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ROLE OF BOARD OF DIRECTORS IN
CORPORATE GOVERNANCE
A Seminar Paper
Presented to
School of Business
The Faculty of Management Studies
Pokhara University
In Partial Fulfillment
of the Requirements for the Degree
Masters of Business Administration
By
Bijay Karmacharya
Exam Roll No. 11220183
Pokhara
June, 2013
ACKNOWLEDGEMENT
It is a matter of great pleasure for me to acknowledge all the people who helped me for the
successful completion of this Seminar Paper Report on the topic “Role of Board of Directors
in Corporate Governance” as per the requirement of the 6th
trimester of the syllabus
provided by Master of Business Administration, Pokhara University.
First of all, I would like to express my heartfelt gratitude and thanks to Mr. Surya Bahadur
G.C. and Umesh Singh Yadav for encouraging me for the involvement in such a creative
work that helped a lot to enhance our knowledge as a business student and helped me to be a
competent student. Also, I would like to thank all the faculty members of Pokhara University
for providing necessary documents and resources needed during the report.
Thanks are due to authors of books, journals and articles that were consulted in course of the
study. I would also like to thanks all my friends, who helped me through out the report, and
seniors for their valuable help and suggestions during this seminar report writing.
I am solely responsible for the errors in this report and any constructive criticism is warmly
welcomed for the betterment.
Bijay Karmacharya
6th
Trimester
MBA
ABSTRACT
The purpose of this seminar paper is to indicate the role of board of directors in corporate
governance. This paper basically focuses on how the role and responsibilities of board of
directors can become critical to a company which is facing various problems due to failure to
implement sound corporate governance within the company. As a consequence of
various scandals and ongoing concerns about corporate governance, boards
have been at the center of the policy debate concerning governance reform
and the focus of considerable academic research.
Thus, this paper investigates the roles of BODs on good corporate governance practices.
Good corporate governance depends on board leadership structure, board composition, board
size, director ownership and board roles and responsibilities. The board of directors is the
highest governing authority within the management structure at any publicly traded company.
It is the board's job to select, evaluate, and approve appropriate compensation for the
company's chief executive officer (CEO), evaluate the attractiveness of and pay dividends,
approve the company's financial statements etc. Thus BODs should be totally committed to
the best practices in the area of corporate governance. The board should regularly review and
update corporate governance practices to accommodate developments within the marketplace
in general and the business in particular, and to comply with internationally recognized
governance standards.
LIST OF ABBREVIATIONS
BODs Board of Directors
CEO chief executive officer
CG Corporate Governance
FI Financial Institution
GCG Good Corporate Governance
NRB Nepal Rastra Bank
OECD Organization for Economic Co-operation and Development
WOCCU World Council of credit Unions
TABLE OF CONTENTS
Acknowledgement
Abstract
List of Abbreviations
Table of Contents
CHAPTER I: INTRODUCTION
1.1 Background..............................................................................................................1
1.2 Statement of the Problem.........................................................................................6
1.3 Significance of the topic of seminar ........................................................................6
1.4 Limitations...............................................................................................................7
CHAPTER II: ROLE OF BODs IN CORPORATE GOVERNANCE
2.1 Corporate Governance & Role of BODs .................................................................8
2.2 Review of literature ...............................................................................................11
2.3 Analysis of Literature ............................................................................................13
2.4 Corporate Governance in Nepalese Context..........................................................14
CHAPTER III:SUMMARY, CONCLUSION & RECOMMENDATIONS
3.1 Summary................................................................................................................16
3.2 Conclusions............................................................................................................16
3.3 Recommendations..................................................................................................17
References
1
CHAPTER I
INTRODUCTION
1.1 Background
People often question whether corporate boards matter because their day-
to-day impact is difficult to observe. But when things go wrong, they
can become the center of attention. Certainly this was true of the Enron,
Worldcom, and Parmalat scandals. The directors of Enron and WorldCom,
in particular, were held liable for the fraud that occurred: Enron directors
had to pay $168 million to investor plaintiffs, of which $13 million
was out of pocket (not covered by insurance); and Worldcom directors
had to pay $36 million, of which $18 million was out of pocket. As
a consequence of these scandals and ongoing concerns about corporate
governance, boards have been at the center of the policy debate
concerning governance reform and the focus of considerable academic
research. Because of this renewed interest in boards, a review of what we
have and have not learned from research on corporate boards is timely.
Thus, it is the responsibility of the entire board of directors to ensure that good corporate
governance is in place in the company and that it is continually improved upon by
bringing the best global practices.
Corporate governance (CG) is defined as the set of relationship between company’s
management, board of directors, shareholders and other stakeholder. It provides the
structure through which the objectives of the company are set and the means of attaining
those objectives and monitoring performance is determined. Corporate governance is a
process, not a state. CG can be defined in two basic ways:
 First, it is a set of behavioral patterns that is the actual behavior of corporations,
in terms of such measures as performance, efficiency, growth, financial
structure, and treatment of shareholders and other stakeholders
 The second set concerns itself with the normative framework: that is, the rules
under which firms are operating
2
Corporate governance is a combination of corporate policies and best practices adopted by
the corporate bodies to achieve its objectives in relation to their stakeholders. The
fundamental objective of corporate governance reforms is to enhance transparency and
transparency enhances accountability. It is widely recognized that transparency enhances
trust among the major players within the governance framework. Various definitions and
principles have been introduced to stabilize the corporate governance among corporate
entities. The definition presented by some institution is presented below.
 Corporate governance is the system by which companies are directed and
controlled (Cadbury Report-1992)
 Set of relationships between a company’s management, its boards, its shareholders
and other stake holders (OECD Principles)
With globalization, vastly increasing the scale of trade and the size and complexity of
corporations and the bureaucracies constructed to attempt to control it, the importance of
corporate governance and internal regulation has been amplified as it becomes
increasingly difficult to regulate externally. Similarly, the role of boards of directors has
been the topic of much attention lately. The role of board of directors is becoming more
involved in assessing and shaping the company policies and practices on wide range of
corporate world. They recognize the importance of good corporate governance as a means
of addressing the interests of Company's shareholders, employees, customers and
community. The Board also ensures that the company maintains good corporate
governance practices. Accordingly, the following guidelines are subject to periodic review
and change by the Board. The corporate governance framework should ensure the strategic
guidance of the company, the effective monitoring of management by the board, and the
board’s accountability to the company and the shareholders.
1.1.1 Objectives of Corporate Governance
The major objectives of corporate governance are as follows:
 To maximize the contribution of firms to the overall economy
 To improve the relationship between shareholders, creditors, and corporations;
between financial markets, institutions, and corporations; and between employees
and corporations
3
 To encompass the issue of corporate social responsibility, including such aspects
as the dealings of the firm with respect to culture and the environment.
