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Board of directors are part of strategic apex indulged in formation of strategy of the organisation. Strategy is followed by all lower levels and thus forms the basis for the success of organisation. In modern era directors are considered to be most significant element in entity and subject to more scrutiny than anyone else
Following essay has been aimed at brief study on relationship among duties and responsibilities of board of directors and their linkage with social theories. An effort has been made to put some light on studies of renowned researchers in social and management studies. Centre of debate is the study of Max Weber, Henry Fayol and Emile Durkheim.
Success of every organisation is correlated with its management regardless of their hierarchy level with in that entity. Each level has its own significance. Usually an organisation is divided into three basic parts.
Basic Components of an Organisation
Board of directors are part of strategic apex indulged in formation of strategy of the organisation. Strategy is followed by all lower levels and thus forms the basis for the success of organisation. In modern era directors are considered to be most significant element in entity and subject to more scrutiny than anyone else. Numerous studies have paid attention for role of directors in different time. Like Cadbury report, Higgs Report, Turnbull guidelines, king's report in Africa and Sarbanes Oxley in USA are considered to be evolutionary in this area. In United Kingdom all studies on corporate governance have been merged to form a generalized guideline for a company that is known as Combined Code of UK. Till to date combined code is operating under principle based approach and companies are subject to accept it voluntarily. Some major guidelines if combined code are manifold.
Board is responsible for setting values and standards of the organisation. Board of director should be composed of at least 50% of Non Executive directors to incorporate the element of independency of directors form management. Small companies can have 2 NED's
Selection criteria for directors should be transparent and rotation should be there after reasonable time and shareholder should be aware of all the process.
Board and all the committees should be appraised after regular intervals questioned if lacking the element of effectiveness and efficiency.
Remuneration of directors should be decided by remuneration committee composed of Non executive directors. Salary should be performance based and can be in form of package like Executive Share Option Scheme or bonuses after achieving certain target either in sales or efficiency.
Board of directors are accountable for presenting true and fair view of company. Development of sound internal control system and avoiding risk of company are major tasks of board of directors.
Members of board of directors should have suitable expertise relevant to their position and role.
Shareholders should be informed and kept in confidence by board of directors and substantial issues should be resolved by having separate resolution in general meetings.
One of key concept regarding director's role and position in a company was determined by the agency theory. Directors were considered to be bond in agency relationship with the owners of entity. Shareholder being the owners was considered principal in this arrangement and directors work as an agent for them. So like any agency relationship agreement it is director's first and foremost responsibility to work for the betterment of shareholders. Whatever the corporate governance structure an entity has either principle based approach or rule based approach it has devised principles to keep an eye on directors. There have been some notorious scandals in past when directors diverged from their responsibilities towards shareholders and company as well. One of well known scandal in these was the scandal of Enron Scandal and also the case of Arthur and Anderson that was one of the biggest accountancy practices in USA. After these huge scandals in both public and private organisations, it was the essence to develop a comprehensive set of rules to avoid future events of similar nature.
Following people can be suffered directly or indirectly by the performance of company.
Now the role of director has widened its jaws and expectations from top management have been raised by all the stakeholders of company. Duties of directors have been legalized now in company law. Duties of directors have been divided into different areas. Some of the duties of directors are manifold.
Duty to Act within powers. They should not exceed their powers conferred on them by articles of association and actions of company should not be beyond its Memorandum of Association. (Sec 171 Companies Act2006)
Prime objective of directors is to promote the success of company. They should consider long-term consequences of any decision by acting in good faith. Success of shareholder is the success of shareholders. (Sec 172 CA 2006)
Duty to exercise independent judgment is also part of director's responsibility.
Promotion of success of the company is also the duty of directors. They should act in bona fide interest of company and should consider the long-term consequences of their decision on the wealth of shareholders.
One of the most important part that directors can play to exercise their skills that are reasonably expected from the person at same position. They are responsible for the protection of the assets of the shareholders.
Conflict resolution is also a major issue in any organisation. Usually a predefined procedure is followed. It's a real challenge for board of directors to create win win situation for both parties and the ultimate beneficiary should be the shareholders of that organisation.
Directors being at very high position can influence the other organisations and create links with third parties. They can make secret profits and may diverge from the interest of shareholders. Individualistic behaviour of directors is prohibited. So they should not accept benefits from third partied to eliminate self interest or familiarity threat.
Disclosure of all interests is required to directors if they indulge in a transaction with company or on behalf of company.
Keeping an eye on liquidity position of company and to manage the risks countered by organisation is also key role of board of directors.
Maintenance of appropriate record of organisation is the responsibility of directors. It is not only for legal or taxation purpose but also for administrative purpose.
Max Weber and board of directors
Weber was born in 1864, in Germany. Weber served as director of the army hospitals in Heidelberg during the First World War. Weber's famous work relates to economic sociology, political sociology, and the sociology of religion. He is regarded as one of the founders of modern sociology.
