According to Davis et al (1997, p. 20) business policy and organization theory have been seriously influenced by the theory of agency. This theory presents senior managers of organizations as agents who may have different interests from the shareholders’ interests. The management of the corporation consist the board of directors who form the highest organ of the corporation and outside directors who are not part of the management team. The outside directors are not of the employees of the corporation and they are not affiliated to the corporation. Outside directors are differentiated from the executive directors who are in charge of making the decisions of the company. The question that arises is whether the nonexecutive directors are of any use to the company. Does the company really require non executive directors, or they are just a waste of time. Many people argue that their involvement in the company is too little and that many time they not even aware of what is happening within the company. This paper attempts to analyze the roles of non executive directors in a corporation and whether are really required in the company or the companies can do without them.
THE ROLE OF OUTSIDE DIRECTORS
According to Barrow (2001, pp.34 -36), the obligation of the outsider directors in the SMEs has been easy to understand until recently where their obligations are changing and becoming more complex. Their main roles in SME involve ensuring the money invested by the capitalist in this business is spent as it had been planned and that timely and correct financial information reach the investors and operating management as required.
According to Goodridge (2006, p.28), the responsibility of outside directors is to close the gap between the executive committee and the shareholders interests. A non executive director or outsider directors as they are commonly known will be able to understand the both parties and consider the perspective of both sides without any bias. This will enable them to advice and also guide the executives on how to maximize the interest of both parties. Goodridges argues that it is always better to have the role of the NED defined in order to have an independent outside directors. He argues that this task requires some important capabilities which at times are hard to define. These capabilities include strategy thinking, rich experience, independent mind and judgment that are required for one to become a resourceful outside director. The directors also need to have the ability to constructively challenge without favor or fear and also to be in a position to ask questions cutting the centre of the issue. The NED will also bring in the required experience that is inline with the situation of the company and the issue at hand.
Costello (2010, p. 34), argues that due to increasing need for impartiality and independence of audit firm, it is a statutory requirement that audit firms to appoint non executive directors in their board. This will ensure that the interests of shareholders and investors are well represented. The independent outside directors will also represent the interests of the executive directors thus ensuring there is harmony between the interests of all the parties. He continue to argue that by creating a culture where NED are allowed to play their role, the audit firms will continue to build their trust and confidence from the shareholders and investors. According Costello accounting firms should be in a position to demonstrate unquestionable integrity in matters that relate to the safeguarding the shareholders’ interests from the executive directors. The outside directors are important in the audit firms so as to build the confidence of the shareholders and other investors.
According to Beren (2004, p.30), there is need for more diverse and greater presence of non executive directors in the board. He argues that NED plays a major role as shareholders ally and ethical supervisors within an organization. The role of these directors is seen crucial especially when it comes to the issues that are sensitive to the public such as issues that are handled by nomination, remuneration and the audit committees. The inclusion of NED in these committees will ensure that the interests of the stakeholders are considered and more so the interest of the stakeholders and the public who may not fully trust the executive directors. The public will also have more confidence with the decision that have been made by these committees when there is NED in these committees given their wealth of experience after serving in similar positions for long time. According to Beren, those who are chosen to the position of outside directors must meet some requirements for them to be relevant to the organization. He argues that these people should be in a position to debate constructively, question intelligently, decide dispassionately and challenge rigorously. One should also be in a position to listen to the opinions of the others sensitively in order to make the correct judgment. At times there may be personal differences among the board members which are not easy to solve. However with the presence of non executive directors who are independent and have experienced such differences before, the conflicting board members will be assisted to resolve their difference appropriately without affecting the operations of the board. However without non executive directors solving such a problem will be difficult and at times it may split the board of directors thus affecting the effectiveness of the board. This will have great effect to the returns of the company. An independent NED will be of great help to the company in order to enable the company to achieve its goals and objectives. The company may not achieve its set goals and objectives without an independent outside directors. Thus from the opinion of Beren, it is very clear that NED are not wastage of time to the company but they are an important assets to the company.