The above objective of CG clearly shows that the subject corporate governance was
incorporated for the welfare of the society or country by binding all the concerned areas
with legal rules and regulations ensuring fairness, transparency, accountability, and
responsibility. The final point it defines is for the improvement and development of the
country. The key concern is the degree of influence which standards of corporate
governance have in promoting the efficient use of scarce resources to the benefit of society
as a whole.
1.1.2 Principles of Corporate Governance
The principles of corporate governance according to OECD (2004) are as follows:
 Ensuring the Basis for an Effective Corporate Governance Framework
The corporate governance framework should promote transparent and efficient
markets, be consistent with the rule of law and clearly articulate the division of
responsibilities among different supervisory, regulatory and enforcement
authorities.
 The Rights of Shareholders and Key Ownership Functions
The corporate governance framework should protect and facilitate the exercise of
shareholders’ rights. Basic shareholder rights should include the right to: 1) secure
methods of ownership registration; 2) convey or transfer shares; 3) obtain relevant
and material information on the corporation on a timely and regular basis; 4)
participate and vote in general shareholder meetings; 5) elect and remove members
of the board; and 6) share in the profits of the corporation.
 The Equitable Treatment of Shareholders
The corporate governance framework should ensure the equitable treatment of all
shareholders, including minority and foreign shareholders. All shareholders should
have the opportunity to obtain effective redress for violation of their rights.
4
 The Role of Stakeholders in Corporate Governance
The corporate governance framework should recognize the rights of stakeholders
established by law or through mutual agreements and encourage active co-
operation between corporations and stakeholders in creating wealth, jobs, and the
sustainability of financially sound enterprises.
 Disclosure and Transparency
The corporate governance framework should ensure that timely and accurate
disclosure is made on all material matters regarding the corporation, including the
financial situation, performance, ownership, and governance of the company.
 The Responsibilities of the Board
The corporate governance framework should ensure the strategic guidance of the
company, the effective monitoring of management by the board, and the board’s
accountability to the company and the shareholders.
1.1.3 Good corporate governance and its Characteristics
Good corporate governance (GCG) in a corporate set up leads to maximize the value of
the shareholders legally, ethically and on a sustainable basis, while ensuring equity and
transparency to every stakeholder – the company’s customers, employees, investors,
vendor-partners, the government of the land and the community (Murthy, 2006). GCG is a
must for ensuring the required values to different stakeholder groups. It enhances the
performance of corporations, by creating an environment that motivates managers to
maximize returns on investment, enhance operational efficiency and ensure long–term
productivity growth. Consequently, such corporations attract the best talent on a global
basis. It also ensures the conformance of corporations with the interests of investors and
society, by creating fairness, transparency and accountability in business activities among
employees, management and the board (Oman, 2001).
Good corporate governance can be pointed as:
 Board members act in the best interest of shareholders.
 The company acts in a lawful and ethical manner in all their dealings.
5
 All shareholders have the same right to participate in company governance and are
treated fairly by the Board and management.
 The board and committees act independently of management.
 All relevant company information is provided in a timely manner
Good corporate governance has the following characteristics:
 Accountability
Not only governmental institutions but also the private sector and civil society
organizations must be accountable to the public and to their institutional
stakeholders. In general an organization is accountable to those who will be
affected by its decisions or actions. Accountability cannot be enforced without
transparency and the rule of law.
 Interests of other stakeholders
Organizations should recognize that they have legal and other obligations to all
legitimate stakeholders.
 Role and responsibilities of the board
The board needs a range of skills and understanding to be able to deal with various
business issues and have the ability to review and challenge management
performance. It needs to be of sufficient size and have an appropriate level of
commitment to fulfill its responsibilities and duties. The key roles of chairperson
and CEO should not be held by the same person.
 Integrity and ethical behavior
Organizations should develop a code of conduct for their directors and executives
that promotes ethical and responsible decision making. It is important to
understand, though, that systemic reliance on integrity and ethics is bound to
eventual failure. Because of this, many organizations establish compliance and
ethics programs to minimize the risk that the firm steps outside of ethical and legal
boundaries.
6
 Disclosure and transparency
Organizations should clarify and make publicly known the roles and
responsibilities of board and management to provide shareholders with a level of
accountability. They should also implement procedures to independently verify and
safeguard the integrity of the company’s financial reporting. Disclosure of material
matters concerning the organization should be timely and balanced to ensure that
all investors have access to clear, factual information.
 Responsiveness
Good governance requires that institutions and processes try to serve all take
holders within a reasonable timeframe.
 Consensus oriented
There are several actors and as many view points in a given society. Good
governance requires mediation of the different interests in society to reach a broad
consensus in society on what is in the best interest of the whole community and
how this can be achieved. It also requires a broad and long-term perspective on
what is needed for sustainable human development and how to achieve the goals of
such development.
1.2 Statement of the Problem
It is the responsibility of the board of directors to ensure that good corporate governance is
in practice in the company. This seminar paper states the roles of BODs and their
relevance in the corporate governance and discusses the present situations of corporate
governance practices in Nepal.
1.3 Significance of the topic of seminar
The seminar paper mainly focuses on how the role and responsibilities of board of
directors can become critical to a company which is facing various problems due to failure
to implement sound corporate governance within the company. The relevancy of this
paper lies to all the researcher, academician, students etc. who wants to know about the
role of board of directors in implementing the corporate governance. The following are
significances of the study:
7
 It will create knowledge on the role and responsibilities of BODs in corporate
governance
 The organizations may use the findings to improve their efficiency and
effectiveness.
1.4 Limitations
The seminar paper considers only one internal mechanisms of corporate governance i.e.
the board of directors. Other internal and external mechanisms of governance have not
been analyzed. This paper mainly focuses on the roles and responsibilities of BODs;
procedures and operation of the BODs or general practices of corporate governance are
not studied. Lastly, this paper is based upon only secondary sources rather than primary
sources.
8
CHAPTER II
ROLE OF BODs IN CORPORATE GOVERNANCE
2.1 Corporate Governance & Role of BODs
A board of directors is a body of elected or appointed members who jointly oversee the
activities of a company. The Board of directors is the formal link between the shareholders
of an organization and the managers entrusted with day today functioning of the
organization (Monks et al, 1995).A board's activities are determined by the powers, duties,
and responsibilities delegated to it or conferred on it by an authority outside itself. These
matters are typically detailed in the organization's bylaws. Boards of Directors consist of
two types of directors - executive and non-executive. The responsibilities of the executive
directors include, setting the company’s strategic objectives, providing the leadership to
put them into effect, supervising the management of the business and reporting to
shareholders on their stewardships. Non-executives are appointed on a part-time basis and
perform various duties including (in some cases) acting as the company’s chairperson and
sitting on various key committees: The Nominations Committee, the Remuneration
Committee, the Audit Committee.
The bylaws commonly also specify the number of members of the board, how they are to
be chosen, and when they are to meet. The law places directors in fiduciary relationship
with shareholders. The fundamental responsibility of the individual corporate director is to
represent the interests of the shareholders as a group. This responsibility obligates
directors to act with care in fulfilling their responsibilities, to be loyal to the corporation,
and not to allow personal interests to function to the detriment of the shareholders they
represent. If shareholders ever doubt that a director has properly performed his duties, they
may file a lawsuit.
