board of directors and related issues professional ethics and corporate governance

provide entrepreneurial leadership of the company represent company view and account to the public decide on a formal schedule of matters to be reserved for board decision determine the

VIETNAM NATIONAL UNIVERSITY HO CHI MINH CITY 5 UNIVERSITY OF ECONOMICS AND LAW FACULTY OF

ACCOUNTING AND AUDITING

Course: Professional Ethics and Corporate Governance

Supervisor: ThS Mai Thi Phuong Thao

LECTURER’S COMMENT

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I DEVELOPMENT OF CORPORATE GOVERNANCE REGARDING

TO THE BOARD OF THE DIRECTORS:

There was there reports that contributed to the existing code with regards to the board

of directors

Firstly, it was Cadbury Report in 1992 This report concluded that the board required constant monitoring and assessment The recommendations were:

® there was a need to split the chairman/CEO role

® necessary to ensure the chairman is an independent person of all time of apointment

Secondly, it was Higgs Report in 2003 This report came about post-Enron and focused

on the role of non-executive directors (NEDs) It is the role of NEDs to represent the needs of shareholders and operate as a cautionary voice on the board It included four things:

¢ atleast half the board should be made up of NEDs

¢ they should be remunerated appropriately for taking on a functional role

¢ they should act as a link between the board and shareholders to reduce the agency problem

© they should communicate regularly to important shareholders

In the same year, Tyson Report was published It was developed from Higgs Report and dealt with the recruitment and development of NEDs:

e the need to expand the gene pool of NEDs beyond reciprocal arrangements between top PLCs

e diversity in background, skills and experience enhanced board effectiveness (agency issue)

e diversity improved communication and relationships with stakeholders including shareholders

© stakeholders on the board improved board understanding of stakeholder issues

In May 2010, the FRC issued a new edition of the Code which will apply to financial years beginning on or after 29 June 2010

This follows a review of the Code carried out during 2009 and consultation on a draft

of the revised Code that ended in March 2010 There were four new principles:

® The chairman's responsibility for leading the board

® The non-executive directors' role in challenging and developing strategy

provide entrepreneurial leadership of the company

represent company view and account to the public

decide on a formal schedule of matters to be reserved for board decision determine the company's mission and purpose (strategic aims)

select and appoint the CEO, chairman and other board members

set the company's values and standards

ensure that the company's management is performing its job correctly establish appropriate internal controls that enable risk to be assessed and managed

ensure that the necessary financial and human resources are in place for the company to meet its objectives

ensure that its obligations to its shareholders and other stakeholders are understood and met

meet regularly to discharge its duties effectively

for listed companies:

¥Y appoint appropriate NEDs

Y establish remuneration committee

Y establish nominations committee

Y establish audit committee

assess its own performance and report it annually to shareholders

submit themselves for re-election at regular intervals All directors in FTSE 350 companies should be put forward for re-election every year

An effective board demonstrates the following capabilities:

clear strategy aligned to capabilities

vigorous implementation of strategy

key performance drivers monitored

sharp focus on the views of the City and other key stakeholders

regular evaluation of board performance

Legal Functions of Board of Directors:

e Adirector performs his duties in good faith and in a manner that he serves for the best interest of the corporation, and as an ordinary person in a like position under certain circumstances

e Attention at meetings, Reliance on management and _ professional information and Delegation (to management to operate the business)

® Decision Making — exercise reasonable business judgement

Board of directors:

[ eoaroor oiecrors |

ROLES AND RESPONSIBILITIES

| BOARD composimion |

( APPOINT CEO v

[ COMPANY STRATEGY ] ACQUIRE AND ALLOCATE CORPORATE RESOURCES

Some examples of mission statements:

- Microsoft:

Microsoft mission

Empower every person and

every organization on the

planet to achieve more

điểm nổi trội, tính túy trone dây chuyển

cung ứng dịch vụ của từng sân bay sẽ

được chọn lọc, kế thừa nhằm đồng bộ

thành chương trình chất lượng dịch vụ

chung

HiIl BOARD MEETING AND BOARD STRUCTURE:

