In addition, with public disclosure of an apparently reasonable basis for a resignation, typically there is no embarrassment to the company or to the believed-to-be-inadequate president. Most boards of directors and most individual directors are intensely reluctant to face the unpleasant conclusion that the president of the company must be replaced.
While sometimes the unpleasantness is avoided by hiring outside consultants or by resigning from the board, there are some situations in which board members who have procrastinated in taking any action find themselves obligated to face the task of asking the president to resign.
These situations are relatively rare. For the most part, the outside directors remained on the board and devoted more than casual amounts of time to the company in distress. Many directors expressed regret for not having responded to the symptoms of weakness they had seen earlier, now more recognizable than before. They gave more of their time to the affairs of the ailing company, and they acted as responsible corporate citizens by assuming for the interim the de facto powers of control held previously by the president.
The business literature describing the classic functions of boards of directors typically includes three important roles: a establishing basic objectives, corporate strategies, and broad policies; b asking discerning questions; and c selecting the president. In this section of the article, I shall discuss the evidence that I collected during my interviews on each of these generally accepted roles. Boards of directors of most large and mediumsized companies do not establish objectives, strategies, and policies, however defined.
These roles are performed by company managements. Presidents and outside directors generally are agreed that only management can, and should have, these responsibilities. We decide what course we are going to paddle our canoe in.
We tell our directors the direction of the company and the reasons for it. Theoretically, the board has a right of veto, but they never exercise it. Naturally, we consult with them if we are making a major change in direction. We communicate with them. But they are in no position to challenge what we propose to do. And the market, for more and more companies, includes opportunities abroad, thus adding another complicating dimension of analysis.
The typical outside director does not have time to make the kinds of studies needed to establish company objectives and strategies. At most, he can approve positions taken by management—and this approval is based on scanty facts, not on time-consuming analysis. Giving operational meaning to a set of defined corporate objectives is generally achieved by allocating or reallocating corporate capital resources.
The managements of a few companies, I found, do not accept the idea that boards can, or should be, involved in the process of capital appropriations, even in an advisory capacity. Accordingly, their studies and approvals of capital appropriations are made at management levels and not at the level of the board of directors. In most companies, the allocation of capital resources, including the acquisition of other enterprises, is accomplished through a management process of analysis resulting in recommendations to the board and in requests for approval by the board.
The minimum dollar amounts which require board approval and the quantity of analytical supporting data accompanying such requests vary among companies.
Approval by boards in most companies is perfunctory, automatic, and routine. Presidents and their subordinates, deeply involved in analysis and decision making prior to presentation to the board, believe in the correctness of their recommendations, and—almost without exception—these go unchallenged by members of the board. Rarely do boards go contrary to the wishes of the president.
In a few instances, boards of directors do establish objectives, strategies, and major policies, but these are exceptions.
Here, the president wants the involvement of the directors, and he not only allows for, but insists on, full discussion, exploration of the issues, agreement, and decisions by the board along with himself. A second classic role ascribed to boards of directors is that of asking discerning questions—inside and outside the board meetings. Again, I found that directors do not in fact do this. Board meetings are not regarded as proper forums for discussions arising out of questions asked by board members; the president and directors alike feel that such meetings are not intended as debating societies.
In one situation, for example, an outside director, who was concerned about steadily declining earnings and who perceived no apparent management program to reverse the trend, asked the chairman and the president what was being done to correct the situation.
The other outside directors also expressed their concern, and the president, obviously embarrassed, responded with unpersuasive and unimpressive replies. After the meeting, the chairman asked the initial questioner to stop by his office before leaving, and there he explained:. You must remember that you are challenging the president in the presence of his subordinates, some of who are insiders on the board.
If you have questions about what is being done to reverse the trend, the proper way is to make a date to confer with the president privately. Presidents generally do not want to be challenged by the questions of directors, especially if subordinates of the president are on the board or in attendance at the meeting. Despite the fact that most presidents profess that they want questions to be asked by interested members of the board, I have concluded that, while they may say this, and may even go to some trouble to make directors feel that they are free to question, actually the presidents do not want discerning questions or comments.
The unsophisticated director may learn from experiencing rebuffs that the president does not want penetrating and issue-provoking questions, but only those which are gentle and supportive and an affirmation that the board approves of him. Many presidents stated that board members should manifest by their queries, if any, that they approve of the management.
If a director feels that he has any basis for doubt and disapproval, most of the presidents interviewed believe that he should resign. The lack of active discussion of major issues at typical board meetings and the absence of discerning questions by board members result in most board meetings resembling the performance of traditional and well-established, almost religious, rituals.
In most companies, it would be possible to write the minutes of a board meeting in advance. The format is always the same, and the behavior and involvement of directors are completely predictable—only the financial figures are different.
My research disclosed few exceptions to this routine. In a handful of instances, presidents said that they do in fact want discerning, challenging questions and active discussions of important issues at their board meetings. There are also a few directors who do in fact ask discerning questions, the desires of the president notwithstanding.
