Value of having a board of directors
ACOMPANY is a separate legal entity from its members who constitute it. It can hold, purchase and sell properties and enter into contracts in its own name. It is an artificial legal person who can sue and be sued.
A company is a third legal business structure and has entirely a different organisational structure from the sole proprietorship or partnership.
There are two common types of companies namely Public limited which collects its capital by the sale of its shares to the general public and a Private limited whereby the transfer of shares is limited to its members.
For the past decades global economies have experienced the development of numerous companies around the world.
Companies facilitate economic growth of a nation and are of great importance to the government hence most companies share a set of goals namely profit maximisation, growth and expansion.
It is only evident that the success of companies creates a great centre of attention for its owners and partners hence much investment is required to ascertain a leading team that fuels the success of a company.
A company being an artificial person cannot run itself hence it requires agents who serve as leaders and managers on behalf of it.
Companies are owned by shareholders and they elect the board of directors, who run the company.
Company directors are the people responsible for the day to day running of a limited company but do not own the company whilst a board of directors is an elected group of individuals that represent shareholders.
In Zimbabwe Section 2 of the Companies Act 2012 defines a director as any person occupying the position of director by whatever name called and shall include a shadow director.
Therefore, under the law, a director is defined by what they do rather than the actual job title. Even a person not formally appointed by the shareholders might be deemed a director if their role could be deemed equivalent of a director.
The board is a governing body that typically meets at regular intervals to set corporate management and oversight policies.
In Zimbabwe according to the Companies Act every limited company is expected to have a set of board of directors. Directors exist in two forms namely executive and non-executive directors.
All the companies are managed and run by the company's top executives, the board of directors who are appointed by the shareholders at the general meeting to handle the affairs of the company on their behalf.
The composition of the company's board of directors includes both executive and non-executive directors. Executive directors are the working directors, hired by the company, for salary and who holds a position in the company's board.
And so, they are the employee of the company and the member of the board as well who represent internal directors whilst non-executive directors popularly known as NEDs are not part of the managing team and employees of a company but plays a crucial role in the formulation of policies and plans, and decision making of the company and represents external directors.
The 1992 Cadbury Report initiated a debate on why a board of directors should have two thirds of its board as NEDs because the prior reason for appointing a non-executive director to the company's board is their independence from the company's management and other stakeholders. Hence, they bring objectivity, unbiasedness, calibre and other qualities to the board.
Up to date countries as the UK have adopted this predicament. A balanced board of directors should have both sets of non- executive and executive directors such as the UK Corporate Governance Code which states that the board should include an appropriate combination of executive and non-executive and in particular, independent non-executive directors, such that no one individual or small group of individuals dominates the board's decision-making.
The structuring of a board of directors tends to be more varied outside of the United States. In certain countries in Asia and the European Union, the structure is often split into two primary boards — executive and supervisory.
The executive board is made up of company insiders that are elected by employees and shareholders. In most cases, the executive board is headed up by the company CEO or a managing officer. The board is typically tasked with overseeing the daily business operations.
The supervisory board concerns itself with a broader spectrum of issues when dealing with the company, and acts much like a typical US board.
The chair for the board varies but is always headed up by someone other than the pre-eminent executive officer and this is known as a two- tier structure.
The unitary board model is adopted by, inter alia, companies in the UK, US, Australia and South Africa. The company's directors serve together on one board comprising both executive and non-executive directors.
While much of the comment and discussion on a board of directors focuses on their importance in the running of a company much is to be discussed about their expected duties as well.
The relation between a board of directors and the company they serve is of a principal — agent relationship hence a board of directors occupies fiduciary duties aspect.
The definition of fiduciary duty is an obligation to act in the best interest of another party which are strictly codified in Section 198 of the Companies Act 2012 of Zimbabwe.
In a foreshadowing of the Act, the board of directors should always prefer the long-term consequences for the company over the short-term benefit for shareholders.
The board should always ensure a rigorous assessment of the environmental, social and health implications of its operations for its long-term success. Additionally, board of directors must be involved the company's strategic growth planning process.