According to Bushrod (2003, p.1), the duties of outside directors in many companies remain to be a hotly debated issue in the UK. This was accelerated by the down fall of Enron Company and also many management issues that were facing Energies and Marconi Company. According to the recent market survey in UK the role of NED remains unclear to many professionals in the industry. Many executives and professionals do not agree with opinion that NED know very little about what is happening in the company and therefore hardly perform any role in the organization. When the NED are fully involved and updated of what is happening in the company by the current executive directors, they will be in a position to perform their responsibilities as defined by the company constitution. NED plays a crucial role when it comes to appointments of the company, the way the company is using its resources and the standard of conducts that are set and followed by the company when it comes to operations of the company.
According to Keasy and Hudson (2002 p.361), the main obligation of the directors (executive and non executive) is to ensure good performance of the company and giving shareholders good returns for their investment. The directors also have the accountability obligation where they are expected to guard the equity of the shareholders by ensuring there is transparency and accountability when it comes to reporting of the financial statements of the company. Keasy and Hudson argue that non executive directors also have a crucial role to ensure that these two responsibilities are accomplished. NED does not need to perform these duties directly but indirectly through overseeing the operations of the executive directors who performs these duties directly. According to these two scholars, NEDs are not homogenous but they are different in terms of experience, background, skills and also in their roles. This will enable them to perform their obligations as expected given their richness in experience. Some of these directors have served as the chairmen of the boards in different companies they have served. This has given them a wide range of experience in many issues encountered by the executive committee in their daily management of the companies. These directors have different educational background and skills which will enable them to have well balance perspectives as they evaluate the performance of the companies. For instance, some may have come from the legal field, while others in business background that enable them to judge the interests of the shareholders and the executive directors from point of knowledge. This will be an added advantage to the owners of company who may not obtain these entire knowledge assets from the executive directors only. Thus appointment of outside directors will not be a waste of resources to the company but a source of resourceful knowledge to the company.
According to Yuval (2002, p. 134), one of the major responsibility of NED is to monitor the operations of the executive directors. NEDs are in a position to look at the effectiveness and appropriateness of the strategic plans they are formulated and implemented by the executive committee. These outside directors are in a position to scrutinize, ask constructive questions and challenge the strategic plans that are undertaken by the company. They are in good position to look on the viability of these development projects such as acquisition and mergers, takeovers and opening of new subsidiaries and many other development plans that are undertaken by the executive directors. NED also has a responsibility to scrutinize how well does the management committee meets the performance target that was previously set. The NED will give their recommendations after their scrutiny and they may even challenge the executive directors to the point of removing them from office. These outside directors also play a crucial role in determining the appropriate remunerations for the executive directors. Furthermore in most company the appointment of the senior managers and the succession plans are obligations of the non executive committee given the wealth of experience in such matters. All these are very crucial role in the company and they will determine the performance of the company especially in the long term. It is there very crucial for the company to have non executive directors who can perform these duties accordingly. Thus as Yuval (2002, p. 134) has observed outside directors play very important role that cannot be termed as the waste of resources to the company.
However non executive directors do not give these services for free but in most companies they are paid some remuneration. As Sinha (2011) notes, there is increasing need of non executive directors in most companies who are paid almost the same salary as the CEO. This is making this job as one of the most lucrative career which is done as part time by the bankers, consultants, civil servant who have retired and corporate lawyers. This has increased the salary expenses of many corporations over the past few years. This is a major reason given by those who oppose the appointment of non executive directors. They argue that the remunerations paid to these directors are not equivalent to the duties they perform in the company. They view this as wastage of resources which could be used in other different ways that are more profitable to the company. Though this may be true in some companies it is different in many other companies depending on the role played by the outside directors in that specific company.
RESPONSIBILITIES OF THE DIRECTORS
Bosch (2002, p.270) define corporate governance as the process of controlling companies and other similar organizations. This process involves the owners of the corporation (the shareholders) as well as the managers and directors of the company who bear the responsibility for managing the company on behalf of the shareholders. Shareholders come together to combine their savings in order to form the company and then appoint directors and give them the powers to manage the companies on their behalf.
According to Fernando (2006, P. 17), the main responsibilities of the board of directors in private and public companies comprises of three crucial areas, namely; protecting the shareholders, company and all other stakeholders. These three functions include; corporate strategy, executive performance and compensation, risk, reporting and accounting systems. It will also involve carrying out monitoring and evaluation and changing the system when necessary.