1 Board meeting:

1.1 A definition of board meeting

A Board Meeting is a formal meeting of the board of directors of an organization and any invited guests, held at definite intervals and as needed to review performance, consider policy issues, address major problems and perform the legal business of the board and presided over by a chairperson of the organization

1.2 Board agenda items

A board agenda ts likely to include the following topics:

- Company performance:

The first item on the agenda is usually a rundown of the company’s performance since the last board meeting Talk about whether the company’s performance metrics are moving in the right direction and if the targets have been achieved

Conversations about the company’s performance should be limited to quick

summaries, with full reports available for members to review outside of the meeting Talk about the main pain points or highlights and save the details for follow-up calls

- Future strategies:

After reflecting on what has and hasn’t been working, it’s nice to follow up and strategize about what to do in the future to promote your organization’s growth The bulk of any good board meeting should consist of discussing what future strategies are going to be implemented and how they’Il be executed by the company

- Key performance indicators (KPIs):

After agreeing on strategies, the board of directors should talk about the key performance indicators that are assigned to these strategies Creating these action plans comes with identifying concrete metrics that can indicate how effective your strategies are going to be

- Problems and opportunities:

With implementing new roadmaps and strategies across an organization comes new obstacles and challenges Board meetings are a great time to discuss roadblocks and encourage ideas to work around them

- Making plans of action:

Once all of the important details are discussed, the board may then talk about plans of action that will affect the future of the company These plans can be proposed and voted on during the meeting

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= In conclusion, the board meeting should satisfy these items:

- Agenda should strike a balance between short and long-term issues and every director should have the opportunity to place items on the agenda

- All the topic should have supportive information, including risk and alternatives identified and be distributed in the right time

1.3 Time to set up the agenda

Board meetings take place at set intervals, often quarterly or biannually They can happen more frequently, depending on how your company works and how often your directors want to meet to review processes and company progress The purpose of board meetings is for the directors to talk about any issues that the company 1s facing, review the company’s performance and discuss new policies to be enacted

Board meetings shouldn’t be longer than two to three hours Your board members’ time is very valuable, and the meetings should focus on topics at the strategic level, with smaller details left for follow-up syncs and separate meeting times

=> Meeting should be regular or at need and attendance expected

The model of a one-tier board structure is essentially a mirrored image of the neo- liberal norms of the importance of investors and a free-market economy The German two-tier model is in many ways a mirrored image of stakeholder importance, codetemination and managerialism

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EXECUTIVE NEDS MANAGEMENT SUPERVISORY

(LOWER TIER) (UPPER TIER)

Structure comprising executive and | responsible for the day-

non-executive directors today running of the (NEDs) business, consisting of

executives only and led by the chief executive The supervisory (corporate) board with a wider membership, responsible for the strategic oversight of the organisation and led by the

The decision-making Under a two-tier board process is expected to be structure, the two boards less time consuming as meet separately, so Decision-making process | decisions, which otherwise | executive discussion

would require supervisory | around running the board approval, only have | business will not be heard

to pass one body by the higher board

members, and vice versa This is unlike the single board meeting that will be held for a unitary board

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2.1 Unitary board

The idea of one-tier board started from Anglo-Saxon model of corporate

governance This is a system of supervision and control over the corporation, functioning in the United States, Canada, Australia and the United Kingdom The main feature of this model is to rely on the capital market, as the place of control over the corporation Supervision is exercised mostly by investors who expressed theirs favour

or disapproval for the actions of management by the buying/selling shares of the company and voting during the general meetings of shareholders In this model, the management shall not be subject to the strict control within the organization due to the high liquidity of the market The relationship between managers and shareholders are short-lived and official

- The boards of most listed companies have between eight and twelve board members, and there are four structures of unitary:

there are all executive director board

the majority excecutive director board

the majority non-executive director board

the all non-excecutive director board

- Advantages and disadvantages of one-tier board:

