetings regularly and preparing thoroughly before entering the Boardroom increases the
quality of interaction at Board meetings. Board meetings are the forums for Board decision-
making. These meetings enable directors to discharge their responsibilities. The effectiveness of
Board meetings is dependent on carefully planned agendas and providing relevant papers and
materials to directors sufficiently prior to Board meetings.
3.4.1.9. Code of conduct
It is essential that the organization‘s explicitly prescribed norms of ethical practices and code of
conduct are communicated to all stakeholders and are clearly understood and followed by each
member of the organization. Systems should be in place to periodically measure, evaluate and if
possible recognize the adherence to code of conduct.

28
3.4.1.10. Strategy setting
The objectives of the company must be clearly documented in a long-term corporate strategy
including an annual business plan together with achievable and measurable performance targets
and milestones.
3.4.1.11. Business and community obligations
Though basic activity of a business entity is inherently commercial yet it must also take care of
community‘s obligations. Commercial objectives and community service obligations should be
clearly documented after approval by the Board. The stakeholders must be informed about the
proposed and ongoing initiatives taken to meet the community obligations.
3.4.1.12. Financial and operational reporting
The Board requires comprehensive, regular, reliable, timely, correct and relevant information in a
form and of a quality that is appropriate to discharge its function of monitoring corporate
performance. For this purpose, clearly defined performance measures - financial and non-financial
should be prescribed which would add to the efficiency and effectiveness of the organization.
The reports and information provided by the management must be comprehensive but not so
extensive and detailed as to hamper comprehension of the key issues. The reports should be
available to Board members well in advance to allow informed decision-making. Reporting should
include status report about the state of implementation to facilitate the monitoring of the progress
of all significant Board approved initiatives.
3.4.1.13. Monitoring the Board performance
The Board must monitor and evaluate its combined performance and also that of individual
directors at periodic intervals, using key performance indicators besides peer review. The Board
should establish an appropriate mechanism for reporting the results of Board‘s performance
evaluation results.
3.4.1.14. Audit Committees
The Audit Committee is inter alia (among other things) responsible for liaison with the
management; internal and statutory auditors, reviewing the adequacy of internal control and
compliance with significant policies and procedures, reporting to the Board on the key issues. The
quality of Audit Committee significantly contributes to the governance of the company.
3.4.1.15. Risk management
Risk is an important element of corporate functioning and governance. There should be a
clearly established process of identifying, analyzing and treating risks, which could prevent
the company from effectively achieving its objectives. It also involves establishing a link
between risk-return and resourcing priorities. Appropriate control procedures in the form of a

29
risk management plan must be put in place to manage risk throughout the organization. The
plan should cover activities as diverse as review of operating performance, effective use of
information technology, contracting out and outsourcing.
The Board has the ultimate responsibility for identifying major risks to the organization, setting
acceptable levels of risk and ensuring that senior management takes steps to detect, monitor and
control these risks. The Board must satisfy itself that appropriate risk management systems and
procedure are in place to identify and manage risks. For this purpose the company should subject
itself to periodic external and internal risk reviews.
3.4.2 The Role of Directors
The institution of board of directors was based on the premise that a group of trustworthy and
respectable people should look after the interests of the large number of shareholders who are not
directly involved in the management of the company. The position of board of directors is that of
trust as the board is entrusted with the responsibility to act in the best interests of the company.
The Board of Directors plays a pivotal role in ensuring good governance. The contribution of
directors on the Board is critical to the way a corporate conducts itself. The board’s
responsibilities are derive from law, custom, tradition and current practice. In the present times
transparency, disclosure accountability, issues of sustainability, corporate citizenship,
globalization are just some of the concerns that the Boards have to deal with. In addition, the
Boards have to respond to the explosive demands of the marketplace. This two dimensional
role of the Board of Directors is corner stone in evolving sound, efficient, vibrant and dynamic
corporate sector for attaining of high standards in integrity, transparency, code of conduct,
accountability as well as the social responsibility.
To establish the Vision & Mission Statement: Approval of company‘s philosophy, vision and
mission statement is done by the board of directors. Organization‘s activities should be consistent
with its stated purpose. The Board ensures that the organization effectively and efficiently work
towards achieving its mission and be committed to continuous quality improvement. Based on the
value of quality, openness, integrity, responsibility and accountability, board members and
employees should act in the best interest of achieving the organizations mission at all times.

