Effective corporate governance requires that everyone involved has clear and structured roles and responsibilities. It also helps in fostering a positive work culture which values diversity and encourages fairness and impartiality. These frameworks are suitable for an array of organizations including large corporations, professional associations and families.
The board develops and approves corporate strategies that aim to create sustainable value over time; selects the chief executive officer (CEO) and supervises management of the business. The board also invests capital and assesses risks, manages them and establishes the “tone at the top” for ethical conduct. The board is typically comprised of the insiders–major shareholders, founders and executives. There are also independent directors who have experience managing or directing other large corporations. Independent directors are deemed to be beneficial for governance because they do not have the same ties that often exist among insiders, which could lead to conflicts of conflict of interests.
The composition of the board is important because members are often dealing with technical issues which require a variety of viewpoints. Governance experts suggest that a board has at least a majority of independent directors. Tenure and diversity also are important in ensuring the board’s effectiveness, especially when discussions are lengthy and filled with strong opinions. Board members who are new can offer fresh perspectives, while those with more tenure can offer continuity and institutional know-how.
Finally, the board is responsible for reviewing, understanding and directing the annual operating plan of management and budgets. The board through its corporate governance committee and nominating committee, must also engage in regular contact with major shareholders to determine their views and communicate with them frequently on important questions that affect the business.
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