The board's key purpose is to ensure the company's prosperity by collectively directing the
company's affairs, whilst meeting the appropriate interests of its shareholders and
stakeholders. By law, the board of directors has a duty and responsibility for governing the
corporation. The Board owes its loyalty to the corporation itself whose best interests must
be guide for all its decisions. The board has the responsibility of enhancing the economic
9
efficiency and competitiveness of the corporation as well as orienting its operations
towards growth and survival. The Board must therefore direct the business of the
organization with fairness and due regard to shareholders’ value and stake in the
enterprise. It is incumbent upon the board to ensure that timely, accurate and complete
reports on all relevant aspects of the organization are issued to all stakeholders. In this
regard the Board must put in place the system of reporting with standards of disclosure
that are fully consistent with international accounting practices. In order to be fair to its
stakeholders, the corporation must live to its duty of transparency and open full disclosure.
2.1.1 Key Roles of BODs
The role of the Board in creating an environment where a corporation can succeed is the
key to future success of the business. The board should work to ensure that it builds a
united, cohesive and coordinated team working towards the main goal of attaining desired
corporate performance. Directors have a duty to look after the company and its business in
a proper manner. There is need for greater control over corporate entities due to the
increasing concern about corporate failures and the need for better monitoring. The key
roles of BODs in corporate governance are as follows:
a) Establish vision, mission and values
 Determine the company's vision and mission to guide and set the pace for
its current operations and future development.
 Determine the values to be promoted throughout the company.
 Determine and review company goals.
 Determine company policies
b) Set strategy and structure
 Review and evaluate present and future opportunities, threats and risks in
the external environment and current and future strengths, weaknesses and
risks relating to the company.
 Determine strategic options, select those to be pursued, and decide the
means to implement and support them.
 Determine the business strategies and plans that underpin the corporate
strategy.
10
 Ensure that the company's organizational structure and capability are
appropriate for implementing the chosen strategies.
c) Delegate to management
 Delegate authority to management, and monitor and evaluate the
implementation of policies, strategies and business plans.
 Determine monitoring criteria to be used by the board.
 Ensure that internal controls are effective.
 Communicate with senior management.
d) Exercise accountability to shareholders and be responsible to relevant
stakeholders
 Ensure that communications both to and from shareholders and relevant
stakeholders are effective.
 Understand and take into account the interests of shareholders and relevant
stakeholders.
 Monitor relations with shareholders and relevant stakeholders by gathering
and evaluation of appropriate information.
 Promote the goodwill and support of shareholders and relevant
stakeholders.
e) Other roles
 Selecting, compensating, monitoring and, when necessary, replacing key
executives and overseeing succession planning.
 Aligning key executive and board remuneration with the longer term
interests of the company and its shareholders.
 Ensuring a formal and transparent board nomination and election process.
 Monitoring and managing potential conflicts of interest of management,
board Members and shareholders, including misuse of corporate assets and
abuse in related party transactions.
 Overseeing the process of disclosure and communications.
 Monitoring the effectiveness of the company’s governance practices and
making changes as needed.
11
2.1.2 Key Responsibilities of BODs
Directors look after the affairs of the company, and are in a position of trust. They might
abuse their position in order to profit at the expense of their company, and, therefore, at
the expense of the shareholders of the company. Consequently, the law imposes a number
of duties, burdens and responsibilities upon directors, to prevent abuse. Much of company
law can be seen as a balance between allowing directors to manage the company's
business so as to make a profit, and preventing them from abusing this freedom. Directors
are responsible for ensuring that proper books of account are kept. The key responsibilities
of BODs are as follows:
 The directors must always exercise their powers for a 'proper purpose' – that is, in
furtherance of the reason for which they were given those powers by the
shareholders.
 Directors must act in good faith in what they honestly believe to be the best
interests of the company, and not for any collateral purpose. This means that,
particularly in the event of a conflict of interest between the company's interests
and their own, the directors must always favor the company.
 Directors must act with due skill and care.
 Directors must consider the interests of employees of the company.
2.2 Review of literature
The need for good corporate governance has been acknowledged since corporations were
first created and awareness of this need has grown rapidly around the world in recent
years. Initiatives for improvement started to accelerate in the in the early 1990s. Poor
corporate governance is widely regarded as one of the main factors that has brought crisis
in collapsed companies and then contributed to its severity and length. It has undermined
investor confidence not just in affected companies but in the entire national economies.
(Economist Newspaper, "The World in 1999", 1999).
Fama and Jensen (1983) point to the fact that absence of governance controls
would allow managers to pursue interests that are likely to deviate from that of the
corporate owners. According to the WOCCU report (2005) internal governance
defines the responsibilities and accountability of the general assembly, the board of
directors, management and the staff. These responsibilities include achieving an
12
appropriate governing structure of the credit union, preserving the continuity of future
credit union operations, creating balance within the organization and remaining
accountable for their actions.
Boards of Directors are widely recognized as an important mechanism for monitoring the
performance of managers and protecting shareholders’ interests and hence an important
component of internal governance (Fama and Jensen, 1983). Baker (1998) opposed to the
system of electing directors because in their view, the democratic election of the Board
of Directors creates problems in credit unions due to inaccurate representation of owners
and unqualified personnel in decision control. Since directors are elected from the general
membership on a one-person, one vote basis, this rule of governance creates
problems when the individuals elected do not have the expertise to make sound
judgments. The ability of directors to fulfill their role as a monitor or control depends
upon their business acumen or management skills.
According to Rock, Otero & Saltzman (1998) Board Directors are democratically elected
by membership however; they may remain beholden to individual members who
mobilized votes on their behalf. Branch (2005) agrees with Rock et al (1998) on the
election process of board members adding that these members most often act as
Volunteers. Small, young SACCOs are also staffed entirely by volunteers. As they grow,
more sophisticated and risky operations require professional managers and problems
occur when volunteer board members continue to make operational decisions, after
Professional managers have been recruited, instead of focusing on monitoring operations.
According Branch and Baker (1998) it is important that Board members be qualified as
unqualified board members may be unable to make proper decisions.
13
Conceptual Framework
Figure: Conceptual framework on BODs and Business performance
Description of the Model:
This model explains that the board members should be accountable, fair and transparent in
every thing they do in the corporation. This results in strong cohesiveness and ultimately
results in good business performance. Corporate Governance affects survival and
business performance among various selected organizations and ultimately share
holders value.
