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Non executive directors are very useful members of the company boards. There is a big role played by the non executive directors that include reducing the level of conflict of interest between the company management and shareholders in the company.
These directors also play a big part in monitoring company’s strategy implementation and their performances. In illustrating the useful role of the non executive directors, this academic research majored on monitoring role and the general corporate governance role of the non executive directors.
For instance, the academic research states that the survey conducted positioned the presence of the non executive directors as the most crucial mechanism of corporate governance that people recommended (Bainbridge 165). This shows the preference that people have for these non executive directors. If the inside executive directors are on their own in the governance board, it will be more likely for them to manipulate the company’s records in their favor.
They may engage in acts like checking their own remuneration packages to suit them best and securing their jobs in unauthorized ways. One role of non executive directors in company boards is to take part in the audit of the company (Bainbridge 113).
This is a duty that these directors play whether there is an audit committee or not. Any doubted information or details are questioned by the non executive directors on behalf of the shareholders. In this light, it would not be easy for the inside executive directors to manipulate financial and other records of the company for their own gains.
Another role that the non executive directors play is monitoring the company’s strategies. The implementation and performance of these strategies are the main things monitored. The academic research has also clarified this by emphasizing the need of an average number of inside and outside directors.
This is where Mace (1986) states that too great proportion of either inside or outside directors can shift the balance in a bad direction. It is argued that too many inside executives can cause the board to make close-minded decisions.
The non executive directors usually come up with independent decisions that turn out to be more effective. To enhance this, the Cadbury Report stated that the company boards could have a minimum of three non executive directors because they bring an independent judgment towards the strategy, performance and resources of the company (Romana 23).
Recipe for a Good Board
The recipe given for a good board in the literature is a good one. As per the literature, a good board is one which the members meet frequently. These board members should also be ethical and with high levels of literacy to enhance good and effective decision making. In a board, the major considerations are the usual balances of members, communications, selfless and unbiased (Romana 68).
Some of these are not included in the recipe given in the literature. I would prefer a brief list of ingredients where all the important ingredients are inclusive. Therefore, the preferable can include balance, frequent meeting, communication, unbiased, and selfless.
In the literature, the recipe given for a good board has touched on maintaining a good balance of power. This balance also entails the gender and age balance. A good board should have a balanced number of men and women, and also age of members. The most important ingredients in this balance are communication and selfless.
First communication is considered important because it is through it that board members get to know what they should discuss and find a way of reacting to the issue (Romana 132). Whenever there is a problem that is not mentioned by any of the members in a board meeting of the company, then the board would not be able to work on the problem.
This makes the board of governance ineffective. Consequently, a good board communication is an important ingredient for the corporation. Selfless is another crucial consideration for a good board. Once the board members are selfless, then the entire board will be one with no self interest The board being selfless is important because meeting the objectives of the company demands that no one should put his or her self-interests ahead.
Diversity of Boards
Studies have been done to investigate the effectiveness of diversity of the boards in companies. Most of them come up with the conclusion that such diversity is indeed important as the study by McKinsey and company. One major importance of diversity in the boards is that it enhances the financial performance. Studies show that companies with a large number of women at board perform better than those with few women. This diversity is not just fixed to gender diversity, but it extends to ethnicity and the minority.
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In the boards, diversity introduces new customer base which is very important for a company. Women and the minority contribute a bigger portion to the economy jointly. Introducing them into the boards will mean bringing their efforts and contribution in. This may lead to new customers who will be women and the minority (Bainbridge 96).
Increased investment towards the company is another importance that may come along with diversity of boards. Social responsible investors are usually keen in noting if the company is not biased or gender insensitive. These investors check the members of the boards where they retrieve the representation of the company.
Creation of a good corporate reputation is also another relevant aspect that comes along with diversity. Customers, shareholders, and society will have a good image of the company.
Corporate Risk Disclosure
In the Turnbell Report, there are numbers of stages set to check on risks and their effects. In this framework, the last stage is where we have the disclosed materials by the shareholders being interpreted. This is so important to the shareholders since it enables their feedback to be heard. The stakeholders are also giving an opportunity to take control even from the external end.
This conceptual framework is also important to the shareholders since they are enabled to know the possible risks to be encountered and how they will be handled if they occur. Therefore, the strategies are preventive, protective and responsive to the issues in the field. As a result, shareholders can take decisions on how they will deal with the risks when they occur and determine whether to buy more shares with the company.
There are communication and decision links created between the shareholders and the company by the conceptual framework for risk disclosure. These created links are useful to the shareholders who usually want to be involved in running of the companies.
Bainbridge, Stephen. The New Corporate Governance in Theory and Practice. Oxford: Oxford University Press, 2008. Print.
Romana, Roberta. Foundation of Corporate Laws. California: Foundation Press, 2010. Print.