Deborah Plc. Corporate Governance and Theories

Seminar 2- Corporate Governance and theories

Question 1

Deborah plc. is a large and profitable UK listed company with global operations. However, although it has been consistently successful for many years, with annual profits growing at an average of about 10% per year, it has been losing market share to some of its competitors. The newly-appointed chairman of the company, having analysed this problem for some time, has come to the opinion that the company has an ineffective board. He thinks that, although the board members between them have an excellent range of experience and skills, well-suited to the needs of the business, the board is not functioning as well as it should do. As chairman, he recognises his responsibility to make improvements.

He consults the company secretary, who offers the opinion that decision-making on operational matters by the board is driven by the Chief Executive Officer (CEO), and invariably the CEO’s recommendations to the board are accepted without much questioning. The company secretary suggests that, in order to create a more effective board, the chairman should review boardroom practice and boardroom behaviours.

Required

a) Suggest the weaknesses that may exist currently in boardroom practice and boardroom behaviours and recommend improvements that the chairman should introduce to create a more effective board of directors.

There are a few key issues that arise in this situation:

• The board might be failing to schedule regular meetings to allocate duties appropriately.

• At these meetings an official list of matters must be created, and these matters must be discussed and decided on.

• The annual report should include a statement of how the board operates, including a high-level statement of which types of decisions are taken by the board itself and which are to be delegated to management.

• The board is failing in its role to effectively provide leadership and make decisions – due to this most of the decision making has been assumed by the CEO and this indicates poor chairmanship of the board which highlights failings in basic boardroom practice.

o The ineffectiveness of the board could also be attributed to the attitudes and behaviour of board members.

• The Non-Executive Directors may be unclear on what is expected in their role due to a lack of experience in the industry or a lack of cohesion between themselves and Executive Directors. This could lead to them being reluctant to question assumptions and established viewpoints, which leads to them failing in their role of challenging proposals constructively set forth by executive management.

• The board could also seem to be indecisive as they have been reluctant to reach a final decision on matters of business. This is reinforced by company secretary suggesting the CEO’s recommendations to the board without questioning.

Recommendations:

• The Chairman needs to re-establish the authority of the board. This can be done by effectively communication any planned changes and giving reasons for any changes to the CEO and other members of the board.

o The Chairman and CEO must build rapport and be able to work together as the changes made to the boardroom must be wholly accepted by the CEO, as to minimise disputes.

• A list of matters should be reserved for deliberating by the board only and decisions on how to deal with those matters should be discussed by the board.

• The Chairmans role includes:

o Creating a list of matters (if one does not already exist), in draft form, assisted by the company secretary, for discussion and approval by the full board.

o Making certain that board meetings are held as frequently as necessary to enable the board to carry out its responsibilities fully and effectively.

o Ensuring that all directors contribute sufficiently, and all voices are heard in board discussions.

o Ensuring all directors receive the necessary reliable and relevant information on matters being discussed at board meetings for them to make the correct informed decision.

o Must ensure the agenda for the board meeting is appropriate so the board discusses the relevant matters at hand.

• The company secretary could potentially be given the responsibility for checking in advance of board meetings that any action that needs taking has been considered by the director responsible.

Suggestions for behavioural change:

• All board members should be offered extensive training in corporate governance and be made aware of the contribution expected of an effective board.

• A change in culture at the top is needed. Director’s must be aware of their responsibilities and potential consequences of actions taken.

• Non-Executive