2.3 Analysis of Literature
After reviewing various literatures, we find that the board of directors has significant roles
and responsibilities in conducting sound corporate governance practices. How ever, the
board members should be accountable, fair and transparent in every thing they do in the
corporation. Absence of proper governance controls would allow managers to pursue
interests that are likely to deviate from that of the corporate owners. We also find that
most of the literatures have defined what BODs should do for better corporate governance
but none of has care about their needs and requirements. The board members should be
qualified as unqualified board members may be unable to make proper decisions. There is
huge difference in theory and reality. The board makes the broad decisions and designates
the officers to execute the decisions. In practice, in the case of large public corporations,
the idea that the board of directors actually manages the company is gradually being
Board
Members
Accountability
Fairness of
Decisions
Transparency
Cohesiveness
Business
Performance
14
replaced with the notion that the board’s primary function is to monitor management and
oversee the operation of the corporation.
2.4 Corporate Governance in Nepalese Context
In Nepalese society, the general attitude towards profit, risk taking and entrepreneurship is
not very positive. Moreover, the history of modern corporations is very short in our
country. Most of the families, who are in business in Nepal, started as traders, merchants;
and only in the last few decades went into modern company style organizations governed
by company act. The majority of the business is family business, most are small or
medium sized. Banking sector is the most visible publicly traded sector which has
emerged as a new and different breed from the real sector. The few multinational
companies or subsidiaries are closely held companies.
For the last few years, the corporate governance has been a matter of growing academic
interest in the policy studies. Given the infant stage of securities market development and
gradual transformation of the external sources of corporate finance from bank to market,
Nepal is passing through a transitional phase of institutional and governance reform. The
high concentration of corporate ownership structure and dominance of family business
groups in corporate affairs have become major constraints in exercising good corporate
governance. Nevertheless, a number of governance reforms are underway and some
positive symptoms have been observed in the banks and financial institutions. To ensure a
good corporate governance in Nepal requires a joint effort of the investors (promoters)
who need to be more transparent, responsible and socially accountable; the shareholders
who must actively participate in their corporate affairs to help prevent any fraudulent and
insider practices and; the regulatory authority that should effectively enforce rules and
regulations in order to protect the rights of all stakeholders and create favorable
environment to enhance good corporate governance culture.
The major issues and problems regarding corporate governance practices in Nepal are as
follows:
 Poor qualification of BODs
 Lack of responsibility and accountability in functioning of BODs
15
 Lukewarm implementation of accounting and auditing standards for financial
disclosure
 Poor system of control
 Poor transparency and disclosure
 Most of the organization follows family structure management.
 Corruption, lack of accountability of BODs towards shareholders and Lack of
accountability of management to BODs is common in the case of Nepal.
 Poor compliance with national legislation
 Lack of succession planning in the organization
The roles of board of directors in corporate governance in Nepal are as follows :( Directive
6 issued by NRB)
 Directors should not interfere in day-to-day operation of the financial institution.
 If there is a conflict, director needs to inform the board before assuming office.
 Directors should not involve in any activity which is against the interest of the
company (conflict of interest)
 Chief executive should work fulltime.
 Directors of one deposit taking institution cannot act as director of other FI.
 Director cannot act as custodian or trustee of any of the customer
 Director shall not misuse its position and should deal fairly.
 Director should keep up to date and accurate record of accounts and reports
 Director should not use or misuse information received from clients for person
benefit
 Outlines the duties and responsibilities of the directors
 Provides additional disqualification for the appointment of chief executive
directors
 Provides for code of conduct to be followed by the chief executive and other
employees.
16
CHAPTER III
SUMMARY, CONCLUSION & RECOMMENDATIONS
3.1 Summary
The board of directors is the highest governing authority within the management structure
at any publicly traded company. It is the board's job to select, evaluate, and approve
appropriate compensation for the company's chief executive officer (CEO), evaluate the
attractiveness of and pay dividends, recommend stock splits, oversee share repurchase
programs, approve the company's financial statements, and recommend or strongly
discourage acquisitions and mergers. BODs should work to ensure the integrity and
sustainability of its business operations. Thus BODs should be totally committed to the
best practices in the area of corporate governance. Knowing the importance of complying
with corporate governance standards, the board should regularly review and update
corporate governance practices to accommodate developments within the marketplace in
general and the business in particular, and to comply with internationally recognized
governance standards.
The Board of Directors is responsible to shareholders for the overall strategy of the
company, its governance and performance. The board guides the Company's business and
affairs. The Chairman and the Managing Director should provide the rest of the Board
members and committees with the company's information in due course. All Board
members should maintain the confidentiality of the company's data, information and
documents. All Board members have the right to obtain any documents or company-
specific information to support them in performing their duties, provided that these
documents should be sent through the Board's Secretary. The Board has the right to seek
external advisers and experts to support and provide the needed consultations, provided
that the approval on requesting those external experts is through the Board itself.
3.2 Conclusions
Corporate governance is the means by which companies are directed, administered and
controlled. It influences how the objectives of the company are set and achieved, how risk
is monitored and assessed, and how performance is optimized. Good corporate governance
enables companies to create value (through entrepreneurialism, innovation, development
17
and exploration) and provides accountability and control systems commensurate with the
risks involved. The role of the Board in creating an environment where a corporation can
succeed is the key to future success of the business. It is incumbent upon the board to
ensure that timely, accurate and complete reports on all relevant aspects of the
organization are issued to all stakeholders. In this regard the Board must put in place the
system of reporting with standards of disclosure that are fully consistent with international
accounting practices. The powers of the corporation are vested in its board of directors
who are answerable to the owners of the company, the shareholders. Company’s board of
directors provides the company with direction and advice. It is the responsibility of the
board of directors to ensure that the company fulfills its mission statement.
The board should maintain, and periodically update, organizational rules, by-laws, or other
similar documents setting out its organization, rights, responsibilities and key activities.
To support board performance, it is a good practice for the board to carry out regular
assessments of both the board as a whole and of individual board members. Assistance
from external facilitators in carrying out board assessments can contribute to the
objectivity of the process. As discussed in this document, the primary responsibility for
good corporate governance rests with boards (supported by the control functions) and with
senior management. A good corporate governance practice should provide proper
incentives for the board and management to pursue objectives in the interest of the
company and shareholders and should facilitate effective monitoring.
3.3 Recommendations
Though there are many provisions and act regarding the corporate governance, the NRB
and government have failed to track down bad governance practices on time. Government
is not only the one to be blamed; the institutions and organizations also should be
responsible to maintain good corporate governance. The regulations may not prove to be
successful every time. The business houses and institution must maintain self- discipline,
conduct good corporate governance practices.
For the practice of sound corporate governance the following recommendations are
suggested:
18
 BODs must be more responsible for ensuring the institution has effective code of
conduct for good corporate governance in their system and also must ensure that
each member and staffs follow those codes of conduct.
 Competitive and qualified persons should be encouraged while electing board of
directors.
 BODs should identify its actual role & responsibilities towards maintaining sound
corporate governance practices.
 The shareholders must actively participate in the organizational issues to maintain
the good corporate governance practices in the institution.
 There is no match between the roles and responsibilities fulfilled by the BODs and
the remuneration paid to them. In order to encourage and motivate them for their
job they should provided handsome salary, bonus and other facilities.
