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February 26 2004 Sophie LHlias
Role and Responsibilities
of the Board of Directors
Fiduciary Duties andIndependence of the Board
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Fiduciary Dutiesvs.
Director Duties
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Directors Fiduciary Duties
A legal concept that is pillar in Anglo-American corporate
governance
A legal concept that does not exist perse in many developed
markets
Shouldnt we be addressing director
duties?
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Director Duties Vary
Economic environment
Legal environment
Cultural environment
Shareholder base: a result of the above
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Economic Environment
Role of government
Sources of capital
Role of capital markets in economic
development
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Legal Environment
Regulators, codes and laws
Courts and enforcement
Civil vs. criminal actions
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Cultural Environment
Perception of capital markets by society(population, courts,
media, government)
Proportion of population tied to capitalmarkets (retirement,
investment)
Free market vs. planed economy
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Shareholder Base
Government agencies
Public institutional (pension funds)
Private individual
Family Domestic institutional
Pension funds, mutual funds, alternative funds
Foreign institutional: Pension funds, mutual funds, alternative
funds
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Comparing Shareholder Base
Anglo-American
Domestic institutional:large
Private individual: large
Public institutional: large
Foreign institutional:limited
Continental European Domestic institutional:
limited
Private individual: limited
Public institutional:limited
Foreign institutional:large
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Investor Remedies
Anglo-American
Offers remedy to investorswho have been wronged
Numerous investor law suits
Class action suits action
Large punitive damages
Extensive civil directorliability
Limited criminal liability
Continental European
Balances interests of thecompany with other interests
Few investor law suits
No class actions
No punitive damages
Limited civil director liability
Extensive criminal liability
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Convergence of Duties ?
Global investors expectations & demands
Media exposure: domestic & international
Competing for funds: domestic investors
Corporate governance codes
Laws (voting, proxies, etc)
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Director Independence
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Why is IndependenceImportant?
Conflicts of interest hinder judgment andaffect
decision-making
Judgment and decision-making are whatdirectors are asked to
do
Directors must feel free to think, express,question and decide
in the interest of those
they represent
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Box-Ticking vs. EffectiveIndependence
Current definitions are based on Ownership of shares
Contracts and services rendered Relationships
Family ties
What about effective independence? Independent minded
Commitment (time and knowledge)
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Importance of Selection
Who selects directors?
How are they selected (pool, resources,
interviews)?
Who determines their independence?
Who elects directors?
Who evaluates directors? Who removes directors?
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Independence of Directors
Disclosing conflicts of interest: Does the Board have clear
guidelines of
conflicts that must be disclosed?
Who discloses conflicts?
To whom are conflicts disclosed? What happens if conflicts are
not disclosed?
How is independence enforced?
What if conflicts are disclosed later? good faith vs. bad
faith
What is disclosed to the Board and/or toshareholders?
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Board Committees
What is their purpose?
What is their power?
How are members selected, renewed orremoved?
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How Committees Operate
Process: Setting the agenda
Discussion, debate, vote, minutes
Recommendation, decision, report
Constraints: Budgetary and resources
Access to outsiders: management, advisors,
suppliers, etc.
What happens to committee findings andrecommendations?
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Conclusion: Several Modelswith Converging Objectives Prevent
(and react to) wrong-doing by
management, directors, advisors/suppliers,partners and
shareholders
Ensure protection of shareholder interestsand rights
Ensure the long term growth of the company