Weber investigated bureaucracy, which he regarded as the most efficient of all forms of organization. In bureaucracy he noted that there are numerous written rules and standard procedures and complete separation of policy making from operational control. Bureaucracy is rational, stable and self-perpetuating and it involves a lot of planning, many levels of authority and the managerial division of labour which is extensively applied.
Bureaucracy hides the limitations of the individuals by establishing a system of division of labour. Each office function has a sphere of competence within which it is empowered to act. According to Weber, bureaucracy was a logical institutional response to the organizational needs of industrial society. It's under Weber's system of bureaucracy where roles and responsibilities of individuals (board) within an organization arise. This enhances accountability among individuals as they become aware of what is expected out of them and work towards achievement of their goals.
The concept of division of labour among the employees in an organisation is quite evident in theory of Max Weber regarding bureaucracy. Delegation of duties and authorities is a form of division of labour. For example, the top company management is usually appointed or designated by the board of directors who are the organization governing body. Their authority is concerned with the overall management policy and strategy. On the other hand, the middle level management, like the head of departments deals mostly with the actual demonstration and operation of the firm's activities in a particular section. Similarly director themselves are also appointed by shareholders of company. They work as an agent of company under agency theory.
Weber's principles have direct relation with the responsibilities of board of directors. Some of these relations have been highlighted below.
According to Weber, organizations have a variety of levels, for example the lower
level is controlled by the level above (Andrew 57). It's at this the top
level that forms the basis of central planning and centralized decision making in a
company. Strategy formation is the responsibility of board of directors.
Management by rules
Management by rule or top down approach consist the formulation of rules and regulations by the board of directors that allows consistent execution of decisions by all lower levels. This is also similar to the power and authority which comes from the higher level management to lower level.
The division of labour allows groups in organization to perform tasks based on their skills.
This ability to differentiate work based on functions improves the organization's ability to
motivate employees. Moreover, this leads to development of norms and values, and groups'
cohesiveness that promote high performance (Stones 37).
The idea of the board is to treat the entire line of employees uniformly as well as customers,
and by so doing, not subjective by individual differences.
The bureaucratic structure in management is very common that majority of board members tend to accept its normal way of organizing or coordinating company activities as well as any endeavour. Individuals in bureaucratic firms usually accuse the unattractive side effects of bureaucracy on management, or the board, or the shareholders, without awareness that the real cause is the organizing form (Nicos 118).
Although bureaucratic organisation provide sense of security and chances for career development but they are still some inherent limitations in Max Weber's bureaucratic structure that are manifold.
Actual behaviour is sometimes influenced by charismatic leaders who are not the part of official chain of command.
Bureaucracy can also stifle initiative like precision of job descriptions may encourage personnel not to think or act independently. This structure has lack of innovation and creativity.
Social theorists believe that frequent bureaucracy in an organization will rarely accommodate change.
Emile Durkheim theory and Board of Directors
Emile Durkheim a French sociologist was born in 1858. He combined sociological theory with empirical social research. Beside Weber's concentration on bureaucracy and level of authority which he regarded to be the best forms of organization, Emile Durkheim theory emphasizes the relationship between the individual and society. Based on this theory, organization comes in between individuals and society and has to operate according to the stipulated norms of the society.
The board of directors will always act like a bridge between the shareholders and the top managements of the company and serve the interest of the shareholders not individual (their) interest. Durkheim was initially concerned with how a society need to sustain the integrity and consistency in today's job set ups, times when religion and ethnic settings is the order of the day.
Durkheim Theory of Sociology
Durkheim was the foremost individual to give explanation concerning the reality and value of diverse parts of a society for example the employment sector and its key stakeholders in regard to the functions they play to support its continuation. Durkheim theory stressed that society is even more significance as compared to the sum of its components. Thus, unlike his social group of Max Weber, he paid more attention on what motivated individuals to actions rather than a focus on social facts; a phenomena he invented to illustrate an existence of a given class of people - board who were not bound to actions of their colleagues; their juniors.
Classical organization theory of Henry Fayol
Henry Fayol who was a frech industrialist, offered fourteen principles of management for the very first time in 1916. According to him managerial excellence is a technically ability and can be acquired. He developed theories and principles of management which are universally accepted and make him universalistic. He was pioneer of the formal education in management. Fayol's principles of management meet the requirements of modern management.
Henry was one of first to describe management function as top down just like Weber bureaucratic structure he explained the flow of decision from apex. He described
If we analyze the Henry Fayol's principles we can find some best practises that can be followed by board of directors to lead the entity in right direction. Some of these practices are described below that can be adopted by board of directors.
They should make a combination of long term and short term planning. This strategic planning must include flexibility, continuity, relevancy and accuracy.
Strategy formation should be a rational approach.
Plans should be imposed on lower levels. They must be controlled and reviewed after regular intervals.
Duties should be clarified and care should be taken during recruitment process within organisation.
Single and precise decisions should be made.
Classical organization theory according to Fayol is very essential for effective operation of an organization. This theory connects with Weber's bureaucratic system where organization authority is segmented, hence provision for division of labour and levels of authority and responsibilities. Moreover, Fayol theory links with his counterpart Durkheim linkage of individuals to society-through the expected norms from an individual to society and from society to an individual; discipline. The principles of management highlighted by Fayol include;
Division of work
According to Fayol, division of work or specialization of labour depends belongs to the natural order. It helps a person to acquire an ability and accuracy with which he can do move and better work with the same effort.