REFERENCES
Fischmann, A. (2010). The Roles of Board of Directors in Listed Companies in Brazil.
The OECD Principles of Corporate Governance, 2004
Corporate governance and the role of non executive directors in large UK companies: An
Empirical study, 2002
The Role of Boards of Directors in Corporate Governance: A Conceptual
framework and Survey
www.icgn.org
www.cgforumnepal.org
www.corpgov.net

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Role of BODs in Corporate Governance

  • 1. ROLE OF BOARD OF DIRECTORS IN CORPORATE GOVERNANCE A Seminar Paper Presented to School of Business The Faculty of Management Studies Pokhara University In Partial Fulfillment of the Requirements for the Degree Masters of Business Administration By Bijay Karmacharya Exam Roll No. 11220183 Pokhara June, 2013
  • 2. ACKNOWLEDGEMENT It is a matter of great pleasure for me to acknowledge all the people who helped me for the successful completion of this Seminar Paper Report on the topic “Role of Board of Directors in Corporate Governance” as per the requirement of the 6th trimester of the syllabus provided by Master of Business Administration, Pokhara University. First of all, I would like to express my heartfelt gratitude and thanks to Mr. Surya Bahadur G.C. and Umesh Singh Yadav for encouraging me for the involvement in such a creative work that helped a lot to enhance our knowledge as a business student and helped me to be a competent student. Also, I would like to thank all the faculty members of Pokhara University for providing necessary documents and resources needed during the report. Thanks are due to authors of books, journals and articles that were consulted in course of the study. I would also like to thanks all my friends, who helped me through out the report, and seniors for their valuable help and suggestions during this seminar report writing. I am solely responsible for the errors in this report and any constructive criticism is warmly welcomed for the betterment. Bijay Karmacharya 6th Trimester MBA
  • 3. ABSTRACT The purpose of this seminar paper is to indicate the role of board of directors in corporate governance. This paper basically focuses on how the role and responsibilities of board of directors can become critical to a company which is facing various problems due to failure to implement sound corporate governance within the company. As a consequence of various scandals and ongoing concerns about corporate governance, boards have been at the center of the policy debate concerning governance reform and the focus of considerable academic research. Thus, this paper investigates the roles of BODs on good corporate governance practices. Good corporate governance depends on board leadership structure, board composition, board size, director ownership and board roles and responsibilities. The board of directors is the highest governing authority within the management structure at any publicly traded company. It is the board's job to select, evaluate, and approve appropriate compensation for the company's chief executive officer (CEO), evaluate the attractiveness of and pay dividends, approve the company's financial statements etc. Thus BODs should be totally committed to the best practices in the area of corporate governance. The board should regularly review and update corporate governance practices to accommodate developments within the marketplace in general and the business in particular, and to comply with internationally recognized governance standards.
  • 4. LIST OF ABBREVIATIONS BODs Board of Directors CEO chief executive officer CG Corporate Governance FI Financial Institution GCG Good Corporate Governance NRB Nepal Rastra Bank OECD Organization for Economic Co-operation and Development WOCCU World Council of credit Unions
  • 5. TABLE OF CONTENTS Acknowledgement Abstract List of Abbreviations Table of Contents CHAPTER I: INTRODUCTION 1.1 Background..............................................................................................................1 1.2 Statement of the Problem.........................................................................................6 1.3 Significance of the topic of seminar ........................................................................6 1.4 Limitations...............................................................................................................7 CHAPTER II: ROLE OF BODs IN CORPORATE GOVERNANCE 2.1 Corporate Governance & Role of BODs .................................................................8 2.2 Review of literature ...............................................................................................11 2.3 Analysis of Literature ............................................................................................13 2.4 Corporate Governance in Nepalese Context..........................................................14 CHAPTER III:SUMMARY, CONCLUSION & RECOMMENDATIONS 3.1 Summary................................................................................................................16 3.2 Conclusions............................................................................................................16 3.3 Recommendations..................................................................................................17 References
  • 6. 1 CHAPTER I INTRODUCTION 1.1 Background People often question whether corporate boards matter because their day- to-day impact is difficult to observe. But when things go wrong, they can become the center of attention. Certainly this was true of the Enron, Worldcom, and Parmalat scandals. The directors of Enron and WorldCom, in particular, were held liable for the fraud that occurred: Enron directors had to pay $168 million to investor plaintiffs, of which $13 million was out of pocket (not covered by insurance); and Worldcom directors had to pay $36 million, of which $18 million was out of pocket. As a consequence of these scandals and ongoing concerns about corporate governance, boards have been at the center of the policy debate concerning governance reform and the focus of considerable academic research. Because of this renewed interest in boards, a review of what we have and have not learned from research on corporate boards is timely. Thus, it is the responsibility of the entire board of directors to ensure that good corporate governance is in place in the company and that it is continually improved upon by bringing the best global practices. Corporate governance (CG) is defined as the set of relationship between company’s management, board of directors, shareholders and other stakeholder. It provides the structure through which the objectives of the company are set and the means of attaining those objectives and monitoring performance is determined. Corporate governance is a process, not a state. CG can be defined in two basic ways:  First, it is a set of behavioral patterns that is the actual behavior of corporations, in terms of such measures as performance, efficiency, growth, financial structure, and treatment of shareholders and other stakeholders  The second set concerns itself with the normative framework: that is, the rules under which firms are operating
  • 7. 2 Corporate governance is a combination of corporate policies and best practices adopted by the corporate bodies to achieve its objectives in relation to their stakeholders. The fundamental objective of corporate governance reforms is to enhance transparency and transparency enhances accountability. It is widely recognized that transparency enhances trust among the major players within the governance framework. Various definitions and principles have been introduced to stabilize the corporate governance among corporate entities. The definition presented by some institution is presented below.  Corporate governance is the system by which companies are directed and controlled (Cadbury Report-1992)  Set of relationships between a company’s management, its boards, its shareholders and other stake holders (OECD Principles) With globalization, vastly increasing the scale of trade and the size and complexity of corporations and the bureaucracies constructed to attempt to control it, the importance of corporate governance and internal regulation has been amplified as it becomes increasingly difficult to regulate externally. Similarly, the role of boards of directors has been the topic of much attention lately. The role of board of directors is becoming more involved in assessing and shaping the company policies and practices on wide range of corporate world. They recognize the importance of good corporate governance as a means of addressing the interests of Company's shareholders, employees, customers and community. The Board also ensures that the company maintains good corporate governance practices. Accordingly, the following guidelines are subject to periodic review and change by the Board. The corporate governance framework should ensure the strategic guidance of the company, the effective monitoring of management by the board, and the board’s accountability to the company and the shareholders. 1.1.1 Objectives of Corporate Governance The major objectives of corporate governance are as follows:  To maximize the contribution of firms to the overall economy  To improve the relationship between shareholders, creditors, and corporations; between financial markets, institutions, and corporations; and between employees and corporations
  • 8. 3  To encompass the issue of corporate social responsibility, including such aspects as the dealings of the firm with respect to culture and the environment. The above objective of CG clearly shows that the subject corporate governance was incorporated for the welfare of the society or country by binding all the concerned areas with legal rules and regulations ensuring fairness, transparency, accountability, and responsibility. The final point it defines is for the improvement and development of the country. The key concern is the degree of influence which standards of corporate governance have in promoting the efficient use of scarce resources to the benefit of society as a whole. 1.1.2 Principles of Corporate Governance The principles of corporate governance according to OECD (2004) are as follows:  Ensuring the Basis for an Effective Corporate Governance Framework The corporate governance framework should promote transparent and efficient markets, be consistent with the rule of law and clearly articulate the division of responsibilities among different supervisory, regulatory and enforcement authorities.  The Rights of Shareholders and Key Ownership Functions The corporate governance framework should protect and facilitate the exercise of shareholders’ rights. Basic shareholder rights should include the right to: 1) secure methods of ownership registration; 2) convey or transfer shares; 3) obtain relevant and material information on the corporation on a timely and regular basis; 4) participate and vote in general shareholder meetings; 5) elect and remove members of the board; and 6) share in the profits of the corporation.  The Equitable Treatment of Shareholders The corporate governance framework should ensure the equitable treatment of all shareholders, including minority and foreign shareholders. All shareholders should have the opportunity to obtain effective redress for violation of their rights.
