Roles Of Board Of Directors In Corporate Governance

Corporate Governance is defined as a system of rules, practices and process by which a company is directed and controlled [1]. The importance of corporate boards is always debatable and questionable but after the scandal of Enron, Worldcom and Parmalat, more and more attention is being given to the corporate governance with the emphasis on the role of the board of directors including the structure and the composition of the board itself. In this article, the authors outlined the role of the directors and provide some empirical evidence on the role of the directors especially in the role of hiring, firing and assessment of management and also on the role of setting of strategy for the company. Some models of assessments were also being used

The authors have divided the directors into two groups which are the inside directors and outside directors. Inside directors are full time employee of the firm and has executive function in the management and administration of the company while an outside director (also known as Independent director) is usually independent of corporate management and does not have a material or pecuniary relationship with company or related person, except sitting fees .[3] The authors have highlighted that based on a sample of 508 largest US corporations between 1989 to 1995, on average outsiders make up 55% of directors while 30% insiders and affiliated directors remaining 15%. The authors should highlight that the number of independent director has significantly increase based on the analysis done on S&P 500 companies in USA in which the independent director held 84% of the board seat [4]. If we compare to Malaysian composition of board of directors, the Bursa Malaysia has outlined that at least 2 or 1/3 of the board of directors of listed company must be independent director or outsider director [5]. Bank Negara Malaysia however has a stricter rule on board composition for banks which outline that there should not be more than one inside director on the board of a Licensed Institution

They highlighted that having a banker, a venture capitalist, a politically connected directors and CEO of other company as advisory role might be valuable to the board and the company. From the authors’ findings, I could conclude that having a banker and venture capitalists as outside directors will be a boost to the reputation of the board of directors. Shareholders will want somebody with strong financial background and strong business acumen to be able to give sound advice based on their expertise to the company. Besides the arguments given by the authors, I can conclude that having a politically connected director in the board has both advantage and the disadvantages. Some political appointees have conflicting objectives which is not in line with company’s objectives of maximizing profit, for example, maximizing employment or minimizing social costs. However, a director who has knowledge and experience with government procedure, insights in government policy, and the ability to persuade the government favour to the company’s interest would be valuable to the company [9]. Nevertheless, I do not agree with having labor representative as outside directors and only 50% agreeable to other CEO as outside director. A labor representative generally will have conflict of interest with the board as they would normally put the employees’ interest first