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In general, a board of directors is an agent to represent the shareholders and run the company. A board in large corporation is not involved in running the day to day operations. Instead , the board handles major decisions and is responsible for everything else to corporate officers.
Functions of board of directors :
fire, evaluate, and maybe fire top management.
Vote on major operating proposals. (large capital expenditures)
Vote on major financial decisions. (issuance of stocks)
Offer expert advice to management.
make sure that the firms's activities are accurately reported to shareholders.
The board of directors provides an important corporate governance function , because it is a part of the firm's organizational structure ( at the top of the corporate hierarchy) so it might be considered the most important internal monitor of the company.
The board legal duties:
according to business corporation act, Every state requires that a corporation should have a board of directors , and a corporation should be exercised and managed under the authority and direction of board of directors. Moreover , directors required to act in good faith, sincere , and meet the best interests.
Directors have a fiduciary duty , to enhance the firm's profitability and share value. Directors also have a duty of loyalty and fair dealing. They must also exercise the duty of care. Finally, board of directors must have a duty of supervision.
Election of directors :
Shareholders vote to elect the board of directors. the vote depends on the voting power of each share of stock. All of the board of directors can be removed and replaced by the shareholders for any reason or no reason, although the timing of replacements may vary depending on the company's rules. However , the process of electing the board of directors is not easy in large corporations.
When there is a contested vote to elect directors , this is called proxy fight , which means management and discontented shareholders try to persuade other shareholders to vote for their candidates.
Nowadays , voting is becoming an easy way , because of increasing the electronic communication and the technological develepments.
Major Responsibilities of Board of Directors
1. Determine the Organization's Mission and Purpose
2. Select the Executive
3. Support the Executive and Review His or Her Performance
4. Ensure Effective Organizational Planning
5. Ensure Adequate Resources
6. Manage Resources Effectively
7. Determine and Monitor the Organization's Products, Services and Programs
8. Enhance the Organization's Public Image
9. Serve as a Court of Appeal
10. Assess Its Own Performance
Definition of good board :
Members with experience and likely to be good boards. At least they should had worked in the same industry for several years.
A board that consists of members who have different backgrounds may also be a good board, so they can share their skills and experiences.
Independent boards :
In general , A board consisting of outsiders and independent members is an effective board that could be monitoring the management in an effective way.
Shareholders and regulators believe that outside directors are more objective at evaluating management. However , it is difficult to identify the relation between board independence and board effectiveness. This makes it difficult for regulators to impose board independence regulations, as what is deemed independent is ambiguous.
A board with fewer members might be a better board. Smaller boards are more effective at enhancing a firm's value than larger boards.
For a board with few directors, each board member may exert more efforts , but with large boards it may be more difficult to reach and get anything meaningful done. Therefore , smallet boards may be more dynamic and more active.
Potential problems with Board of directors :
doubts about the capabilities of serious evaluating for the CEO of the corporations.
Doubts about the capabilities of providing the time and expertise required to understand the operations and financial decisions in the firms.
Boards of firms that have been reeling from scandal were filled with former or current executives.
Directors do not have significant vested interests in the firm.
Some directors do not have the expertise to be a board member, which mean lack of independence, so this is not suffveicient quality for being an effective directors.
Some boards are too large, which makes it more unlikely that all directors will be actively involved and more difficult to accomplish needed work.
In summary , the boards nowadays are facing a lot of problems . many directors might not be truly independent, they might be too busy, and they might not have the expertise to carry out their obligations.
An audit committee is a subsect of a company's board of directors . Members of the audit committee are also members of the board. Although the audit committee is one of many board committees, it is very important one. The audit committee not only contributes to the governance of the company, but also helps meet the expectations of outsiders for strong corporate oversight. The responibilities assumes bu audit committees are significant. Regulators are others rely on Audit committees to monitor and help direct a company's system of corporate governance.
Audit Committees provide a counterbalance to the powers held by management because the company. Furthermore , audit committees have specific responsibilities related to the auditor. The relationship and interactions between the audit committee and outside auditor strengthens each of them, permitting them to contribute to the company's honest financial governance and reporting.
Requirements that the independent auditor should communicate with the audit committee are, the all all accounting practices and policies, discussion of all disclosures and treatments that are not understood, and give obserevations and wait for feedback.
Attributes of an audit committee members :
Understanding of GAAP.
Preparing,auditing, analyizing and evaluating financial statements.
Understanding of internal controls.
Understanding of audit committee functions.
Well educated and have an experience in field work.
Supervising and overseeing.
Responsibilities of an audit committee:
A communication tool between board of directors and external auditors.
Oversee the accounting functions .
Supervise and evaluate the current activities of the organization(segregation of duties, documentation, safeguarding of assets and authorization.
Meet on a regular basis (quarterly, monthly or anually).
Handle and receive complaints related to accounting , ICFR, and auditing issues.
Resolving any problems that may arise between management and auditors.
Hiring , compensating, and overseeing the company's independent auditors.
Issues of the company should be confidential.
According to SOX , the definition of an Audit committee is :
A committee (or equivalent body) established by and amongst the board of directors of an issuer for the purpose of overseeing the accounting and financial eporting processes of the issuer and audits of the financial statements of the issuer.
Each issuer must have , and certify that it has and will continue to have , an audit committee of at least three members,each of whom:
Satisfies the independence standards.
Must not have participated in the preparation of the financial statements of the issuer or any current subsidiary of the issuer at any time during the past three years.
Is able to read and understand fundamental financial statements, including a company's balance sheet, income statement, and cash flow statement. Additionally, each issuer must certify that it has, and will continue to have, at least one member of the audit committee who is financially sophisticated.
Exceptions exist that allow one member of the audit committee to lack independence under certain criteria and that permit audit committees to smaller companies to be made up of only two members.
Composition of audit committees:
The new york stock exchange requires audit committees to have at least three members who must be independent. This differs from the requirements for Board of directors membership, since directors are not required to be independent. SOX sets criteria for independence that have been implemented through SEC requirements. The SEC requirements are also referenced by the new york stock exchange in its rules. The SOX independence requirements state that an audit committee member cannot be affiliated with the company or any of its subsidiaries. Furthermore , an audit committee members cannot be compensated by the company for any activities except their participation on the board of directors, audit committee, and any other board committees. The SEC rule reflects the substance of the SOX requirements.
Audit committees are also expected to have at least one member who is a financial expert. The SEC rule requires companies to disclose if they have at least one audit committee financial expert serving on the audit committee. The company must also disclose the name of the expert and state that the expert is independent of management. If a company does not have an audit committee member who qualifies as a financial expert, it must disclose this fact and explain why.
Rules and procedures
The Audit Committee shall decide on its own rules of procedure and communicate it to the Committee of Ministers.
The annual work programme and related budget of the evaluation and internal and external audit functions shall be brought to the attention of the Audit Committee.
The Audit Committee shall adopt recommendations on a consensual basis. In the case of dissent among Committee members, the conclusions of the chairperson in charge of the meeting, together with the dissenting opinion, shall be presented in the subsequent Committee report.
Access to documents
The Audit Committee shall have access to all records and documents of the Organisation, including audit and evaluation reports, investigations, and work documents of the Directorate of Internal Oversight as well as the reports and management letters from the External Auditor. Committee members shall sign non-disclosure statements at the beginning of their tenure.