Company AND Security Laws: The Role AND Functions Of Directors In Corporate Governance Report Sample

Introduction

Organizations can at times create positions that are just unique to them (as determined by the company’s operations). On these unique jobs, the law might not have anything specific to say, except perhaps only under industrial laws. However, there are positions that are known to be a natural part of all organizations and are, as such, specifically defined by the law. The board of directors is one of the sections that are natural to corporate governance, particularly for companies that operate large sums of money. Indeed, it is central to the governance of companies. The board of directors plays several roles and performs different functions, including hiring for top management positions. Based on key court cases over the years: AWA Ltd v Daniels (1992) 7 ACSR 759 and ASIC v Rich [2003] NSWSC 85, as well as a review of the CAMAC, Guidance for Directors Report of 2010, this paper summarizes the major roles and functions of the board of directors in corporate governance.

Part 1

AWA Ltd v Daniels (1992) 7 ACSR 759: a Summary

Function(s) of the Board of Directors

Generally the main function of the board of directors is to run the affairs of companies which operate on large sums of money. The main role of the board of directors is the oversight of a company’s affairs. In this respect, the board makes the key decisions regarding the present and future of the company. To do this, the board must know the ‘up-to-date’ position about matters (AWA Ltd v Daniels, 1992).

Set corporate goals

Appoint the chief executive
Oversee the manager’s plans for the acquisition and organization of corporate financial and human resource in the effort to attain the organizational goals

Regularly (bi-monthly, quarterly or half-yearly, etc) review the company’s progress towards attaining the organizational goals

Hire and seek the advice of expert or professional advice on complex matters and situations.
Roles of Management as Distinguished from those of the Directors
Performing day to day control of the company’s business affairs
Establishing a framework for proper internal control, including the management of accounting records and management information systems
Communicating to those under them and implement the policies and strategies adopted by the board
Reviewing and summarizing on behalf of the board the figures, contracts and other information on the company’s affairs as well as financial position

Preparing proposals regarding certain aspects of the day to day running of the company and submitting these to the board

Preparing the company budget
Running personnel matters, such as the hiring and firing of staff as well s determine their terms of employment
Roles/Duties/Functions of a Managing Director or Chief Executive Officer (CEO)
The judgment also distinguished non-executive directors from the managing director (MD) or the chief executive officer (CEO). According to the judgment, the CEO or MD is the ‘director’ to whom the board has delegated its powers of management of the company’s business. In other words, the MD or CEO works on behalf of the board. Unlike the non-executive director, the MD or CEO is bound to give continuous attention to the company’s affairs (AWA Ltd v Daniels, 1992).

Roles/Duties/Functions of the Chair of the Board of Directors

The judgment also distinguished between the roles/duties’ functions of the directors from those of the board’s chairman (i.e. chairman of the board of directors). The chairman of the board has more responsibility than any other director (AWA Ltd v Daniels, 1992). His/her roles include:

Sets board meeting agenda by selecting matters and documents for the board to attend to.

Formulates policy of the board
Promotes the company’s position
In this respect, the board chairman must corporate with the MD or CEO.
Part 2
ASIC v Rich [2003] NSWSC 85 on the Roles/Duties/Functions of the Chairman of the Board of Directors: a Summary
Another legal event that had a key impact on the evolution of the roles and functions of the board of directors and the management in corporate governance was the ASIC v Rich [2003] NSWSC 85 case, particularly in the paragraphs 51-72. On the roles, duties and functions of the Chair of the Board of Directors, this case summarized the conclusions of previous cases in which this matter was a key consideration. This was largely due to the lack of a legal provision for this position. Generally, the judgment outlined the following as part of the roles/duties/functions of the chairman of the board of directors:
Presides over board of directors’ and shareholders’ meetings, and in this respect preserves good order during discussions and decision-making, so that business is conducted properly

Sets agenda for board meetings

Ensures the members of the board fully perform their supervisory duties, including leading the board in monitoring management
Ensure the board is familiar with the company’s financial circumstances, position and performance, including carefully going through the returns from the other branches (with the general manager) and bringing to the attention of the board any issue(s) requiring their consideration

