Over the past few decades, the definition of the effectiveness of the board of directors as part of corporate governance has shifted dramatically. In the aftermath of the global financial scandals and crisis within the world known organization such as WorldCom and Enron Corporation, most organizations board of directors are now necessitated to be accountable while making oversight of the financial reporting of the companies they oversight (Dutra, 2013). In order to make them more accountable the professional code of conduct and the financial reporting code is holding the personally liable for any risks which the organization might undergo through during the tenure of their leadership. The role of this report is to elaborate how enhancing effectiveness of the board of directors in an organization might be relevant and helpful to the organization, stakeholders and shareholders.
The members of the board of directors understand all the aspects relating to the operation of the organization and they have the potential to either make the organization to succeed or to fail. In order for the board of directors to be effective and efficient, the board members are necessitated to work as a team and to clearly define their mission and role of oversight. There must always be defined roles and functions, capital allocation and acquisition and succession (Alice, 2012). In order to establish and have an effective board in an organization it is important to group them board into: foundational, developed, advanced and strategic board. The role of the functional board is to provide the fundamental compliance oversight and the basic survival of the organization. Both the developed and advanced board plays the role of development of the strategies which have been suggested by the foundational board. On the other hand, the strategic managers usually provide the forward looking insight and strategies which results into high performance and full actualization of the organization.
Poor process management, lack of clarity, lack of agreement and alignment of the company strategy, board composition and poor team dynamics are the major causes of failure of the board of directors in ensuring effective corporate governance. Organizations’ having an effective corporate board of governance has become a challenging and complex issue than ever before. Most organizations and companies need board of directors in order to assist them to attain the necessary regulatory compliance (George, 2015). The board of directors are therefore demanded to deliver solid strategic decision and provide a direction while conducting the oversight in order to avoid cases of misrepresentation, insider trading and fraud within the organization. Even before the organization employ the directors to its board it is of importance to develop directors who goes beyond their personal interest and consider the interest of the organization first. By doing so the organization shall perform highly and attain full actualization of its strategic goals.
Effectiveness of the board in corporate governance depends on whether the board has clear evaluation objectives, whether there is a leader within the board driving the process and whether the process being used incorporates the aspects of the management which interacts with the board. It should always be understood that the assessment of the board goes beyond compliance aspects and that the directors should always be ready to review the results obtained from the assessment and address the emerging issues (Wright, 2009). A successful assessment process of the board of corporate governance should: reflect on the culture of the board and the organization, collective support from all the board of directors and the process of assessment should be characterized by confidentiality.
The major issue related with corporate governance are related with the quality of the financial reporting, the role of the board of directors, the role of auditing, risk management, remuneration of the directors and citizenship. The duties of the directors in the organization are regarded to be fiduciary where they are necessitated to act in the best interest of the organization while at the same time use the powers bestowed to them to exercise the duty of care and to avoid conflict with the organization. The composition of the board of directors is of great importance as far as the success and the failure of the organization is concerned. Most of the organizations in the world and more so Enron Corporation have ended up being bankrupt as a result of their board being dominated by single senior executives. Most senior executive in the companies use their powers to distort financial reports for their own personal gains and interests (Ibrahim, 2014). The failure of Enron Company in United Kingdom was associated with an executive director misrepresentation, insider trading, money laundering and fraud. The functions of the chief executive officer and the chief financial officer should be clearly defined in order to avoid the conflict of interest within the board of management. By doing so, most organizations shall be in position to avoid some of the conflict and scandals associated with improper composition of the board of directors. Large organization should avoid excessive remuneration of their directors in order to ensure that they become liable for their misconduct.
Effective financial reporting depends on the reliability of the external auditors. The board of directors has a behavior of working together with the external auditors to misrepresent the financial position of the organization in order to attract the stakeholders and shareholders for more investment (Wright, 2009). In order to avoid this, there is need for the board to conduct internal control and risk management assessment regularly. Once the necessary regulations, evaluation and assessment are put into place, it is possible for the organization to have effective board of directors, function effectively and avoid conflict of interest.
Dutra, A. (2013). A more effective board of directors. Retrieved from: https://hbr.org/2012/11/a-more-effective-board-of-dire
Alice, S. (2012). Improving board effectiveness: Five principles for getting the most out of a board assessment. Retrieved from: https://www.spencerstuart.com/research-and-insight/improving-board-effectiveness-five-principles-for-getting-the-most-out-of-a-board-assessment
George, K. (2015). Medtronic plc Principles of Corporate Governance. New York publishers.
Ibrahim, L. (2014). Corporate Governance Failure And Its Impact On Financial Reporting Within Selected Companies. International Journal of Business and Social Science. Vol. 2 No. 21
Wright, A. (2009). The corporate governance mosaic and financial reporting quality. Journal of Accounting Literature, 87-152.