30
Strategic Direction and Advice: Board is to review and approve management‘s strategy, plans
and decisions, financial objectives, extra-ordinary business transactions. Boards are in an excellent
position to provide input and advice to the CEO and the top management regarding the company‘s
strategic direction. They can contribute opinions, viewpoints and information that are not always
readily available to the company‘s management. As the directors are not involved in day-to-day
development of strategy, however, they are in a position to provide an objective and detached view
of its potential effectiveness.
Overseeing Strategy Implementation and Performance: Developing a valid strategy is only the
first step in creating an effective organization. The board plays a crucial role in advising, evaluating
and monitoring strategy implementation. Boards can best monitor strategy implementation by
setting benchmarks to measure progress and by drawing on objective sources of information.
Appointing and evaluating of CEO and Senior Management: It is the duty as well as the power
of the Board to appoint the CEO and other senior management officers and specialist officers of
the company. Boards need to be proactive in evaluating the performance of CEO and top
management team. The Board has to be involved in planning the development of senior
management. The board is responsible for
→ Hiring senior staff persons,
→ Giving direction to senior staff persons, and;
→ Evaluating senior staff persons.
Risk Mitigation: Directors are expected to identify and manage obstacles that may prevent the
organization from reaching its goals. The whole board must be involved in risk management,
particularly around financial matters and legal compliance. In managing risk, directors have a
responsibility to owners to foresee what could affect the organization and to make sure plans are
in place that will minimize the impact of events or changes that will have a negative effect. Each
company will face a different risk profile. Each board will identify the key risks affecting their
own sector and then take steps to manage those risks.
Procuring resources: Financial resources, human resources, technological resources, business
relationship are the key resources that are essential to an organization‘s success. Boards play an
Important Role in Helping the Organization Procuring the Resources.
3.4.3 Types of Board
Traditionally, there are two types of boards: the unitary board and two tier board
3.4.3.1 Unitary Board
The unitary board, remains in full control of every aspect of the company‘s activities. It initiates
action and it is responsible for ensuring that the action which it has initiated is carried out. All the
directors, whether executive or outside, share same aims and same responsibilities.

31
3.4.3.2 Two-tier Boards
The alternative board model to unitary board is the two-tier board, which was developed in its
present form in Germany. A two-tier board fulfils the same basic functions as a unitary board, but
it does so through a clear separation between the tasks of monitoring and that of management. The
supervisory board (Asfusichtsrat) oversees the direction of the business and the management board
(Vorstand) is responsible for the running of the company. The supervisory board controls the
management board through appointing its members and through its statutory right to have the final
say in major decisions affecting the company. The structure rigorously separates the control
function from the management function and members of the one board cannot be members of the
other. This separation is enshrined in law and the legal responsibilities of the two sets of board
members are different. The supervisory board system was introduced to strengthen the control of
shareholders.
Who are Directors?
The company being an artificial person it requires certain natural persons to represent the company
at various fronts. The position of directors in their relationship to the company is not only as the
agents, but also trustees of the company
Section 2(13) of the Companies Act, 1956 defines, director' as "any person occupying the position
of director, by whatever name called”.
3.4.4 Types of Directors
3.4.4.1 Executive Director: The term executive director is usually used to describe a person who
is both a member of the board and who also has day to day responsibilities in respect of the affairs
of the company. Executive directors perform operational and strategic business functions such as:
→ managing people
→ looking after assets
→ hiring and firing
→ entering into contracts
Executive directors are usually employed by the company and paid a salary, so are protected by
employment law.
Examples of executive directors are production director, finance director or managing director or
human resource director.
3.4.4.2 Non-Executive Director: They are not in the employment role of the company. They are
the members of the Board, who normally do not take part in the day-to-day implementation of the
company policy. They are generally appointed to provide the company with the benefits of
professional expertise and outside perspective to the board. They play an effective role in
governance of listed companies, but they may or may not be independent director.

