Question

Analyse the interaction between members’ rights, directors’ duties and corporate governance

Answer 1

The term "Corporate Governance" is a versatile concept. “It includes the structure, systems and process a corporation uses to communicate authority, responsibility and accountability among stakeholders. Good Corporate Governance is one which balances the interests of various Stakeholders namely, a company's employees, government, suppliers, owners and customers to ensure the long-term sustainability and success of a corporate venture.” 1 Corporate Governance is based on standards and guidelines. The corporation while being independent identity, has network of relationships with a large body of stakeholders such as directors, staff, suppliers, customers, state, society and the community where corporation is located. Shareholders are the indispensible part of any organization, as they are capital providers to the organization. Directors become part of supervisory board to oversee the work of Executive committees. Here Corporate Governance play vital role for safeguarding the interest of various above mentioned Stakeholders.

One of the primary aspects of Corporate Governance is corporate compliance with all applicable Central and State regulations. Banks have to follow a set of laws administered by national and local governments. These laws shape the composition of a Bank’s Corporate Governance guidelines before it begins to operate.

The stakeholders of a corporation are employees, customers, creditors, staff, suppliers, state, society and owners. Each of these parties is somehow related to the business. Corporate Governance Code helps the banks to meet the interests of each of these stakeholders without compromising the overall integrity.

“The owners of an organization are called shareholders. They are the primary stakeholders in any organization. The return on their investments in the corporation depends upon success of the corporation's workings. Shareholders meet annually to elect members of a Board of Directors who take care of their investments in the company. Shareholders may not play role in the company's operations or development. This “disconnect" between the owners of a corporation and the company itself is one of the most critical aspects of Corporate Governance. Good Corporate Governance emphasises on healthy and transparent relationship between stakeholders and company's operations.”

The Board of Directors in a corporation play imperative role in the Corporate Governance structure. Board members look after the budget and operations of a bank. It is part of their duty to scrutinize the operations and present them to the shareholders sincerely and accurately. The board is the primary player of Corporate Governance. They are the link between different stakeholders of the bank.

The relationship between the board of directors and the management cannot be described as just being that of a relationship between an employee and his or her manager. Though the board oversees the decisions taken by the management and ratifies them along with acting as the final arbiters of the strategic direction and focus that the company is heading into, the relationship goes beyond that. For instance, the board of directors is responsible for the actions of the management and hence not only does the board need to monitor the management, the management needs to take the board into confidence about its decisions. Hence, the relationship can be described as being symbiotic with each with each serving in an ecosystem called the organization. The point here is that neither the management nor the board can exist without each other and hence both need each other to survive and flourish.

Another aspect to the relationship between the board and the management is that more often than not, there is a significant representation of the management in the board. This means that the other board members have to study the decisions taken by these members carefully so that there are no agency problems, conflicts of interest and asymmetries of information.

Only when the board and the management coexist together in a harmonious manner can there be true progress for the organization. For this to happen, there must be a provision for having independent directors and those directors that are not affiliated to the management. The point here is that unless there is objectivity and separation of the directors belonging to the management and those from outside can there is a semblance of avoidance of conflict of interest.

The third aspect of the relationship between the board and the management is the role played by institutional investors or directors from large equity houses and mutual fund companies. These directors bring to the table rich and varied expertise and experience in running companies and hence their input is crucial to the working of the company. It is for this reason that many regulators insist on having a certain percentage of the board as independent directors and another percentage from institutional shareholders. The reason for this is the fact that unless there is a process of due diligence and oversight over the actions of the management, the management can take unilateral decisions that are not always in the best interests of the company.

Finally, the relationship between the board and management is somewhat strained whenever the company is not doing well. This happens because the board has a top view of the organization and the management has a deeper insight. Hence, to be fair to the management, they are the ones who have to run the organization and so they cannot be constrained by what the board dictates sitting on its perch. This is the classic problem that many companies face especially when they are not doing well and the remedy for this is to take the board into confidence about the complexities of the day to day operations and apprise them of the nuances and subtleties of running the organization.