The board must spend time dealing with the company's business strategy, its risks, and maximizing growth opportunities for the company's long- term success. The board of directors have a duty to exercise a degree of skill and care as a reasonable person would do looking after their own business.
Care can to be understood as carefulness, though not caution, skill suggests ability, whereas diligence might be understood as requiring a director to use his skills devotedly in the affairs of the company, in the particular matter in hand.
Such reasonable care must be measured by the care an ordinary man might be expected to take in the same circumstances on his own behalf and excludes damages occasioned by errors of judgment. Acting in good faith in the interests of the company as a whole includes fair and equal treatment of all holders of common shares is one of the key principles of effective corporate governance.
Among the specific rights that should be guaranteed equally total shareholders are: the right to receive dividends; preemptive rights to purchase additionally placed shares; the right to obtain adequate information on a company's activities; the right to participate in the general shareholders meeting, including adequate disclosure in advance of all materials necessary to make informed decisions and the right to receive a proportionate share of a company's property, after payment of creditors, in the event of its liquidation.
The board of directors has a duty not to put themselves in a position in which their duties to the company conflict with their personal interests as well as disclosing at the first opportunity their interest in any material contract with the company (or its subsidiaries) or their material interest in any person which is a party to a material contract with the company (or its subsidiaries).
The board must not use the position of director, or any information obtained as a director, to gain personal advantage or for personal gain, nor advantage for any other person, other than the company itself.
Nor must the director cause harm to the company as well as not accepting a benefit from a third party conferred by reason of being a director for his doing (or not doing) anything as a director and this obviously includes a bribe. The board covers a massive duty of ensuring that the company they serve operates and complies to the rules and regulations outlined in the Companies Act.
According to corporate governance executive and non-executive directors make up the board but their election process is different. The rules for appointing a director are set both by law and by a company's governing documents (the articles of association). A company's shareholders can appoint directors. This is usually done by passing an ordinary resolution in favour of the appointment.
The board of directors can normally also appoint directors but only when the articles of association allow them to do so.
Non- executive directors are appointed using a Letter of appointment (LOA) which is a contract setting out the terms of the appointment.
It has been argued that the process of appointing independent directors known as NEDs is influenced by the top management, the CEO, owners and controlling shareholders of a company as reported by the Malaysian Corporate Governance Code.
However, to ensure that the right people are appointed, the boards should follow a set of selection criteria for the appointment of new independent directors rather than make appointments based on a recommendation from top management.
Furthermore, appointment of nonexecutive directors should be from a broad range of professional backgrounds relevant to the operations of the company.
Executive directors are appointed using a type of contract of employment appointment (a service agreement), which covers their employment status, office as director and the relationship between these.
An effective and balanced board of directors adds up to the value of a company and leads it to overall success. Over the past years, companies have struggled to maintain a skilled board as its importance in the company outweighs the cost.
In essence, board directors are essential because they act as stewards of the company that govern for the present times and provide guidance and direction for the future. As they are the agents of the company, they serve they take part in making tough and risky decisions which should benefit the company and its shareholders in the long run.
They engage themselves into strategies to fight the company they serve against competition such as building brand and reputation, adopting new skills of operation and technology, compiling to a code of ethics. It is often argued that a well- recognised and good board of directors serve as a lee way to investor attraction.
A board of directors acts a listening ear to other lower employees since it ensures good working conditions for its subordinates, taking for instance, and executive directors aim to report to the NEDs and CEO issues facing and affecting lower level management.
Communication to the higher hierarchy is made easier when a board in place. Boards must communicate clearly and in a timely manner to develop a sense of mutual confidence and trust with their managers. It's important for board directors to be having regular conversations with managers about risk mitigation and prevention.
As your company grows, it will have an increasing need for experienced stewardship and strategic direction. In the real, world larger companies experience increasing tension between working in the business, day-to-day operations, working on the business, developing future strategy, creating policies to support business performance and dealing with compliance issues.
A board of directors comprises of both executive and non- executive directors and eventually big companies will reach a stage where it will benefit from “outside” or “independent” directors whose experience will help them work “on the business”.