Typical garden-variety outside directors, selected by the president and generally members of a peer group, do not ask questions inside or outside board meetings. However, directors who serve on corporate boards of companies because they own or represent the ownership of substantial shares of stock generally do in fact ask discerning questions. Their willingness to query presidents is, in part, a manifestation of the split in the de facto powers of control of those companies.
The large stockholder-directors are not usually on the board because the president wants them there, but because through cumulative voting procedures they can force their way onto the board. Directors, as described in the literature, represent the stockholders. Yet, typically, they are actually selected by the president and not by the stockholders.
Accordingly, the directors are on the board because the president wants them there. Implicitly, and frequently explicitly, the directors in point of fact represent the president. But a large stockholder-director is not selected by the president and does not therefore represent the president; rather, he represents himself and an interest more likely to be consistent with that of the other stockholders. These differing attitudes with regard to stock ownership often are manifested in the extent to which discerning questions are asked of the president by the directors.
A third classic role usually regarded as a responsibility of the board of directors is the selection of the president. Yet I found that in most companies directors do not in fact select the president, except under the two crisis situations cited earlier. The board does not select the management; the management selects the board.
In some situations, formal or informal committees of outside members of boards are charged with the responsibility of evaluating candidates inside the management for the presidency.
But, generally, these committees have no more control over the naming of the president than do similar committees charged with identifying and recommending the names of candidates for board membership. In both committee situations, the president with de facto powers of control essentially makes the decisions. The administrative use by the president of board committees to evaluate candidates for his successor in the presidency gives the selection process an appearance of careful evaluation and objectivity.
But in most cases the decision as to who should succeed the president is made by the president himself. Certainly, the president knows the key members of his organization better than anyone else.
He has worked with them closely and, typically, over a considerable period of time. Board members with relatively brief exposure to company executives—whether on the board or not—base their appraisals necessarily on very inadequate evidence. When insiders appear before the board for presentations of their divisional operations, for example, or to explain a request for a large capital appropriation, the setting is artificial and synthetic.
Executives, aware that the process of evaluation is going on, rehearse their appearances to communicate to the board that they have the capacities and skills needed for the presidency. Boards of directors, I found, do serve in an advisory role in the selection of a new president—in their capacity as a sort of corporate conscience. The process of electing a new president requires a vote by the board, and the president generally observes the amenities of corporate good manners by discussing his choice with individual members prior to the meeting.
Rarely does a board of directors reject a candidate for the presidency who is recommended by the president. In the small family company, the ownership of the stock and the management are identical. In an earlier study, I found that the powers of control are in the family owners, and what the board of directors does is determined by the owners. The owner-managers of some small companies add outside directors to multiply the inputs to policy making, policy implementation, and day-to-day operating problems.
The primary function of the outside directors is to provide a source of advice and counsel to the family owner-managers, and they do not serve in a decision-making role, except in the case of the unforeseen death of the dominant family owner-manager.
They have the authority to manage the enterprise, and the board is at most a legally required body which can be used for advice and counsel on management or family problems. The family owners determine what the board does or does not do.
At the opposite end of the spectrum is the large, widely held corporation in which typically the president and members of the board own little stock. Here, the de jure powers of control are dispersed among thousands of stockholders who are generally both unorganized as owners and essentially unorganizable.
With this absence of control or influence by the corporate owners, the president typically does have the de facto powers to control the enterprise, and with these powers of control it is the president who, like the family owner-managers in the small company, determines in large part what the board of directors does or does not do.
Bylaws should specify how many board members are elected and how they are elected by shareholder vote at an annual meeting, for example and how often the board meets. A board can have any number of members; however, most have between three and fifteen members. Some believe the optimal size is nine. While shareholders elect directors, the nominating committee decides which candidates are put forward for nomination. Nine years is considered the most time a director should sit on a particular board.
A director can be expelled for breaking foundational rules. There are several types of infractions, including, but not limited to:. Some European and Asian countries divide corporate governance into two tiers — executive boards and supervisory boards. The executive board is headed by the CEO or managing director, who employees and shareholders elect.
The executive board is responsible for the day-to-day operations of the business. The supervisory board is chaired by an independent outside director the chair and consists of non-executive directors. Directors outside the company NEDs are paid. Also of note is the fact that many high-profile non-executive directors hold multiple directorships in addition to their full-time executive positions. You can work for an organisation, rise through the ranks and become a c-suite executive elected to the board by the shareholders.
To become a non-executive director, you must first know how to be a director and gaining a formal qualification always helps. On a board, the highest rank is held by the chair. Gregory Boop, Business Insurance Expert, says this about the liability of corporate board members :. Directors and officers may be sued individually for acts or errors they commit while serving the corporation. These individuals may be held personally liable for such acts.
If a director or officer is found liable for a wrongful act, his or her personal assets may be used to pay damages to the plaintiff. Actively scan device characteristics for identification. Use precise geolocation data. Select personalised content. Create a personalised content profile. Measure ad performance. Select basic ads. Create a personalised ads profile. Select personalised ads. Apply market research to generate audience insights.
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