Settle the agenda of the board meetings

Formulating policy of the board
Promoting the company’s position, including ensuring the accuracy of public statements made on behalf of the company as well as the company’s compliance with stock exchange listing rules
CAMAC, Guidance for Directors Report (2010): a Summary
In 2010, the Australian Government’s Corporation and Markets Advisory Committee (CAMAC) published the Guidance for Directors Report, which provided in detail the roles, duties and functions of the different positions in the company towards corporate governance. The report provided answers to some of the following issues (CAMAC, 2010):

The Responsibilities of the Directors

According to this report, the board of directors holds important responsibility in the company. Generally, the report notes that the board:

Run the company on behalf of the shareholders

Plays a central role in the corporate governance system, with the ultimate responsibility for the direction and performance of the company. Implementing and continually maintaining global practice standards of corporate governance

The Best Practice for Board Structure

The directors do hold a lot of power and influence in the company. This can lead to the abuse of power, with some directors working for their own benefits, sometimes at the expense of the company. However, according to the CAMAC (2010) report, how much of power and/or influences an individual director realizes he/she has depends on “the nature of his or her interaction with fellow directors on a company board” (CAMAC, 2010, p.7). This interaction is determined by the board structure. Therefore, to avoid the abuse of power and influence of the directors, it is important to adopt the right board structure. Although there is no one framework for the ‘right’ structure, the following recommendations are considered important:
A unitary approach, which allows for the consolidation (into a single unit of strength) of the skills, knowledge and experiences of the individual directors

Have fewer executive directors

Demands and Expectations Placed on Directors
In relation to their roles and responsibilities, the board of directors is expected to carry out their roles and perform their duties is expected to set the tone for the how the company is governed and performs. In this respect, the directors are expected to understand the fundamentals of the corporation’s business and the trends in the industry within which the company operates. This can be hard on the non-executive directors who may be only part-time and have managerial role and, consequently, lack sufficient ability to oversee the company’s day-to-day business. But this may also be hard on the executive directors, especially if the company is big and constitutes large and complex operations (CAMAC, 2010).

Relationship between the Directors and the Management

For the board to perform its duties and responsibilities, it must with the management, who have a better view of the day to day operations of the company. In this respect:
The directors rely on the role of the management to run the day to day business on their behalf, including the implementation of their decisions and keep the abreast about the performance and the direction of the company.

The directors also depend on the advice of the management to make key decisions for the company.

The Meaning of Board Effectiveness
An effective board is expected to help the company achieve its short- and long-term goals. In this respect, the directors are judged on their ability to constructively challenge and help develop strategy proposals, effectively scrutinize performance the performance of management towards meeting agreed goals and objectives as well as monitor the reporting of performance (CAMAC, 2010).

The General Legal Duties and Obligations of the Directors and the Potential Dangers of these Legal Duties and Obligations

Generally, this report lists these as the legal duties and obligations of the board of directors:
Oversee the operation of the company’s operations
Set the company’s strategic aims
Supervise the management of business and report to the shareholders
The company directors do hold considerable power and influence in the company. Directors may, therefore, abuse their power and influence for personal or group benefit at the expense of the company and the shareholders. However, the answer to this, as noted above, is to adopt the right board structure.
Apart from adopting the right board structure, the directors are not unanswerable for the actions and decisions. Moreover, the directors are subject to a range of legislative and reporting requirements. These fall under environmental protection, workplace relations, occupational health and safety, consumer protection, competition, anti-corruption statutes and human rights, among others (CAMAC, 2010). Upon the breach of any of these provisions, the directors may be individually liable and be subject to civil or criminal liability.

R Grayson and I Ramsay on the Responsibilities of the Board of Directors: Summary

Grayson and Ramsay (2014) also cite the conclusions of previous court cases in which this matter was explored and, consequently, hardly offer anything new about the responsibilities of the board of directors that has not been addressed in the documents cited above. However, Grayson and Ramsay (2014) divide these responsibilities into two categories: statutory and the corporate ones (set by the company constitution).