32
3.4.4.3 Shadow Director:
Shadow Director is a person who is not formally appointed as a director, but in accordance with
whose directions or instructions the directors of a company are accustomed to act. That is, such
persons act in the capacity of a director in different dimensions. However, a person is not a shadow
director merely because the directors act on advice given by him in a professional capacity.
Holder of controlling or majority stock (share) of a private firm who is not (technically) a director
and does not openly participate in the firm‘s governance, but whose directions or instructions are
routinely complied with by the employees or other the directors. In the eyes of law, he or she is a
de facto director and is held equally liable for the obligations of the firm with the other de facto
and de jure directors.
3.4.4.4 Independent Director:
The word independent with reference to board composition was used for the first time in corporate
legislation in relation to investment companies by a Report that introduced the Investment
Company Act, in 1940. It suggested that at least 40 percent of the Board of directors of an
investment company shall be Independent for safeguarding the investors.
The term independent director in Clause 49 of the Listing Agreement means:
The expression independent director shall mean a non-executive director of the company director
is defined who:
(a) apart from receiving director‘s remuneration, does not have any material pecuniary
relationships or transactions with the company, its promoters, its directors, its senior management
or its holding company, its subsidiaries and associates which may affect independence of the
director;
(b) is not related to promoters or persons occupying management positions at the board level
or at one level below the board;
(c) has not been an executive of the company in the immediately preceding three financial
years;
(d) is not a partner or an executive or was not partner or an executive during the preceding
three years, of any of the following:
(i) the statutory audit firm or the internal audit firm that is associated with the company, and
(ii) the legal firm(s) and consulting firm(s) that have a material association with the company.
(e) is not a material supplier, service provider or customer or a lessor or lessee of the company,
which may affect independence of the director; and

33
(f) is not a substantial shareholder of the company i.e. owning two percent or more of the
block of voting shares;
(g) is not less than 21 years of age
3.4.4.5 Nominee Director
Nominee director means a director nominated by any institution in pursuance of the provisions of
any law for the time being in force, or of any agreement, or appointed by any Government, to
represent its shareholding.
It is pertinent to mention here that there is a divergent view as to whether a nominee director can
be considered independent or not. While Clause 49 specifically provides that nominee directors
appointed by an institution, which has invested in or lent to the company shall be deemed to be
independent directors, the Companies Bill, 2009 specifically excludes nominee director from being
considered as independent. Naresh Chandra Committee in its report stated that 'nominee director'
will be excluded from the pool of directors in the determination of the number of independent
directors. In other words, such a director will not feature either in the numerator or the
denominator.
However, the Institute of Company Secretaries of India holds the view that any director who
represents any interest cannot be considered as independent. Therefore, a nominee director
representing a particular organization such as a Financial Institutions (FI), Foreign Institutional
Investors (FII), Bank, Central or State Government should not be treated as Independent director.
3.4.5. Tenure of Independent Director
The tenure of an independent director affects his independence. An independent director with
"externality" may lose its independence or may become not so independent due to friendship
established with the internal directors and the management. It is therefore necessary to limit the
tenure of an independent director. Excessively long tenure of independent directors reflects:
Closeness of the relationship between the independent director and management and lack of Board
renewal.
ICSI Recommendations to strengthen Corporate Governance suggests that a maximum tenure of
6 years in aggregate should be specified for independent directors and be made mandatory.
Clause 49 of listing agreement (non-mandatory requirement) recommends a maximum of 9 years
in aggregate for independent directors.
Corporate Governance Voluntary Guidelines, 2009 recommends to limit the tenure of an
independent director to not more than six years, and a period of three years should elapse before
such an individual is inducted in the same company in any capacity. No individual may be allowed
to have more than three tenures as Independent Director in aforesaid manner.

