5 - Board on Task: developing a comprehensive understanding of the performance of boards  pp. 225-250

Board on Task: developing a comprehensive understanding of the performance of boards

By Jaap Winter and Erik van de Loo

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Introduction

The governance crisis of 2001–03 and the financial crisis of 2007–08 have sparked and continue to spark extensive debate on and regulation of boards of directors of companies. The term ‘board’ in this chapter is used to describe the interaction between non-executives and executives, regardless of whether the organisational structure is a one-tier board which comprises executive directors and non-executive directors, or a two-tier model in which executive directors and non-executive directors take seats in two separate boards.

In short, the governance crisis revealed that boards of listed companies apparently were unable to stop executives from manipulating financial statements in order to boost their bonuses, stock options and performance shares. In the financial crisis, boards of financial institutions were unable to ensure proper risk management (Winter 2012a). The two crises have left us wondering what boards and, within boards, what non-executives are actually doing or should be doing. The regulatory response in both cases has been to enforce the monitoring role of non-executives towards executives, fuelled by the dominant economic corporate governance model of the agency theory. Non-executive duties in fields like audit, internal control and risk management, which we refer to as ‘corporate hygiene’, have been described and detailed explicitly in mandatory regulation and corporate governance codes. At the same time, the personal responsibility of non-executives for a professional execution of this monitoring role has been emphasised.

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