Solomon(2010, p.4) argues that when the companies that are operating in a capitalist economies such as USA and UK have a system of corporate governance that is effective, they becomes more efficient and productive thus impacting the whole society positively.
According to Inglish (2010, p. 72) it is important for board members to understand their role as the agents of the shareholders who in this case act as the principal. Inglish argues that the main work of the board of directors is not management of the transit system but to ensure that the transit system is managed properly. Every director ought to understand properly his or her role as the agent of the people who have appointed him or her to serve them. When the directors recognize their responsibilities as the servant of the people, they will ensure there are mechanisms to safeguard the trust of the people as their trust agency. Inglish further argues that the board of directors should recognize that they safeguard the trust of the people through the CEO or the general manager. The board should therefore ensure that they hire the right person for that post since the success of the company will depend so much on the person. The board should not act as a commission but a corporate board. This is because corporate board will meet to discuss the company issues, then plan and implement these plans for the interests of the whole organization. This means that public opinions will not be the main focus or the driving force for taking a certain action though it will be put into consideration during the board meetings. Board rules that are well defined will also make board to work more effectively and harmoniously.
According to Pascal and Tudway (2006, pp. 305 – 316) one of the main responsibility of the board of directors is to ensure maximum shareholders value. This is a statutory requirement of the company law. The law requires directors to always serve interests of the shareholders. Directors are also required to declare any personal interests so that they can serve the shareholders without any conflicting self interest. The company legislations also require the directors to be accountable of any other interest that they think might affect the shareholders in one way or the other. However the law does not clearly define the legal action that should be taken against shareholders who fail to pursue policies that are in accordance with the maximization goal of the shareholders value. According to these two scholars it is difficult for the shareholders and other stakeholders to obtain the necessary information in order to persue a legal case against directors who fail to maximize the shareholders value. At such a case the shareholders are not at the advantaged end and they may end up losing their share value due to the inappropriate decisions taken by the directors. At such instance the shareholders are left with only one option which is to sell their portfolio when they feel that the directors have failed to act in line with their interests. According to Jesen et al (1976 PP. 305 – 360), many times the principal (shareholders) have to bear the cost of wrong decisions that are made by the agents thus making the company to lose the shareholders value. These scholars propose strict rules to be put in place in order to regulate the behaviors of agents who are not responsible. According Brealey and Myers (1989) several actions such as compensation, aligning agent needs with the needs of the stakeholders can be used to safeguard the interests of the stakeholders from those of the agents.
According to Hendry(2005, pp. 53 -63), for us to understand how the board of directors affect the governance process of a company, there is need to see beyond the perception of agency and that of steward and agency relationship. Though the directors are agents of the shareholders, the shareholders do not have all the legal power to protect directors from making wrong decisions that will minimize the shareholders value. This calls for other means to ensure that directors are there to serve the interests of the shareholders. These include methods such as good remuneration to the directors as well as rewarding them for the good work they are doing on behalf of the shareholders.
Mintz (2005, p.1) notes that, the approach of stakeholders’ theory emphasizes a corporate governance where the interest of the stakeholders are catered for by the company management and directors. These other stakeholders include employees who perform a crucial task in the success of the corporation. According to Philip (1997, pp. 51 -66) the performance of any organization will depend so much on how the organization manages its relationships with the other stakeholders. These stakeholders include customers, employees, creditors, suppliers, communities and other groups that can help the organization to realize its goals and objectives. It very important for the directors and other senior managers as the stewards of the shareholders value to ensure there exist a healthy relationship between the company and all these stakeholders.
AS whistler (1988, PP.309 -321) states many small companies are stable and have an effective and stable management system. However the role of an effective board of directors cannot be emphasized in all companies. The directors are the agents who serve the shareholders and they should safeguard the interests of the shareholders. The shareholders should also motivate the directors and the managers through good remuneration and rewards for their excellent performance in order to align their interests with the interests of the stakeholders. Outside directors are also very important in the companies for they represent the interests of the stake holders and the management committee. This means that outside directors are not a waste of resources but a resourceful asset to the company as some people argue.
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