34
3.4.6 Role of Independent Director
Independent directors are known to bring an objective view in board deliberations. They also
ensure that there is no dominance of one individual or special interest group or the stifling of
healthy debate. They act as the guardians of the interest of all shareholders and stakeholders,
especially in the areas of potential conflict.
Independent Directors bring a valuable outside perspective to the deliberations. They contribute
significantly to the decision-making process of the Board. They can bring on objective view to the
evaluation of the performance of Board and management. In addition, they can play an important
role in areas where the interest of management, the company and shareholders may diverge such
as executive remuneration, succession planning, changes in corporate control, audit function etc.
Independent directors are required because they perform the following important role:
(i) Balance the often conflicting interests of the stakeholders.
(ii) Facilitate withstanding and countering pressures from owners.
(iii) Fulfill a useful role in succession planning.
(iv) Act as a coach, mentor and sounding Board for their full time colleagues.
(v) Provide independent judgment and wider perspectives.
3.4.7 Chairman of the Board
The responsibility for ensuring that boards provide the leadership which is expected of them is that
of their chairman. Chairmen, however, have no legal position; they are whoever the board elects
to take the chair at a particular meeting. Boards are not bound to continue with the same chairman
for successive meetings. In law, all directors have broadly equal responsibilities and chairmen are
no more equal than any other board member. Chairmen are an administrative convenience and a
means of ensuring that board meetings are properly conducted.
Thus from a statutory point of view there is no necessity for a board to have a continuing chairman.
The chairmanship could, for example, rotate among board members. Although board chairmen
have no statutory position, the choice of who is to fill that post is crucial to board effectiveness. If
the chairman is not up to the task, it is improbable that the meeting will achieve anything but
frustration and waste of that most precious of resources—time. Continuity and competence of
Chairmanship is vital to the contribution which boards make to their companies.
The Chairman‘s primary responsibility is for leading the Board and ensuring its effectiveness.
3.4.7.1 The role of the Chairman includes:
→ setting the Board agenda, ensuring that Directors receive accurate, timely and clear
information to enable them to take sound decisions, ensuring that sufficient time is allowed for
complex or contentious issues, and
→ encouraging active engagement by all members of the Board;

35
→ taking the lead in providing a comprehensive, formal and tailored induction programme
for new Directors, and in addressing the development needs of individual Directors to ensure that
they have the skills and knowledge to fulfill their role on the Board and on Board Committees;
→ evaluating annually the performance of each Board member in his/her role as a Director,
and ensuring that the performance of the Board as a whole and its Committees is evaluated
annually. Holding meetings with the non-executive Directors without the executives being present;
→ ensuring effective communication with shareholders and in particular that the company
maintains contact with its principal shareholders on matters relating to strategy, governance and
directors’ remuneration. Ensuring that the views of shareholders are communicated to the Board
as a whole.
3.4.7.2 Separation of role of Chairman and Chief Executive Officer
It is perceived that separating the roles of chairman and chief executive officer (CEO) increases
the effectiveness of a company‘s board.
It is the board’s and chairman’s job to monitor and evaluate a company’s performance. A CEO,
on the other hand, represents the management team. If the two roles are performed by the same
person, then it’s an individual evaluating himself. When the roles are separate, a CEO is far more
accountable.
To prevent unfettered decision making power with a single individual, Corporate Governance
Voluntary Guidelines, 2009 provide for the separation of the roles of the chairman of the Board
and that of the Managing Director/CEO.
ICSI Recommendations to strengthen Corporate Governance suggests that there should be clear
demarcation of the roles and responsibilities of the chairman of the board and that of the Managing
Director/ CEO. The roles of Chairman and CEO should be separated to promote balance of power.
The chairman is responsible for leadership of the board, ensuring its effectiveness on all aspects
of its role and setting its agenda. The chairman is also responsible for ensuring that the directors
receive accurate, timely and clear information. The chairman should ensure effective
communication with shareholders. The chairman should also facilitate the effective contribution
of non-executive directors in particular and ensure constructive relations between executive and
non-executive directors.
A clear demarcation of the roles and responsibilities of the Chairman of the Board and that of the
Managing Director/ CEO promotes balance of power.
3.4.7.3 The benefits of separation of roles of Chairman and CEO can be:
1. Direct Communication: A separate chairman provides a more effective channel for the
board to express its views on management
2. Guidance: a separate chairman can provide the CEO with guidance and feedback on his/her
performance