An enhanced superior flow of information The structure and small board size of one tier system enhance excellent circulation of information The board meetings frequently and its housing of the various committees, with a clear majority of experts within the executive and non-executivemembers, helps in promoting individual relationships, in-depth knowledge of the business and aneffective supervisory function of the Board

Faster decision making and reduced bureaucracy The structure of one-tier board enhancesfaster decision-makings because there is no separate

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supervisory board Thus, the need for separat eapproval of decisions does not arise

® Issues specific to the unitary board tend to relate to the role of NEDs Main role of NED in unitary:

¢ NED expertise: the implied involvement of NEDs in the running of the company rather than just supervising

¢ NED empowerment: they are as responsible as the executives and this is better demonstrated by their active involvement at an early stage

® Compromise: less extreme decisions developed prior to the need for supervisory approval

¢ Responsibility: a cabinet decision-making unit with wide viewpoints suggests better decisions

© Reduction of fraud, malpractice: this is due to wider involvement in the actual management of the company

¢ Improved investor confidence: through all of the above

¢ Relationships: banks have a much closer relationship with German companies than in the UK They are frequently shareholders, and other shareholders often deposit their shares and the rights associated with them with their banks

This creates a backdrop to creating structures where these parties are actively involved

in company affairs, hence the two-tier structure

Structure of two-tier board:

Lower tier: management (operating) board

® responsible for day-to-day running of the enterprise

© generally only includes executives

© the CEO co-ordinates activity

Upper tier: supervisory (corporate) board

e Appoints, supervises and advises members of the management board

¢ Strategic oversight of the organization

® Includes employee representatives, environmental groups and other stakeholders' management representatives

e The chairman co-ordinates the work

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® Members are elected by shareholders at the annual general meeting (AGM)

® Receives information and reports from the management board

Advantages of a two-tier board:

Clear separation between those that manage the company and those that own it

or must control it for the benefit of shareholders

Implicit shareholder involvement in most cases since these structures are used

in countries where insider control is prevalent

Independence of thought, discussion and decision since board meetings and operation are separate

Direct power over management through the right to appoint members of the management board

Problems with a two-tier board:

Dilution of power through stakeholder involvement

Isolation of supervisory board through non-participation in management meetings

Agency problems between the two boards

Added bureaucracy and slower decision making

Reliant upon an effective relationship between chairman and CEO

Comparison of One-tier (Unitary) and Two-tier Governance Board Systems The size of the board: One of the major differences between these structural board systems is the size The one-tier boards are usually smaller than the two- tier boards regarding members

Board Meetings: There are more frequent meetings in a one-tier structure than a two-tier structure

Shareholders Vs Stakeholders: The one-tier board system is aimed at protecting the rights and interests of the shareholders, while the two-tier structure focuses

on the benefit of all stakeholders

Orientation: Two-tiered boards are representative in nature with network orientation, while one-tiered boards are independent and more market oriented Directors Emoluments: The board compensation styles of both models are distinct to their governance systems In the USA, executive remuneration is worked out by the board in consultation with remuneration consultants In Germany, the supervisory board determines themanagement board's

compensation, but under statutory regulation

3 Composition of the board

Executive directors: are directors who also have executive management responsibility

in the company They are normally full-time employees of the company Eg: CEO,

CFO

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Non-Executive directors (“NEDS”) :are directors who do not have any executive management responsibility in the company (They might be an executive director in a different company):

- NEDs are not employees of the company

- They are not full-time employees

Independent directors: an independent director is an individual who:

- Has no link to a special interest group or stakeholder group

- Has no significant personal interest in the company such as a significant contractual relationship of the company