Besides the statutory responsibilities, the board of directors is expected to:

Set corporate goals

Appoint the chief executive officer (CEO)

Oversee the managers’ plans for the acquisition and organization of the company’s financial and human resources in the effort to attain the organizational goals and objectives

Regularly review the corporation’s progress in attaining its goals and objectives

These responsibilities come with legal obligations. For example, the directors are expected to exercise their duties with care and diligence. This includes only approving financial statements that comply with the set accounting standards, which involves proper scrutiny of all reports forwarded by the MD or CEO.
There is an exploration of the directors’ delegation roles. This is also nothing original, only stating (as already stated above) that the directors, not being able to run the day to day operations of the company, delegate these duties to the management, particular directly to the managing director or chief executive officer who communicate and implement the policies and recommendations of the directors to the rest various departments of the company, all towards achieving short- and long-term organizational goals and objectives.

Evolution of the Roles of the Board of Directors from the 1990s to the 2010s: Critical Analysis

These reports cover the way that the position as well as roles, duties and responsibilities of the board of directors has evolved over the years, particularly between 1990s and the 2010s.
As evident in the AWA Ltd v Daniels (1992) 7 ACSR 759, by the early 1990s, the legal framework did not yet specify what was the role of the board of directors. Instead, in Australia, for instance, the role of the director was defined under the 229(2) of the Code. It merely stated that the director is supposed to “exercise a reasonable degree of care and diligence in the exercise of his or her powers and the discharge of his or her duties” (AWA Ltd v Daniels (1992) 7 ACSR, p.864). But the question of ‘care and diligence’ left a lot of questions unanswered, particularly what ‘care and diligence’ involved. As a result, legislation on companies did not yet distinguish between the roles of the board from those of the management, and even the roles of the directors from those of the chairman of the board. For example, the court, in their examination of the circumstances surrounding the case, found that the chairman of the boards had no other responsibilities that distinguished him/her from the other directors besides presiding over board and shareholder meetings. It was, therefore, mostly left to isolated court case judgments to provide the answer to this question. The AWA Ltd v Daniels (1992) 7 ACSR case was one of those that started to specify the roles and responsibilities of the board of directors in corporate governance. These judgments, as already noted, was not based on any legislations, but more on their understanding of the increasing complexities of commercial life and the nature of corporations (including, but not limited to, increasingly large annual turnover, large stake assets and liabilities and the management and use of very substantial resources, including as many as thousands of employees) and how these had impacted on the expectations of communities on directors and even reflected in increased payment packages.
The ASIC v Rich [2003] NSWSC 85 case at the start of the new millennium also did not find any concrete legislative provisions for the role and responsibilities of the directors. Like the AWA v Daniels case, this case also relied on the judgments of previous cases to make its own judgments. However, most importantly, the roles and responsibilities of the directors (in contrast to those of the management), and even the functions of the chairman of the board (from those of other directors) were becoming increasingly clear.
But the new millennium saw many governments take legislative steps to define these roles more clearly. This is what we see in the CAMAC (2010) report, which cites the legislative steps taken by the Australian government toward defining these roles and responsibilities. The legislation have only done more toward specificity rather than offering any new provisions.

Conclusion

This paper was on legislative definition of the roles of directors toward corporate governance. In this respect, it cites documents that define these roles over time, from the 1990s to the 2010s. Although there is a difference on how legislations provide for these roles, as noted, the evolution of these roles is only on their specificity and not necessarily on any changes on responsibilities.

References

ASIC v Rich [2003] NSWSC 85
AWA Ltd v Daniels (1992) 7 ACSR 759
Corporations and Markets Advisory Committee (CAMAC) (2010). Guidance for
Directors: Report. Australian Government
Grayson, R. & Ramsay, I. (2014). Responsibilities of the Board of Directors: a Research
Note. In R. Baxt (Ed.)., Company Law.