Transformation of Board of Directors

A charismatic and omnipotent Chief Executive Officer has long been the hallmark of the American corporate sector while the Directors on Boards of companies have been content to remain passive. Sarbanes Oxley has significantly raised the profile of Directors and expects them to provide alternative perspectives besides their monitoring role in companies. Eventually, directors of companies are expected to contribute to strategy formulation, refine the culture of their companies as well as manage strategic risks. Accounting problems, in the final analysis, are caused by failures of strategy or the inability to read the early warnings of stress on corporations. Directors have to be willing to analyze relevant information, suggest solutions and supervise the implementation of strategies.

A pre-requisite for a more active role for directors is the separation of the role of the Chairman and Chief Executives or vesting of greater authority of the Board of Directors in some other form. In a recent survey conducted by AT Kearney, it was found that 61% of the companies had a lead or presiding director and 43% of them appointed them in the year before the survey in 2004. The same survey also shows that the large majority of directors do not favor the separation of the role of the Chairman and the Chief Executive Officer. The diminished role of Chief Executives is evident from the fact that the Chairpersons of Committees are selected by the Boards in 50% of the cases up from 24% in 2002.

Willingness to acquire knowledge of the financials of the company, as well as the competitive and industrial environment of the company, would prepare the directors to participate in the decision making process. In the past, they had neither direct access to the details of the financials of the company or the knowledge and interest to ensure the integrity of the reporting. Recent surveys are indicating that a significant numbers of the members of the Board (66%) as well as their Audit Committees (71%) are gaining understanding of the finances of their companies and knowledge of their internal controls which they need to do to understand the many nuances of chancery in accounting methods. The internal auditors of companies are also reporting directly to the Audit committees. The intended objective of Sarbanes Oxley to increase the independence of Boards of Governors of companies and commensurate access to information and responsibility for the outcomes in companies is being achieved.

Boards still have to make a great deal of progress before they can contribute to the performance of companies and shareholder value. They are still pre-occupied with ensuring the compliance of their companies with the existing regulations (74% report active involvement) while 32% report active involvement in improving the performance of companies. The Boards of Directors rate their effectiveness in examining problems and monitoring financials is relatively high at 49% and 43% respectively while the corresponding figures for guiding strategies and managing risks was 21% and 16%. The achievement of this objective will depend greatly on the availability of relevant information about the company in real time.

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