  • 9. 4  The Role of Stakeholders in Corporate Governance The corporate governance framework should recognize the rights of stakeholders established by law or through mutual agreements and encourage active co- operation between corporations and stakeholders in creating wealth, jobs, and the sustainability of financially sound enterprises.  Disclosure and Transparency The corporate governance framework should ensure that timely and accurate disclosure is made on all material matters regarding the corporation, including the financial situation, performance, ownership, and governance of the company.  The Responsibilities of the Board The corporate governance framework should ensure the strategic guidance of the company, the effective monitoring of management by the board, and the board’s accountability to the company and the shareholders. 1.1.3 Good corporate governance and its Characteristics Good corporate governance (GCG) in a corporate set up leads to maximize the value of the shareholders legally, ethically and on a sustainable basis, while ensuring equity and transparency to every stakeholder – the company’s customers, employees, investors, vendor-partners, the government of the land and the community (Murthy, 2006). GCG is a must for ensuring the required values to different stakeholder groups. It enhances the performance of corporations, by creating an environment that motivates managers to maximize returns on investment, enhance operational efficiency and ensure long–term productivity growth. Consequently, such corporations attract the best talent on a global basis. It also ensures the conformance of corporations with the interests of investors and society, by creating fairness, transparency and accountability in business activities among employees, management and the board (Oman, 2001). Good corporate governance can be pointed as:  Board members act in the best interest of shareholders.  The company acts in a lawful and ethical manner in all their dealings.
  • 10. 5  All shareholders have the same right to participate in company governance and are treated fairly by the Board and management.  The board and committees act independently of management.  All relevant company information is provided in a timely manner Good corporate governance has the following characteristics:  Accountability Not only governmental institutions but also the private sector and civil society organizations must be accountable to the public and to their institutional stakeholders. In general an organization is accountable to those who will be affected by its decisions or actions. Accountability cannot be enforced without transparency and the rule of law.  Interests of other stakeholders Organizations should recognize that they have legal and other obligations to all legitimate stakeholders.  Role and responsibilities of the board The board needs a range of skills and understanding to be able to deal with various business issues and have the ability to review and challenge management performance. It needs to be of sufficient size and have an appropriate level of commitment to fulfill its responsibilities and duties. The key roles of chairperson and CEO should not be held by the same person.  Integrity and ethical behavior Organizations should develop a code of conduct for their directors and executives that promotes ethical and responsible decision making. It is important to understand, though, that systemic reliance on integrity and ethics is bound to eventual failure. Because of this, many organizations establish compliance and ethics programs to minimize the risk that the firm steps outside of ethical and legal boundaries.
  • 11. 6  Disclosure and transparency Organizations should clarify and make publicly known the roles and responsibilities of board and management to provide shareholders with a level of accountability. They should also implement procedures to independently verify and safeguard the integrity of the company’s financial reporting. Disclosure of material matters concerning the organization should be timely and balanced to ensure that all investors have access to clear, factual information.  Responsiveness Good governance requires that institutions and processes try to serve all take holders within a reasonable timeframe.  Consensus oriented There are several actors and as many view points in a given society. Good governance requires mediation of the different interests in society to reach a broad consensus in society on what is in the best interest of the whole community and how this can be achieved. It also requires a broad and long-term perspective on what is needed for sustainable human development and how to achieve the goals of such development. 1.2 Statement of the Problem It is the responsibility of the board of directors to ensure that good corporate governance is in practice in the company. This seminar paper states the roles of BODs and their relevance in the corporate governance and discusses the present situations of corporate governance practices in Nepal. 1.3 Significance of the topic of seminar The seminar paper mainly focuses on how the role and responsibilities of board of directors can become critical to a company which is facing various problems due to failure to implement sound corporate governance within the company. The relevancy of this paper lies to all the researcher, academician, students etc. who wants to know about the role of board of directors in implementing the corporate governance. The following are significances of the study:
  • 12. 7  It will create knowledge on the role and responsibilities of BODs in corporate governance  The organizations may use the findings to improve their efficiency and effectiveness. 1.4 Limitations The seminar paper considers only one internal mechanisms of corporate governance i.e. the board of directors. Other internal and external mechanisms of governance have not been analyzed. This paper mainly focuses on the roles and responsibilities of BODs; procedures and operation of the BODs or general practices of corporate governance are not studied. Lastly, this paper is based upon only secondary sources rather than primary sources.
