A conscious guardian of Corporate Governance ?
A company serves as an avenue for large investments and to conduct its business essentially with capital that has been raised from the general public or by private investors who are often the ones who administer and manager the company. It is a common platform for different stakeholders to make investments for profit.
In the company, there are usually various interest groups, thus requiring that all underlying operations be handled with transparency and with adequate controls by the company´s management.
An independent Director who is not involved in the daily management of the company, who is an external person, is the most appropriate person to look after the interests of the Shareholders, guaranteeing that the Company operates objectively and trying to satisfy all interested parties (Stakeholders). Furthermore, it is the responsibility of the Independent Director to hold the Administration responsible in case of suspicion of mismanagement within a Company.
Therefore, in such circumstances, it is appropiate to recognize that with such a large amount of capital that is raised and investments are made; the needs to promote the growth of a company; the benefit of having the specialized advice represented by the Independent Director, as well as having an interlocutor within the company´s senior management in the strategic, investment and financial plans of the business groups; The question arises of who should take the role or assume this type of responsibility in the company ?
Practice in all jurisdictions indicates that the presence of Independent Directors is a response to all of that.
Independent Directors and Corporate Governance
A combination of people, rules, processes, and procedures is needed to manage the incorporated business as a company. This is how we define Corporate Governance.
Corporate Governance forms the basis for corporations to make decisions that consider many environments, including the economic, social, regulatory, and market environment. Corporate Governance is rooted in ethical behavior and business principles, with the goal of creating long-term value and sustainability for all stakeholders.
Directors of Corporate Boards face the ongoing challenge of aligning the interests of the Board, Management, Shareholders, and Stakeholders. They respond to their duties and responsibilities with full respect for transparency and accountability.
It is often said that Corporate Boards are responsible for providing oversight, insight, and foresight. That is a difficult task in today´s market, which is complex and volatile particularly in these post-pandemic times. The principles of Corporate Governance are fundamental to the work carried out by Directors.
The Role of Directors in Corporate Governance
Corporate Boards have many duties and responsibilities. In every decision the Board makes, it must consider how it will affect its employees, customers, suppliers, communities, and shareholders.
Good Corporate Governance is based on clear differences in the roles of Directors and Managers. Board Directors were never intended to be directly involved in the day-to-day operations of a Corporation, and they certainly should not be involved in the micro-management of the Company. The primary role of the Board of Directors is oversight and planning. Despite the differences, the Directors of the Board may delegate certain powers to the President or the Chief Financial Officer under certain circumstances.
The Boards also regularly delegate some of their functions to the Board Committees. The Committees of the Corporate Board act as a subset of the full Board. Committees dedicate the necessary time and resources to issues for which the full Board doesn´t have time. Committees dig deep into issues and often turn to experts for help. The Committees provide periodic reports to the Board on the matters they are charged with handling.
What is the proper composition of Independent Directors on the Board ?
The composition and number of Directors for a company tend to be viewed differently in the early stages of development. Early-stage Boards of Directors typically include one or more founders. Boards are typically smaller in the early stages, with five (5) to seven (7) Directors having various areas of expertise. Odd numbers avoid a tie in votes. Each Board Director gets one (1) vote.
Board size generally increases with growth and is often related to the needs of the corporation and normal industry practices. As Boards acquire investors, they generally offer the CEO a seat on the Board. Some investors will also insist that they get a seat on the Board, so they can visibly monitor their investments. Shareholders also often influence the hiring of Independent Directors, who have increasing influence on the Board and the corporation as the company grows.
Best practices for Corporate Governance encourage Board of Directors to offer the majority of positions on the Board of Directors to Independent Directors. A wel-composed Board brings a wide range of experience, perspectives, and knowledge to that Board room. Regulators, Investors, and others are also working hard to get Boards to consider diversity in a multitude of domains, including age, gender, experience, ethnicity, race, religion, skills, and experiences.
Long-term role of Directors for Shareholders and Stakeholders
The function of the Board is to plan and strategize goals and objectives for the sustaining the company in the long term, and to establish mechanisms to monitor progress against the objectives. In this sense, the Directors of the Boad must review, understand and discuss the objectives of the company. In particular, the Board relies on Independent Directors to challenge the Board´s perspectives and ensure sound decision-making.
The role must have confidence in how they plan to address uncertainties and how they can capitalize on opportunities for the future, while identifying and managing actual and potential risks. To inspire the confidence of the Shareholders, it is necessary for the Directors of the Board to be able to articulate their plans for the future so that the Shareholders have a clear idea of the long-term prospects.
The relations of the Directors with Senior Management and Administration of the Company
It is best for the Board to develop good working relationships with Managers. Corporations work best when the Board and Management have the same perspectives on strategy, priorities, and risk management.
Communication is a vital component of good Corporate Governance. Board must communicate in a clear and timely manner to develop a sense on mutual trust and confidence with their Managers.
It is important for Board Directors to have regular conversations with Managers about risk mitigation and prevention. Managers must understand the risks in order to implement processes and thus protect the Company. The conversations about risks between the Boards and the Managers must cover a series of areas of economic, business, financial, technological risk, security, controls, among others.
The Role of the Independent Director will then be a conscious guardian of good Corporate Governance for Shareholders, Management and Stakeholders, with the appropriate composition on the Board, and to facilitate the achievement of the objectives pursued by the company.
by: Eddy Silvera
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