Role and Responsibilities of the Board of Directors

Fiduciary Duties and Independence of the Board

February 26 2004

Sophie LHlias

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 Shouldnt 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 Public institutional: large Foreign institutional: limited

Continental European
Domestic institutional: limited Private individual: limited Public institutional: limited Foreign institutional: large

Investor Remedies
Anglo-American Offers remedy to investors who have been wronged
Numerous investor law suits Class action suits action

Continental European Balances interests of the company with other interests

Few investor law suits No class actions No punitive damages Limited civil director liability Extensive criminal liability

Large punitive damages

Extensive civil director liability

Limited 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