In this section, we look at the functions and responsibilities of a company’s board of directors.
There is no standard structure or composition for the board of a company. It varies by company size, complexity of operations, and geography. Some common board structures are discussed below:
Staggered board is a commonly followed practice where directors are divided into three groups and elected into office in consecutive years, so that all of them are not replaced simultaneously.
Two primary responsibilities of the board are:
Other responsibilities of the board are as follows:
The board of directors delegates specific functions to individual committees that, in turn, report to the board on a regular basis. The number of committees and their composition may vary based on jurisdiction and industry. Some committees such as the audit is a regulatory requirement in most jurisdictions.
The functions of the audit committee are as follows:
The functions of the governance committee are as follows:
Remuneration or Compensation Committee
The functions of the remuneration committee are as follows:
The functions of the nomination committee are as follows:
The risk committee is responsible for defining the risk policy and risk appetite of the company. It monitors the implementation of risk management and periodically reviews, reports, and communicates its findings to the board.
The functions of the investment committee are as follows:
Among the market factors that affect stakeholder relationships in a company, we focus on shareholder engagement, shareholder activism, and competitive forces.
Companies engage with shareholders periodically through events such as annual general meetings and analyst calls to primarily discuss financial performance and any strategic issues. However, companies see a benefit in interacting with them more often to counter negative recommendations.
Shareholder activism refers to the tactics used by shareholders to influence companies to act in their favor. Often, their primary objective is to increase shareholder value. The strategies used by shareholders include shareholder derivative lawsuits, proxy battles, proposing shareholder resolutions, and publicity on issues of contention.
Competition and Takeovers
Shareholders prefer corporate takeover if the management of a company underperforms. The commonly used methods for corporate takeovers are as follows:
This section focuses on non-market factors that affect stakeholder relationships, such as a company’s legal environment, media’s role, and the corporate governance industry.
The rights of stakeholders depend on the law of the country the company operates in. There are primarily two law systems.
Creditors are more successful in winning legal battles when the terms of indenture are violated. In contrast, shareholders find it difficult to prove in court that a manager/director has not acted in their best interests.
Regulators are keen on introducing corporate governance reforms or pass new laws to protect the stakeholders, especially in the aftermath of 2008-09 financial crisis. Social media is a low-cost, effective tool used by stakeholders to protect their interests, garner support on corporate issues, or use it for negative publicity against a corporate.
The Corporate Governance Industry
The corporate governance industry is a concentrated one. The genesis for the demand for external corporate governance services was a rule introduced by the Securities and Exchange Commission (SEC) in 2003. The SEC mandated that all US-registered mutual funds must disclose their proxy voting records annually. As a result, institutional investors hire experts to help them with proxy voting and corporate governance monitoring.