These external directors bring valuable experience to guide a company through different growth stages. A board of directors is important in ensuring better business performance through skills of non-executive directors. Independent directors can bring additional skills that businesses may be lacking. They can also contribute their experience, especially if they have been through the growth stage of a company, like yours.
Independent directors offer companies an invaluable source of expert advice and act as a “sounding board” outside of friends, colleague and family networks.
They also introduce their networks that different companies can draw on. A board of directors promotes and improves access to capital. Outside expertise can improve a company's positioning and credibility in the market. Establishing an independent board demonstrates that a company is committed to good governance and compliance.
If trying to raise funds, investors will have a greater degree of comfort if they can see real independence demonstrated in company's board and an audit committee, chaired by at least one experienced director with financial expertise.
The decision to implement a board of directors can be difficult for some private companies. CEOs worry about loss of control and debate whether it is worth the cost and effort.
Some private companies assume that a board of directors is just a formal entity that is created at the point where they take in investors but with a great board of directors, a company can have people who are totally focused on what it needs to be successful.
They can guide a company to avoid the risks they don't really want to take. A great board of directors can help expand a company's vision in a way that helps a company achieve its long-term goals and strategic objectives. Lodestone Global in America recently published data that explores the financial benefit of implementing a board.
87 percent of survey participants responded their companies saw increased revenues and 81% reported increased EBITDA which stands for earnings before interest, taxes, depreciation, and amortisation, after implementing a board. Boards promote accountability because key managers are held accountable to deliver on their promises to the board.
Everybody has to report to somebody, and the board helps reinforce accountability and urgency. A board of directors provides “air cover.” Boards can provide cover for difficult strategic decisions such that CEOs or key managers can justify tough choices by saying “the board recommended it.
Having a board of directors is very important as it entails a good corporate governance system in a company. A company's Corporate Governance structure is critical for its successes. Strategy is as much a responsibility of the Board as it is of senior management and leadership. The level of involvement of the board however may vary depending on the size of a company. Rather than just being a “rubber-stamp”, engaged boards take a lead role in devising corporate strategies, ensuring that the company and all its departments are aligned towards its strategic goals at the same time monitoring proper implementation and execution of these strategic plans.
Numerous companies face the challenge of solving the question, how much should we remunerate the CEO, executive and non- executive directors?
The general public has a belief that directors and CEO often remunerate themselves which arouses conflict in any company set up.
A board of directors is important in handling such matters as it has a responsibility of drawing out remuneration schemes for the respected executives which works together with the boards role of creating dividend policies and layouts for its shareholders.
The board therefore eliminates suspicion amongst the public and interested investors of the notion that toplevel management compensate itself.
An effective board portrays integrity and availability of balanced objective advice which helps mitigating risk. Financial institutions, investors and partners view it favourably, which effectively lowers the cost of capital financing for a company.
Customers, employees and vendors view it as a safeguard of their interests. The ultimate protection of interests of various stakeholders of a company due to the existence of a board of directors further increases the credibility of a company.
This in turn can also be beneficial for owners or investors planning an exit strategy, making an Initial Public Offering (IPO) and growing the business.
Unfair dismissal of employees in companies has been long practiced but existence of a board of directors limits such incidents because the board has an ultimate responsibility of hiring and firing of members and executives.
In addition, a board of directors is responsible for helping a corporation set broad goals, supporting executive duties, and ensuring the company has adequate, well-managed resources at its disposal.
The board is important as it has the responsibility of developing a governance system for the business. The articles of governance provide a framework but the board develops a series of policies.
This refers to the board as a group and focuses on defining the rules of the group and how it will function.
The rules that the board establishes for the company should be policy based. In other words, the board develops policies to guide its own actions and the actions of the manager. The policies should be broad and not rigidly defined as to allow the board and manager leeway in achieving the goals of the business.
Another benefit of having a board of directors in a company is a board is responsible for representing and protecting the member's/investor's interest in the company. So, the board has to make sure the assets of the company are kept in good order.
This includes the company's plant, equipment and facilities, including the human capital.
A board of directors makes it easier and possible for a company to develop a governance system. The governance system involves how the board interacts with the general manager or CEO. Periodically the board interacts with the CEO during meetings of the board of directors.
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