36
3. Shareholders’ interest: The chairman can focus on shareholder interests, while the CEO
manages the company
4. Governance: a separate chairman allows the board to more effectively fulfill its regulatory
requirements
5. Long-Term Outlook: separating the position allows the chairman to focus on the long-term
strategy while the CEO focuses on short-term profitability
6. Succession Planning: a separate chairman can more effectively concentrate on corporate
succession plans.
3.4.8 Chief Executive Officer (CEO)
The Board appoints the CEO based on the criterion of his capability and competence to manage
the company effectively. His main responsibilities include developing and implementing high-
level strategies, making major corporate decisions, managing the overall operations and resources
of a company, and acting as the main point of communication between the board of directors and
the corporate operations. He is involved with every aspect of the company‘s performance. The
CEO is supported and advised by a skilled board and CEO is ultimately accountable to the board
for his actions. The most important skill of a CEO is to think strategically. His key role is leading
the long term strategy and its implementation, it further includes:
→ Developing implementation plan of action to meet the competition and keeping in mind
the long-term existence of the company
→ Adequate control systems
→ Monitoring the operating and financial outcomes against the set plan
→ Remedial action
→ Keeping the Board informed
CEO should be able to, by the virtue of his ability, expertise, resources and authority keep the
company prepared to avail the benefit of any change whether external or internal.
3.4.8 Board Composition
Board composition is one of the most important determinants of board effectiveness. Beyond the
legal requirement of minimum directors, a board should have a mix of inside and Independent
Directors with a variety of experience and core competence. The potential competitive advantage
of a Board structure constituted of executive directors and independent non-executive directors is
in its combinations of the depth of knowledge of the business of the executives and the breadth of
experience of the non-executive/independent/outside director.
The Board Composition in the context of most emerging countries is governed by the Listing
Agreement in case of listed companies. Clause 49 of the Listing Agreement mandates:

37
(i) The Board of directors of the company shall have an optimum combination of executive
and non-executive directors with not less than fifty percent of the board of directors comprising of
non-executive directors.
(ii) Where the Chairman of the Board is a non-executive director, at least one third of the Board
should comprise of independent directors and in case he is an executive director, at least half of
the Board should comprise of independent directors.
Figure 3: Description of the Board of Directors
An aspect of Board structure which is fundamental but is very less visited is that of the Board Size.
Board size is also an important determinant of board effectiveness. The size should be large enough
to secure sufficient expertise on the board, but not so large that productive discussion is impossible.
Clause 132(3) of Companies Bill, 2009 states that every listed public company having such amount
of paid-up share capital as may be prescribed shall have at the least one-third of the total number
of directors as independent directors. The Central Government may prescribe the minimum
number of independent directors in case of other public companies and subsidiaries of any public
company.
It needs to be structured so that it provides an independent check on management. As such, it is
vitally important that a number of board members be independent from management

