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THE ROLE OF THE BOARD OF PUBLICLY-HELD COMPANIES

THE ROLE OF THE BOARD OF PUBLICLY-HELD COMPANIES. PAULO CAMARA PORTUGUESE SECURITIES COMMISSION (CMVM). INTRODUCTION. It is fair to say that only recently European laws have begun to dedicate more attention to the role of the board.

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THE ROLE OF THE BOARD OF PUBLICLY-HELD COMPANIES

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  1. THE ROLE OF THE BOARD OF PUBLICLY-HELD COMPANIES PAULO CAMARA PORTUGUESE SECURITIES COMMISSION (CMVM)

  2. INTRODUCTION • It is fair to say that only recently European laws have begun to dedicate more attention to the role of the board. • The role of the board is however the central element of corporate governance – it has to do with the crucial question of how the power should be exercised within a company. 2

  3. INTRODUCTION The structure of this presentation derives from the idea that a publicly-held company is composed of three basic elements that the board is empowered to protect and promote: • The company’s financial performance; • The company’s human capital; and • The investors’ confidence. 3

  4. INTRODUCTION There are basically three models of board structures: • One tier-board • Two tier-board of German type (comprising executive body (Vorstand) and supervisory body (Aufsichrat); • Two tier-board of Latin type (comprising a board of auditors - collegio sindacale (Italy) or conselho fiscal (Portugal)). However, the model chosen does not interfere with the role of the board. And each of these models can deliver adequate corporate governance solutions. 4

  5. I. PRESERVE AND PROMOTE THE COMPANY’S FINANCIAL PERFORMANCE • Direct the company’s management In European countries, it is not consensual whether a company’s board should exercise management functions or just supervise management For publicly-held companies, the board should nevertheless focus clearly on the latter: such is also the indication coming from the OECD Principles (Part V.). 5

  6. I. PRESERVE AND PROMOTE THE COMPANY’S FINANCIAL PERFORMANCE • Use competent and informed judgement Knowledge, experience and skill are required to board members to a correct exercise of their functions. • Evaluation of the company’s performance Board should review the company’s performance and regularly review the strategies in order to increase it. • Representation of the company To achieve the company’s object, contracts have to be signed and, if necessary, enforced before the courts. 6

  7. I. PRESERVE AND PROMOTE THE COMPANY’S FINANCIAL PERFORMANCE • Monitoring audit and internal control Risk management and risk oversight has become a central support for sound corporate governance practices. From a comparative corporate governance perspective, it is debatable what the best model is to accomplish this task. Delegation of powers to a executive committee leads presumably to a similar system as a dual board system. 7

  8. I. PRESERVE AND PROMOTE THE COMPANY’S FINANCIAL PERFORMANCE • Independent decision-making  The use of independent decision-making is guaranteed, in organizational approaches, through the inclusion of non-independent directors in the board.  The terminology is not entirely appropriate, for it implies that the other members are dependent. In Portugal, the regulation on corporate governance asks each company to indicate expressly the definition of independent director they are following. 8

  9. I. PRESERVE AND PROMOTE THE COMPANY’S FINANCIAL PERFORMANCE • Independent decision-making Independence can be defined in a positive or in a negative approach. But the latter is the best model. In the future, the regulation should perhaps also state in which cases independence couldn’t be deemed to exist. However, as we know, no member of the board can pursue personal interests and every one of them should be independent from management. In such very broad terms no board member can be “dependent”. 9

  10. II. PRESERVE AND PROMOTE THE COMPANY’S HUMAN CAPITAL • Leadership  It is both incorrect and unrealistic to suppose that the board works in the democratic fashion of a Parliament. A board must convey decisional power, leadership and strategic vision. The board members commitment to serve the company and to create value added should always serve as an example to the company staff. 10

  11. II. PRESERVE AND PROMOTE THE COMPANY’S HUMAN CAPITAL • Nominate and fire company officers Board must choose the right persons to be in charge of the company’s management, and if necessary fire the ones that are not up to that task. The establishment of adequate compensation is a significant component tool to preserve and promote the company’s intellectual capital. 11

  12. III. PRESERVE AND PROMOTE THE INVESTORS’ CONFIDENCE • The need to preserve confidence is greater in publicly-held companies. In fact, due to the dissemination of shareholder property, the risk of rational apathy is greater and therefore deviations from the company’s objectives can be more frequent. • This is subject to various approaches. Anglo-saxon countries refer to fiduciary duties of the members of the board. German authors speak of duties of loyalty (Treuepflicht). Italian texts address the requirement of correctness (corretezza). 12

  13. III. PRESERVE AND PROMOTE THE INVESTORS’ CONFIDENCE • Act in the interest of shareholders The board must acton behalf of the interests of the shareholders, for as residual claimants they bear the risk of investing in the company. Besides that, the principle of equal treatment of shareholders within the same class must also be respected. Nevertheless, the board should also take into consideration the interests of other stakeholders. 13

  14. III. PRESERVE AND PROMOTE THE INVESTORS’ CONFIDENCE • Act in a fully accountable manner  Given the fact that directors are appointed by the general meeting of shareholders, they also should be accountable before them. But accountability works also before non-executive directors and before the auditors.  Continuous efforts are being done to improve accountability standards (e.g. demand to publish an Operating and Financial Review, currently being proposed in the UK). 14

  15. III. PRESERVE AND PROMOTE THE INVESTORS’ CONFIDENCE Manage adequately conflict of interest in sensible situations • 1. During takeovers A takeover is an offer addressed to shareholders. Therefore, members of the board should not preclude the shareholders’ right to decide upon the merits of the bid. • 2. In the process of fixing remuneration Remuneration should be fixed in a fair manner, by independent persons (board members or not). • 3. In insolvency situations Board must decide to terminate business or to put the company into liquidation. 15

  16. III. PRESERVE AND PROMOTE THE INVESTORS’ CONFIDENCE • Respect the law and business ethics Compliance with laws and regulations also plays a role in respect of promoting confidence – particularly insofar disclosure duties are concerned. The board should not just be satisfied with just complying the minimum legal prescriptions: it should also be their aim to conduct standards of social responsibility of business towards the community. 16

  17. Zagreb, 21 September 2002 PAULO CAMARA pcamaraamartins.@cmvm.pt 17

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