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This Wiki has been created to discuss and evaluate the necessity of the board of directors in corporations through using Babcock and Brown as an example.


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Board-of-directors

Foundations & Frameworks

Corporate Governance

The Purpose of the Board

Board Structure & Size

Accountability & Ethics

Concluding Statement



DOES THE BOARD SERVE A NECESSARY PURPOSE WITHIN A FIRM?


The board of directors, under agency theory, are a group of people used to link the shareholder expectations to the actions of management in an attempt to mitigate agency costs. Though how necessary is a board of directors? In a context driven, dynamically changing world, is a board of directors required for all firms? Focusing on the role of the board in corporate governance, the purpose of the board, the structure and size of the board and the director’s accountability and ethics, the intent of this discussion is to determine the necessity of a board.

Corporate governance is fundamental to firm performance and conformance as it sets out the processes, systems, rules and procedures the firm works by. If shareholders were to monitor and manage corporate governance, the firm would base itself on a high growth with short term performance, disconnected from the concepts of ethics and accountability. On the flip side, if management were to administer corporate governance, the outcomes would not align with the requirements of the shareholders resulting in a disconnect; being the extraction of funds from the business. Therefore, the board is necessary to ensure the interests of all entities that make up the firm are aligned and common goals, objectives and strategies are achieved.

Therefore, the purpose of the board is one of strategy formulation, management of its implementation and monitoring. Strategy is the result of the board being sandwiched between the forces of shareholders expectations, management capabilities and societal demands. Therefore strategy is precariously balanced between the boundaries of conformance and performance.

The board, however, is a group of individuals in itself, so the problem exists of how to ensure the board itself is not biased to one side, thereby affecting the firm’s strategy. An impartial board is therefore critical to firm performance. Management and shareholder expectation is therefore achieved through a board structure made up of executive, grey and independent directors and an independent chairperson, separate from the company CEO.

Finally, the board of directors, being the strategists of the firm, are accountable for the performance and conformance of the firm. This is not a purely financial concept, as directors are held accountable through legislation, being the Corporations Act (2004), and societal demands, forming corporate social responsibility. Therefore the actions and behaviour of the firm are not just dictated by the finite group of shareholders and management, but also society as a whole. The result is that the firm’s strategy, and therefore the board’s effectiveness, is affected by accountability and ethical requirements.

Conclusively, the board is critical to the performance of the firm. The board provides the link between the expectations of the shareholders and the capabilities of management through formulating, implementing and monitoring the firm’s strategy. The board therefore provides a point of accountability within the firm should there be a breach of legislative or societal standards and demands.


REFERENCES

http://www.crikey.com.au/2010/07/21/green-denies-optimistic-profits-at-babcock-brown/

http://www.theaustralian.com.au/business/industry-sectors/babcock-brown-chairman-held-concerns-for-phil-greens-tricom-ties-court-hears/story-e6frg96f-1225894954055

http://www.watoday.com.au/business/the-fall-and-fall-of-babcock--brown-20090920-fws6.html

http://www.crikey.com.au/2008/06/13/time-for-babcock-brown-to-sack-phil-green/

http://www.smartcompany.com.au/financial-services-and-insurance/20090814-babcock-and-brown-may-have-traded-while-insolvent-report.html

http://www.austlii.edu.au/au/legis/cth/consol_act/ca2001172/

http://www.theage.com.au/business/nab-westpac-raise-rates-more-than-rba-20101112-17qi7.html


http://www.abc.net.au/news/stories/2010/11/06/3058911.htm

Johnson, G., Scholes, K., Whittington, R. (2005) Exploring Corporate Strategy: Text and Cases. Prentice Hall, Essex.

Psaros, J. (2009) Australian Corporate Governance: A Review and Analysis of Key Issues. Pearon Education Australia, Frenchs Forest, NSW,

Tricker, R. (1994) International Corporate Governance: Text, Readings & Cases. Prentice Hall, New York.

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