Authority and responsibility
He stressed that authority is not to be conceived of a part from responsibility and wherever authority is exercised responsibility arises. For instance the board tends to exercise authority to their juniors which increases their roles of monitoring the corporation operation which should be geared toward achievement of organization goals and objectives.
The respect for the set down organizational norms directed at achieving obedience at work is necessary. This should prevail throughout an organization as it's essential for smooth running. Senior (board) should respect their juniors and juniors respect their seniors.
Unity of command
Every subordinate should receive orders and be accountable to only one supervisor. This stops the overlapping of duties and authority, as individual group is answerable to one person (supervisor) who delegates duties and monitor their progress.
Unity of direction
According to Fayol this principle, Henry argued that each ground of activities having the same objective must have one head and one plan. This will always create efficient in the way tasks are being carried out and responsible person who is in charge of this task.
Individual general interests
This call for general allocation of roles and responsibilities based on the individual interests which tends to reconcile the efforts invested in a certain task. Based on this principle, there should be a clear distinction between organization interests and those of an individual. When there is conflict between two, the interest of organization should always prevail over individual interests.
Remuneration of personnel
The amount of remuneration and the method of payment should be just and fair. It should also provide maximum possible satisfaction to both employees and employers. The success of a remuneration package will always motivate employees and employers to achieve the set goals of an organization.
The degree of centralization of authority should be based upon optimum utilization of all faculties of the personnel.
Line of authority (Scalar chain)
This principle refers to the chain of superiors ranging from the ultimate authority to
the lowest level in the organization. There should be a clear line of authority ranging
from top to bottom of the organization. This emphasizes, that the interaction between
departments is only made through the head of such departments.
This is concerned with the arrangement of things and placement of people.
Employees should be selected or shortlisted in a certain manner to create some order
in recruitment. Roles and responsibilities of the board should be carried out in a
certain order to avoid being questioned by the employees or the public. In material
order, there should be a place for everything and everything should be in its proper
The principles imply that employees should be treated with justice and kindness.
Both the board and managers should be fair and impartial in their dealings with subordinates.
Stability of tenure of personnel
Employees cannot work efficiently unless job security is assured to them. For the new recruits, time is required for an employee to get used to new work and succeed in doing it well. This also calls for the board to create a good working environment that suits employees' top performance.
Employees at all levels should be given the opportunity to take initiative and exercise judgment in the formulation and execution of plans. The board should create freedom for employees to express their views and what they desire for optimum performance in their work. Such initiative helps to perfect the areas of operation within the firm.
Esprit de corps
This refers to the harmony and mutual understanding among the members of an organization. Union is strength and unity in the staff is the foundation of success in any organization.
According to Henry Fayol, there are five basic functions that should be performed within an organization. The process of management consists of several interrelated activities (They include;
Board of Directors
Henry Fayol Management Activities
Planning is the core task of Board of directors. It involves determining what the organization will specifically accomplish and deciding how to accomplish these goals. It involves setting goals which may be long term or short term for the completion of mission.
This entails designing jobs for employees, moving this job together in developing working relationship among organization units and employees to carry their functions.
Leading: This constitutes motivation, leadership, communication and other behavioural aspects that guide all employees in exercising their efforts. It is the set of activities and behavioural acts influencing other activities in the organization to achieve set goals.
Coordination among all the departments is also of key significance. Lack of coordination can lead to duplication of work. Wastage of time can be there during the flow of information. The board can develop Management Information system that will streamline the flow of information.
As mentioned earlier that like the bureaucratic structure of Max Weber, Henry also emphasised on flow of decision from top level.
This refers to those activities an organization undertakes to ensure that its actions lead to achievement of its objectives. It entails collecting and analyzing information about work performance and taking corrective actions if this information indicates that performance is not contributing to goal achievement.
The sum and substance of this brief study on board of directors and management theories is that the most of management theorists have almost similar opinion. This analysis and study point out that the management theorists' views on managerial issues are almost similar. As Max Weber gives emphasizes on bureaucracy system in organization and if the direction of flow of decision making is form top level it will generate more result generating strategies. There will be least conflicts of interest. As we mentioned earlier that lack of support from bottom can weaken the roots of strategy so in modern age any strategy imposed by strategic apex to lower management should have a blend of lower level ideas. For successful implementation of Henry's best practices there should be harmonization of activities and all fourteen principles should be considered by board of directors when developing long term plans for company. The work of Durkheim can also assist board of directors to consider the new aspects never discussed by Weber or Henry. Even a very strong strategy can face failure if not accepted by social norms. For example the opening of wine factory in country where it is strictly prohibited can lead to failure of business even the strategic planning is very well.
So by incorporating social factors a board of director can formulate a strategy that is more close to reality. 2nd element of Durkheim's study was for board of directors to avoid individualistic behaviour and work for the betterment of shareholders not for their personal interest.