Role and Responsibilities
of the Board of Directors
Fiduciary Duties and
Independence of the Board
February 26 2004
Sophie L’Hélias
Fiduciary Duties
vs.
Director Duties
Directors’ Fiduciary Duties
• A legal concept that is pillar in AngloAmerican corporate governance
• A legal concept that does not exist per
se in many developed markets
• Shouldn’t we be addressing director
duties?
Director Duties Vary
• Economic environment
• Legal environment
• Cultural environment
• Shareholder base: a result of the above
Economic Environment
• Role of government
• Sources of capital
• Role of capital markets in economic
development
Legal Environment
• Regulators, codes and laws
• Courts and enforcement
• Civil vs. criminal actions
Cultural Environment
• Perception of capital markets by society
(population, courts, media, government)
• Proportion of population “tied” to capital
markets (retirement, investment)
• Free market vs. planed economy
Shareholder Base
•
•
•
•
•
Government agencies
Public institutional (pension funds)
Private individual
Family
Domestic institutional
– Pension funds, mutual funds, alternative funds
• Foreign institutional:
– Pension funds, mutual funds, alternative funds
Comparing Shareholder Base
• Anglo-American
– Domestic institutional:
large
– Private individual: large
• Continental European
– Domestic institutional:
limited
– Private individual: limited
– Public institutional: large
– Public institutional:
limited
– Foreign institutional:
limited
– Foreign institutional:
large
Investor Remedies
Anglo-American
• Offers remedy to investors
who have been wronged
Continental European
• Balances interests of the
company with other interests
– Numerous investor law suits
– Few investor law suits
– Class action suits action
– No class actions
– Large punitive damages
– No punitive damages
– Extensive civil director
liability
– Limited civil director liability
– Limited criminal liability
– Extensive criminal liability
Convergence of Duties ?
• Global investors’ expectations & demands
• Media exposure: domestic & international
• Competing for funds: domestic investors
• Corporate governance codes
• Laws (voting, proxies, etc)
Director Independence
Why is Independence
Important?
• Conflicts of interest hinder judgment and
affect decision-making
• Judgment and decision-making are what
directors are asked to do
• Directors must feel free to think, express,
question and decide in the interest of those
they represent
Box-Ticking vs. Effective
Independence
• Current definitions are based on
–
–
–
–
Ownership of shares
Contracts and services rendered
Relationships
Family ties
• What about effective independence?
– “Independent minded”
– Commitment (time and knowledge)
Importance of Selection
• Who selects directors?
• How are they selected (pool, resources,
interviews)?
• Who determines their independence?
• Who elects directors?
• Who evaluates directors?
• Who removes directors?
Independence of Directors
• Disclosing conflicts of interest:
– Does the Board have clear guidelines of
conflicts that must be disclosed?
– Who discloses conflicts?
– To whom are conflicts disclosed?
– What happens if conflicts are not disclosed?
• How is independence enforced?
– What if conflicts are disclosed later?
• good faith vs. bad faith
– What is disclosed to the Board and/or to
shareholders?
Board Committees
• What is their purpose?
• What is their power?
• How are members selected, renewed or
removed?
How Committees Operate
• Process:
– Setting the agenda
– Discussion, debate, vote, minutes
– Recommendation, decision, report
• Constraints:
– Budgetary and resources
– Access to outsiders: management, advisors,
suppliers, etc.
• What happens to committee findings and
recommendations?
Conclusion: Several Models
with Converging Objectives
• Prevent (and react to) wrong-doing by
management, directors, advisors/suppliers,
partners and shareholders
• Ensure protection of shareholder interests
and rights
• Ensure the long term growth of the company