39
3.4.8.1 Board Charter
As a good practice companies may have a Board Charter which is intended as a tool to assist
directors in fulfilling their responsibilities as Board members. It sets out the respective roles,
responsibilities and authorities of the Board and of Management in the governance, management
and control of the organization. This charter should be read in conjunction with the Company‘s
Memorandum and Articles.
A Model Charter may include the following:
➢ The Role of the Board
➢ The principal functions and responsibilities of the Board relating to Strategies, Corporate
Governance, Financial Management, Relationship with Senior Management The Role of
the Chairman, The Role of the CEO, The Role of the Company Secretary, Directors Code
of Conduct, Conflicts of Interests, Related Party transactions, Board Members
Qualifications, skills

40
3.4.9 Board Processes
It is important to consider elements of board processes that contribute to the effective & efficient
performance of the Board.
Board Meetings: Decisions relating to the policy and operations of the company are arrived at
meetings of the Board held periodically. Meetings of the Board enable discussions on matters
placed before them and facilitate decision making based on collective judgment of the Board. This
requires certain businesses to be approved at meetings of the Board only.
3.4.9.1 Good Practices in Convening Board Meetings
→Annual Calendar
An Annual calendar that schedules the Board and committee meetings and accordingly dates by
which action required is accomplished is an effective planner for the year. The planner schedules
in advance the events so that both the providers of inputs and receivers of inputs can plan their
work systematically.
→Meeting Location
The board meetings should take place at a venue that is convenient to the directors (normally the
head office). Boards are increasingly holding at least one board meeting at other company locations
so that directors can see the other sites.
→Board Meeting Frequency
Board meetings should be held regularly, at least four times in a year, with a maximum interval of
four months between meetings.
As a rule of thumb and in line with best practice, six to ten meetings are likely to constitute an
appropriate number of board meetings per year, particularly when committees meet between board
sessions.
→Board Agenda
• Preparation of Agenda
The board agenda determines the issues to be discussed. The items for agenda should be collected
from heads of all the departments. Secretary may segregate the ones that can be discussed and
decided internally and the ones which need to be put up before the Board, in consultation with the
Chairman and/or Managing Director and inputs from the CEO.
Any director can request that the chairman include a matter on the board agenda. It is the
chairman‘s obligation to offer directors the opportunity to suggest items, which cannot be
reasonably denied. In the end, it is each director‘s responsibility to ensure that the right matters are
tabled.

41
Key success factors for setting the agenda include:
❖ Agendas should strike a balance between reviews of past performance
and forward-looking issues.
❖ Strategic issues require more time for debate so it is a good practice that
the allocated discussion time is indicated in the agenda.
❖ Some issues will need to be brought to the board several times as projects
progress and circumstances develop.
Factors to keep in mind
❖ Care should be taken not to consume too much board time on routine or
administrative matters.
❖ The agenda should show the amount of time allocated for each item, without unduly
restricting discussion.
• Circulation of Notice & Agenda
❖ Notice: Even if meetings have been scheduled in advance, the members of the
Board should be adequately and timely sent notice to enable them to plan
accordingly.
❖ Agenda: The agenda should be made available to the Board along with supporting
papers at least seven days before the date of the meeting. The mode of circulation
of agenda should ensure that all directors receive the agenda notes on time. All the
material information should be sent to all Directors simultaneously and in a timely
manner to enable them to prepare for the Board Meeting. This would enable the
board and especially to non-executive independent directors to carefully prepare
for the discussions based on the papers.
→Conducting Board Meetings
• Attendance: Quorum of the meeting is a legal issue covered under section 287 of
Companies Act 1956, here we should understand the importance of recording the
attendance of the meeting.
• Board Briefing Papers: Board materials should be summarized and formatted so that
board members can readily grasp and focus on the most significant issues in preparation
for the board meeting. It is not necessary that more information means better quality. If
relevant and complete information is presented in an orderly manner will be more useful
than a bulky set of documents which has been put together without any order.
The document for Board meetings should be:
• Short. Board papers associated with a particular agenda item should be set out as an
executive summary with further detail provided in annexes.
• Timely. Information should be distributed at least seven business days before the meeting.

