Introduction to the Concept of Board of Directors

Any public limited or private company needs to have a board of directors constituted for the purpose of oversight and accountability to the company. The concept of the board of directors is that it provides an umbrella for the company to operate in and ensures that the decisions and actions taken by its management are reviewed and held to the mirror.

The reason for the existence of the board of directors is that there needs to be a body that is above the management and which can be accountable to the regulators and shareholders for the decisions taken by the management of the company.

Hence, it is common to find many members of the management sitting on the board as executive directors. Again, it is for this very purpose that the regulators deem the company to have a certain percentage of directors in the non-executive capacity and those who are independent.

In recent years, the concept of the board has become crucial for corporate governance because of the incidence of several corporate scandals involving unethical conduct by the management.

In some of these cases like the Enron scandal and the Satyam scandal in India, the board was found to have played a major role in facilitating the scandal. This has led to the regulators asking for greater oversight from the board and to make the board accountable to its shareholders.

Of course, there are many instances that prove the contrary where the board has stepped in to stem the rot that the management has through its actions engendered. Prominent among these are the actions of Reebok in recent months where the board asked the top leadership to resign in the wake of corporate scandals involving them.

The concept of the board has been introduced explicitly to ensure that ethical and normative rules of conduct of corporate governance are followed.

The point here is that since the buck stops with the board of directors, shareholders and regulators know who to turn to in case they have queries or doubts about the decisions taken by the company. In many cases, the board of directors acts as the ombudsman as well for shareholder complaints and grievance redressal.

Further, the board of directors is comprised of individuals with exemplary records of managing companies and hence it is expected that the board of directors would provide technical and managerial guidance to the way in which the company is run.

Finally, the concept of the board of directors is also important for the way in which it is deemed to play a pivotal role in providing good corporate governance. In most cases, the way in which the company is governed depends on the way in which the board directs the management in its operation of the company. This is relevant to the contemporary times where the managerial class has been found to enrich itself at the expense of the company and its shareholders.

It is for this reason that the board of directors is expected to steer the company away from agency problems, conflicts of interest and asymmetries of information in the way shareholders are briefed about the decisions taken by the company.

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Corporate Governance