  • 13. 8 CHAPTER II ROLE OF BODs IN CORPORATE GOVERNANCE 2.1 Corporate Governance & Role of BODs A board of directors is a body of elected or appointed members who jointly oversee the activities of a company. The Board of directors is the formal link between the shareholders of an organization and the managers entrusted with day today functioning of the organization (Monks et al, 1995).A board's activities are determined by the powers, duties, and responsibilities delegated to it or conferred on it by an authority outside itself. These matters are typically detailed in the organization's bylaws. Boards of Directors consist of two types of directors - executive and non-executive. The responsibilities of the executive directors include, setting the company’s strategic objectives, providing the leadership to put them into effect, supervising the management of the business and reporting to shareholders on their stewardships. Non-executives are appointed on a part-time basis and perform various duties including (in some cases) acting as the company’s chairperson and sitting on various key committees: The Nominations Committee, the Remuneration Committee, the Audit Committee. The bylaws commonly also specify the number of members of the board, how they are to be chosen, and when they are to meet. The law places directors in fiduciary relationship with shareholders. The fundamental responsibility of the individual corporate director is to represent the interests of the shareholders as a group. This responsibility obligates directors to act with care in fulfilling their responsibilities, to be loyal to the corporation, and not to allow personal interests to function to the detriment of the shareholders they represent. If shareholders ever doubt that a director has properly performed his duties, they may file a lawsuit. The board's key purpose is to ensure the company's prosperity by collectively directing the company's affairs, whilst meeting the appropriate interests of its shareholders and stakeholders. By law, the board of directors has a duty and responsibility for governing the corporation. The Board owes its loyalty to the corporation itself whose best interests must be guide for all its decisions. The board has the responsibility of enhancing the economic
  • 14. 9 efficiency and competitiveness of the corporation as well as orienting its operations towards growth and survival. The Board must therefore direct the business of the organization with fairness and due regard to shareholders’ value and stake in the enterprise. It is incumbent upon the board to ensure that timely, accurate and complete reports on all relevant aspects of the organization are issued to all stakeholders. In this regard the Board must put in place the system of reporting with standards of disclosure that are fully consistent with international accounting practices. In order to be fair to its stakeholders, the corporation must live to its duty of transparency and open full disclosure. 2.1.1 Key Roles of BODs The role of the Board in creating an environment where a corporation can succeed is the key to future success of the business. The board should work to ensure that it builds a united, cohesive and coordinated team working towards the main goal of attaining desired corporate performance. Directors have a duty to look after the company and its business in a proper manner. There is need for greater control over corporate entities due to the increasing concern about corporate failures and the need for better monitoring. The key roles of BODs in corporate governance are as follows: a) Establish vision, mission and values  Determine the company's vision and mission to guide and set the pace for its current operations and future development.  Determine the values to be promoted throughout the company.  Determine and review company goals.  Determine company policies b) Set strategy and structure  Review and evaluate present and future opportunities, threats and risks in the external environment and current and future strengths, weaknesses and risks relating to the company.  Determine strategic options, select those to be pursued, and decide the means to implement and support them.  Determine the business strategies and plans that underpin the corporate strategy.
  • 15. 10  Ensure that the company's organizational structure and capability are appropriate for implementing the chosen strategies. c) Delegate to management  Delegate authority to management, and monitor and evaluate the implementation of policies, strategies and business plans.  Determine monitoring criteria to be used by the board.  Ensure that internal controls are effective.  Communicate with senior management. d) Exercise accountability to shareholders and be responsible to relevant stakeholders  Ensure that communications both to and from shareholders and relevant stakeholders are effective.  Understand and take into account the interests of shareholders and relevant stakeholders.  Monitor relations with shareholders and relevant stakeholders by gathering and evaluation of appropriate information.  Promote the goodwill and support of shareholders and relevant stakeholders. e) Other roles  Selecting, compensating, monitoring and, when necessary, replacing key executives and overseeing succession planning.  Aligning key executive and board remuneration with the longer term interests of the company and its shareholders.  Ensuring a formal and transparent board nomination and election process.  Monitoring and managing potential conflicts of interest of management, board Members and shareholders, including misuse of corporate assets and abuse in related party transactions.  Overseeing the process of disclosure and communications.  Monitoring the effectiveness of the company’s governance practices and making changes as needed.
  • 16. 11 2.1.2 Key Responsibilities of BODs Directors look after the affairs of the company, and are in a position of trust. They might abuse their position in order to profit at the expense of their company, and, therefore, at the expense of the shareholders of the company. Consequently, the law imposes a number of duties, burdens and responsibilities upon directors, to prevent abuse. Much of company law can be seen as a balance between allowing directors to manage the company's business so as to make a profit, and preventing them from abusing this freedom. Directors are responsible for ensuring that proper books of account are kept. The key responsibilities of BODs are as follows:  The directors must always exercise their powers for a 'proper purpose' – that is, in furtherance of the reason for which they were given those powers by the shareholders.  Directors must act in good faith in what they honestly believe to be the best interests of the company, and not for any collateral purpose. This means that, particularly in the event of a conflict of interest between the company's interests and their own, the directors must always favor the company.  Directors must act with due skill and care.  Directors must consider the interests of employees of the company. 2.2 Review of literature The need for good corporate governance has been acknowledged since corporations were first created and awareness of this need has grown rapidly around the world in recent years. Initiatives for improvement started to accelerate in the in the early 1990s. Poor corporate governance is widely regarded as one of the main factors that has brought crisis in collapsed companies and then contributed to its severity and length. It has undermined investor confidence not just in affected companies but in the entire national economies. (Economist Newspaper, "The World in 1999", 1999). Fama and Jensen (1983) point to the fact that absence of governance controls would allow managers to pursue interests that are likely to deviate from that of the corporate owners. According to the WOCCU report (2005) internal governance defines the responsibilities and accountability of the general assembly, the board of directors, management and the staff. These responsibilities include achieving an
  • 17. 12 appropriate governing structure of the credit union, preserving the continuity of future credit union operations, creating balance within the organization and remaining accountable for their actions. Boards of Directors are widely recognized as an important mechanism for monitoring the performance of managers and protecting shareholders’ interests and hence an important component of internal governance (Fama and Jensen, 1983). Baker (1998) opposed to the system of electing directors because in their view, the democratic election of the Board of Directors creates problems in credit unions due to inaccurate representation of owners and unqualified personnel in decision control. Since directors are elected from the general membership on a one-person, one vote basis, this rule of governance creates problems when the individuals elected do not have the expertise to make sound judgments. The ability of directors to fulfill their role as a monitor or control depends upon their business acumen or management skills. According to Rock, Otero & Saltzman (1998) Board Directors are democratically elected by membership however; they may remain beholden to individual members who mobilized votes on their behalf. Branch (2005) agrees with Rock et al (1998) on the election process of board members adding that these members most often act as Volunteers. Small, young SACCOs are also staffed entirely by volunteers. As they grow, more sophisticated and risky operations require professional managers and problems occur when volunteer board members continue to make operational decisions, after Professional managers have been recruited, instead of focusing on monitoring operations. According Branch and Baker (1998) it is important that Board members be qualified as unqualified board members may be unable to make proper decisions.
