Role and Responsibilities of the Board of Directors Fiduciary Duties and Independence of the Board Sophie L’Hélias
Directors’ Fiduciary Duties • A legal concept that is pillar in Anglo-American corporate governance • A legal concept that does not exist per se in many developed markets • Shouldn’t we be addressing director duties?
Director Duties Vary • Economic environment • Legal environment • Cultural environment • Shareholder base: a result of the above
Economic Environment • Role of government • Sources of capital • Role of capital markets in economic development
Legal Environment • Regulators, codes and laws • Courts and enforcement • Civil vs. criminal actions
Cultural Environment • Perception of capital markets by society (population, courts, media, government) • Proportion of population “tied” to capital markets (retirement, investment) • Free market vs. planed economy
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
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 Comparing Shareholder Base
Anglo-American Offers remedy to investors who have been wronged Numerous investor law suits Class action suits action Large punitive damages Extensive civil director liability Limited criminal liability Continental European Balances interests of the company with other interests Few investor law suits No class actions No punitive damages Limited civil director liability Extensive criminal liability Investor Remedies
Convergence of Duties ? • Global investors’ expectations & demands • Media exposure: domestic & international • Competing for funds: domestic investors • Corporate governance codes • Laws (voting, proxies, etc)
Why is Independence Important? • Conflicts of interest hinder judgment and affect decision-making • Judgment and decision-making are what directors are asked to do • Directors must feel free to think, express, question and decide in the interest of those they represent
Box-Ticking vs. Effective Independence • 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)
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?
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 to shareholders?
Board Committees • What is their purpose? • What is their power? • How are members selected, renewed or removed?
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 and recommendations?
Conclusion: Several Models with Converging Objectives • Prevent (and react to) wrong-doing by management, directors, advisors/suppliers, partners and shareholders • Ensure protection of shareholder interests and rights • Ensure the long term growth of the company