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In: Accounting

How do we prevent or mitigate the loss of Agency between Owners and BoDs? Note that...

How do we prevent or mitigate the loss of Agency between Owners and BoDs? Note that the items discussed have mostly become key elements of corporate governance codes.

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Expert Solution

THE BOARD OF DIRECTORS (ROLE)

The role of the board is shaped by the unique characteristics of the corporation it monitors and the particular corporate issues it is called upon to address. Accordingly, the role of the board depends upon the circumstances of the corporation. A board must be tailored to unique corporate needs, but also be fl exible enough to address both matters of ownership and enterprise.Thus, a board should be composed of a group of diverse and adaptive directors, who can collectively adjust the role of the board to the changing environment. As mentioned above, directors and offi cers are deemed fi duciaries and as such, must fulfi l certain duties. Th e two core fi duciary responsibilities of the board are:

1.The duty of good care:- This duty requires that each director discharge his duties with the degree of diligence, care and skill that an ordinary prudent person would be expected to exercise under similar circumstances. This is of course a question of fact. In essence, the director of a company is expected to exercise the degree of care in the conduct of the company’s aff airs in a fashion that would be deemed prudent by a responsible individual managing his or her own affairs.

2. Duty of loyalty:- The requirement that the directors act in good faith is usually referred to as the directors’ duty of loyalty. Th e director’s duty of loyalty requires that the director serve the broad interests of the corporation when acting in his corporate capacity. Accordingly the director is prohibited from serving his own personal interests at the expense or to the detriment of the corporation. Hence, a breach of the director’s duty of loyalty removes the director’s action from the protection of the business judgment rule. Th e duty of loyalty essentially requires that when faced with a confl ict of interest, directors should act in the corporation’s best interest and not in their own interest. Much of a board’s role is a function of the corporation’s needs at any given point in time, which is, in turn, dependent on such characteristics as age, size and type of business. A younger firm may require more involvement from directors than an older fi rm with more sophisticated management. Smaller fi rms likely require fewer directors, but those selected may become more intricately involved in all aspects of the business. Larger firms may establish a complex board structure with a larger number of directors and committees, each with clear lines of responsibility. Th e board is expected to have a strong role in the articulation of the company’s objectives and in the formulation of corporate strategy. Any set of actions by management requiring stockholder approval, whether by statute, charter or by-laws is fi rst examined by the board. These actions include changes in the capital structure, undertaking major fi nancing programmes, acquisitions and mergers, management compensation plans, and filing for bankruptcy protection. Further, since the by-laws of most corporations place with the directors the formal authority of supervision and control of management, all capital investment plans (short and long-term) and financing programmes have to be ratified by the board. Corporations will seek directors with expertise in the industries in which they operate and in the regulatory and other regimes they must navigate. In short, the appropriate composition of the board is, to a large degree a function of the unique characteristics of time, place, size and structure of the corporation it monitors.


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