IV BOARD COMMITTEES

I Board committee structure

BOARD OF DIRECTORS

NOMINATIONS REMUNERATION RISK AUDIT

COMMITTEE COMMITTEE COMMITTEE COMMITTEE

NON-EXECUTIVES NON-EXECUTIVE NON-EXECUTIVES NON-EXECUTIVE

STRUCTURE PAY AND OTHER COMPANY RISK CONTROLS,

OF BOARD, BENEFITS EXPOSURE INTERNAL AUDIT

AND EXTERNAL NEW EXECUTIVES OF EXECUTIVES AND STRATEGY AUDIT

1.1 Nomination committee

The nomination committee is responsible for leading the board appointment process, considering the requirements of the company and making recommendations to the board This responsibility covers both executive and non-executive directors Responsibilities of nominations committee:

¢ To identify candidates to fill vacancies on the board

e Review regularly the structure, size and composition of the board and make recommendations to the board

© Consider the balance between executives and NEDs on the board of directors

e Ensure appropriate management of diversity to board composition

¢ Provide an appropriate balance of power to reduce domination in executive selection by the CEO/chairman

¢ Regularly evaluate the balance of skills, knowledge and experience of the board

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« Give full consideration to succession planning for directors

® - Be sccn to operate independently for the benefit of shareholders

1,2 Remuneration committee

The role of the remuneration committee is to have an appropriate reward policy that attracts retains and motivate directors to achieve the long-term interests of shareholders

The members of remuneration committees must keep independence, transparency and potential conflicts of interest at the front of their minds when deciding on pay arrangements The design of remuneration policies should be linked to the

achievement of the company’s long-term success, but there is no stmple answer that works for every company

The composition of the committee is also important It is essential that no one should

be involved in deciding his or her own remuneration All, or a majority of,

remuneration committee members will be independent directors, and executives are excluded

Responsobility of remuneration committee:

- The committee should agree with the main board a policy for remuneration

- Set detailed remuneration for all executive directors and the chairman, including pension rights and any compensation payments

- Where there is a performance-related pay scheme, the committee should decide

on the targets for performance Ensure that the executive directors and key management are fairy rewarded for their individual contributation to the overall performance of the company

- The committee should decide on pension arrangement

- Negotiate and agree the remuneration of each individual executive director

- Demonstrate to shareholders that the remuneration of the exe cutive directors and key management ts set by individuals with no personal interest in the outcome of the decisions of the committee

1,3 Audit committees

The primary task of the audit committee is to oversee the relationship with external auditors to ensure the quality of the company’s financial statements

Main responsobility of audit committee:

- Monitor the integrity of the company financial statement and any other formal statement relating to the company’s financial performance

- Review the company’s internal financial controls

- Review the company’s internal and risk management system (unless this responsibility is given to risk committee)

- Make recommendations to the board about the appointment, re- appointment or removal of audit firm

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- Approve the remuneration and terms of engagement of the external auditors

- Review and monitor effectiveness of the audit process

1.4 Risk committee

Include internal controls and risk management

2, Importance of committees

Board sub-committees are a generally accepted part of board operations

Positives that come out of the creation and use of such structures are:

© Reduces board workload and enables them to improve focus on other issues Creates structures that can use inherent expertise to improve decisions in key

VY NON — EXECUTIVE DIRECTORS (NEDS)

I.Who is Non-Executive Director ?

A Non-Executive Director is a member of a company's Board of Directors who is not a part of the executive team Non-Executive Directors are not employed by the company but appointed through a letter of appointment A Non-Executive Director typically does not engage in the day-to-day management of the organization, but is involved in policy making and planning exercises

2, Roles of Non-Executive Director

Non-Executive Directors, also known as external directors, independent directors or outside directors, are put in place to challenge the direction and performance of a company as well as its existing team Since Non-Executive Directors do not hold C- level (CEO,CFO,COO,CIO) or managerial positions, they are thought to understand the interests of the company with greater objectivity than the executive directors, who may have an agency problem or conflict of interest between management and stockholders or other stakeholders

The role of Non-Executive Directors is broad They challenge, question and monitor the CEO and senior management; they bring an independent perspective to decision-

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