  • 18. 13 Conceptual Framework Figure: Conceptual framework on BODs and Business performance Description of the Model: This model explains that the board members should be accountable, fair and transparent in every thing they do in the corporation. This results in strong cohesiveness and ultimately results in good business performance. Corporate Governance affects survival and business performance among various selected organizations and ultimately share holders value. 2.3 Analysis of Literature After reviewing various literatures, we find that the board of directors has significant roles and responsibilities in conducting sound corporate governance practices. How ever, the board members should be accountable, fair and transparent in every thing they do in the corporation. Absence of proper governance controls would allow managers to pursue interests that are likely to deviate from that of the corporate owners. We also find that most of the literatures have defined what BODs should do for better corporate governance but none of has care about their needs and requirements. The board members should be qualified as unqualified board members may be unable to make proper decisions. There is huge difference in theory and reality. The board makes the broad decisions and designates the officers to execute the decisions. In practice, in the case of large public corporations, the idea that the board of directors actually manages the company is gradually being Board Members Accountability Fairness of Decisions Transparency Cohesiveness Business Performance
  • 19. 14 replaced with the notion that the board’s primary function is to monitor management and oversee the operation of the corporation. 2.4 Corporate Governance in Nepalese Context In Nepalese society, the general attitude towards profit, risk taking and entrepreneurship is not very positive. Moreover, the history of modern corporations is very short in our country. Most of the families, who are in business in Nepal, started as traders, merchants; and only in the last few decades went into modern company style organizations governed by company act. The majority of the business is family business, most are small or medium sized. Banking sector is the most visible publicly traded sector which has emerged as a new and different breed from the real sector. The few multinational companies or subsidiaries are closely held companies. For the last few years, the corporate governance has been a matter of growing academic interest in the policy studies. Given the infant stage of securities market development and gradual transformation of the external sources of corporate finance from bank to market, Nepal is passing through a transitional phase of institutional and governance reform. The high concentration of corporate ownership structure and dominance of family business groups in corporate affairs have become major constraints in exercising good corporate governance. Nevertheless, a number of governance reforms are underway and some positive symptoms have been observed in the banks and financial institutions. To ensure a good corporate governance in Nepal requires a joint effort of the investors (promoters) who need to be more transparent, responsible and socially accountable; the shareholders who must actively participate in their corporate affairs to help prevent any fraudulent and insider practices and; the regulatory authority that should effectively enforce rules and regulations in order to protect the rights of all stakeholders and create favorable environment to enhance good corporate governance culture. The major issues and problems regarding corporate governance practices in Nepal are as follows:  Poor qualification of BODs  Lack of responsibility and accountability in functioning of BODs
  • 20. 15  Lukewarm implementation of accounting and auditing standards for financial disclosure  Poor system of control  Poor transparency and disclosure  Most of the organization follows family structure management.  Corruption, lack of accountability of BODs towards shareholders and Lack of accountability of management to BODs is common in the case of Nepal.  Poor compliance with national legislation  Lack of succession planning in the organization The roles of board of directors in corporate governance in Nepal are as follows :( Directive 6 issued by NRB)  Directors should not interfere in day-to-day operation of the financial institution.  If there is a conflict, director needs to inform the board before assuming office.  Directors should not involve in any activity which is against the interest of the company (conflict of interest)  Chief executive should work fulltime.  Directors of one deposit taking institution cannot act as director of other FI.  Director cannot act as custodian or trustee of any of the customer  Director shall not misuse its position and should deal fairly.  Director should keep up to date and accurate record of accounts and reports  Director should not use or misuse information received from clients for person benefit  Outlines the duties and responsibilities of the directors  Provides additional disqualification for the appointment of chief executive directors  Provides for code of conduct to be followed by the chief executive and other employees.
  • 21. 16 CHAPTER III SUMMARY, CONCLUSION & RECOMMENDATIONS 3.1 Summary The board of directors is the highest governing authority within the management structure at any publicly traded company. It is the board's job to select, evaluate, and approve appropriate compensation for the company's chief executive officer (CEO), evaluate the attractiveness of and pay dividends, recommend stock splits, oversee share repurchase programs, approve the company's financial statements, and recommend or strongly discourage acquisitions and mergers. BODs should work to ensure the integrity and sustainability of its business operations. Thus BODs should be totally committed to the best practices in the area of corporate governance. Knowing the importance of complying with corporate governance standards, the board should regularly review and update corporate governance practices to accommodate developments within the marketplace in general and the business in particular, and to comply with internationally recognized governance standards. The Board of Directors is responsible to shareholders for the overall strategy of the company, its governance and performance. The board guides the Company's business and affairs. The Chairman and the Managing Director should provide the rest of the Board members and committees with the company's information in due course. All Board members should maintain the confidentiality of the company's data, information and documents. All Board members have the right to obtain any documents or company- specific information to support them in performing their duties, provided that these documents should be sent through the Board's Secretary. The Board has the right to seek external advisers and experts to support and provide the needed consultations, provided that the approval on requesting those external experts is through the Board itself. 3.2 Conclusions Corporate governance is the means by which companies are directed, administered and controlled. It influences how the objectives of the company are set and achieved, how risk is monitored and assessed, and how performance is optimized. Good corporate governance enables companies to create value (through entrepreneurialism, innovation, development
  • 22. 17 and exploration) and provides accountability and control systems commensurate with the risks involved. The role of the Board in creating an environment where a corporation can succeed is the key to future success of the business. It is incumbent upon the board to ensure that timely, accurate and complete reports on all relevant aspects of the organization are issued to all stakeholders. In this regard the Board must put in place the system of reporting with standards of disclosure that are fully consistent with international accounting practices. The powers of the corporation are vested in its board of directors who are answerable to the owners of the company, the shareholders. Company’s board of directors provides the company with direction and advice. It is the responsibility of the board of directors to ensure that the company fulfills its mission statement. The board should maintain, and periodically update, organizational rules, by-laws, or other similar documents setting out its organization, rights, responsibilities and key activities. To support board performance, it is a good practice for the board to carry out regular assessments of both the board as a whole and of individual board members. Assistance from external facilitators in carrying out board assessments can contribute to the objectivity of the process. As discussed in this document, the primary responsibility for good corporate governance rests with boards (supported by the control functions) and with senior management. A good corporate governance practice should provide proper incentives for the board and management to pursue objectives in the interest of the company and shareholders and should facilitate effective monitoring. 3.3 Recommendations Though there are many provisions and act regarding the corporate governance, the NRB and government have failed to track down bad governance practices on time. Government is not only the one to be blamed; the institutions and organizations also should be responsible to maintain good corporate governance. The regulations may not prove to be successful every time. The business houses and institution must maintain self- discipline, conduct good corporate governance practices. For the practice of sound corporate governance the following recommendations are suggested:
  • 23. 18  BODs must be more responsible for ensuring the institution has effective code of conduct for good corporate governance in their system and also must ensure that each member and staffs follow those codes of conduct.  Competitive and qualified persons should be encouraged while electing board of directors.  BODs should identify its actual role & responsibilities towards maintaining sound corporate governance practices.  The shareholders must actively participate in the organizational issues to maintain the good corporate governance practices in the institution.  There is no match between the roles and responsibilities fulfilled by the BODs and the remuneration paid to them. In order to encourage and motivate them for their job they should provided handsome salary, bonus and other facilities.
  • 24. REFERENCES Fischmann, A. (2010). The Roles of Board of Directors in Listed Companies in Brazil. The OECD Principles of Corporate Governance, 2004 Corporate governance and the role of non executive directors in large UK companies: An Empirical study, 2002 The Role of Boards of Directors in Corporate Governance: A Conceptual framework and Survey www.icgn.org www.cgforumnepal.org www.corpgov.net