42
• Focused and action-oriented. The papers should present the issue for discussion, offer
solutions for how to effectively address the issue, and provide management‘s view on
which action to take.
If a proposal is more complex or requires additional explanation, the board should consider
delegating the matter to a board committee or seek a detailed discussion or require an appraisal by
an outside independent expert.
Directors should inform the chairman if the information they receive is insufficient for making
sound decisions and monitoring responsibilities effectively.
The Information Requirements for Board Meetings
These requirements will vary among companies. In general, directors should expect to receive the
following regular items at least seven days before the board meeting:
An agenda. This should be on one page.
Minutes from last meeting along with action taken report.
Minutes of Committee Meetings.
Information of the statutory compliances of the laws applicable to the company.
Decision Making Process at the Meeting
(I) The Chairman and/or Managing Director should explain the proposal put up before the
Board, the background and the expectation of the proposal in the short as well as the
long- term to contribute to the growth of the company. If need be, a presentation may
be made by the concerned executive for easing the considerations and discussions of
the Board as they tend to highlight the key elements within the written data.
(II) The criticality and viability of the proposal should be explained and their views should
be elicited from all angles.
(III) The Board could then deliberate all these issues and come to a decision.
Voting
Voting practices at board meetings differ worldwide. In some countries, it is usual for a majority
vote to signify board approval. In this situation, decisions are made quickly and minority dissent
is accepted. However, many corporate governance experts argue that boards should be collegial;
consensus must be attained on every agenda item without the need to take a vote. In this case, the
chairman will often require skill in obtaining unanimity among the directors — even though the
debate initially may have involved substantial constructive dissent.

43
Adequacy of Minutes
Minutes are the written record of a board or committee meeting. Preparation of minutes of general,
Board and committee meetings is a legal requirement under section 193 of Companies Act
1956.The Company secretary should ensure compliance of the same accordingly. At a minimum,
the minutes must contain: Meeting location and date, Names of attendees and absentees, Principal
points arising during discussion, Board decisions
Minutes record what actually happens at a meeting in the order in which it happened, regardless
of whether the meeting followed the written agenda. The minutes are important legal documents
and, by law, must be kept by the company. They also serve as important reminders of action to be
taken between meetings.
Minutes should strike a balance between being a bare record of decisions and a full account of
discussions. On more routine housekeeping matters or more sensitive personnel issues, a brief
record is appropriate. For most items, there should be a summary of the matter discussed and the
issues considered. The final decision must be recorded clearly and concisely. This amount of
attention is desirable to show that the board has acted with due care and complied with any legal
duties and obligations.
Where a director disagrees with a board decision, he may ask to have their disagreement recorded
in the minutes. This could be important to avoid future liability for any decision that involves a
breach of law or misuse of the board‘s powers.
It is a good practice to draft the minutes of the meetings and circulate them to the directors in
reasonable time, perhaps not later than a week.
Confidentiality
All board papers and proceedings should be considered to be highly confidential. Board papers
should not be shown or circulated to non-directors. Directors should take great care not to discuss
or disclose any board meeting content or proceedings outside the boardroom.
Separate Meetings
As a good practice the Boards may consider organizing separate meetings with independent
directors to update them on all business-related issues and new initiatives. These meetings give an
opportunity for independent directors for exchanging valuable views on the issues to be raised at
the Board meetings. Such meetings are usually chaired by the independent non-executive Director
or by senior/ lead independent director. The outcome of the meeting is put forward at the Board
meeting.
1. What are the elements of good Corporate Governance Practice?
2. Who are directors and what are their roles in Corporations?

44
3. Describe the types of board of directors existing and explain which amongst is best practice
and why?
4. In details explain the composition of the board and its processes with the aid of a local
example

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