B. The Director's Role-An Active or Passive One? A director must fully understand the extent of his power to act. He must take an active part in corporate affairs. He should insist that board meetings be held regularly. Directors may delegate much of the board's power and authority to executive management and may even require that policy planning and recommendations originate at the management level. However, directors and the board alone have responsibility for major policy and basic objectives and for the selection and election of top executive management. Directors must embrace this role vigorously. They cannot and should not abdicate to management their ultimate responsibility to stockholders. On this point a passive director contributes little of value. Some directors acquaint themselves with the company's non-director officers. In this way, they are better able to appraise the caliber and promise of future management material and vote more effectively when the election of executive management is before the board. The operation of the company is usually entrusted to the executive management group. Directors, therefore, should avoid involvement in day-to-day details. However, they must provide for a continuous check on management performance. Otherwise the advantages of the checks and balances provided by an effective board may be dissipated. The practice of having independent accountants appear before the board and report on their audit is to be recommended. The preparation of the annual report to stockholders is usually handled by executive management, and board of directors' review should not be allowed to delay the preliminary release of the year's results or the prompt mailing of the report itself. However, the board should establish a policy guide for management as to the overall content to be certain that the corporate story will be told clearly, accurately, and adequately without excesses of any kind. Subtle evasions or deceptions should be especially guarded against. Where changes are made in reporting practices which have a material effect on earnings or financial position, directors should make certain that opportunistic alternatives are not being adopted. C. Balanced Boards. A director must always observe the highest standards of loyalty to his corporation and its owners. He should represent all shareholders. Two vital ingredients of any board's deliberations are perspec tive and objectivity, and these can be greatly enhanced by the presence of capable and truly independent "outside" directors. The Exchange hopes that the few listed companies who have no such outside representation will seek to eliminate these situations where boards are composed exclusively of employee officers. D. Youth vs. Age. To perform their duties properly, directors must have physical and intellectual vigor. Many elderly directors make more effective contributions to their companies than those who are considerably younger; others appear to be retained without reference to their current performance. Corporations might well consider how they can improve their boards and provide for future strength by a better representation of younger directors. Some corporations have come to grips with this problem by initiating retirement age limits for board members or creating special honorary classes of board membership. As the base of shareownership broadens across the country and as owner-managers are more and more replaced by professional management, the gap between corporate owners and managers sometimes tends to widen. In many cases, the board of directors can effectively bridge this gap, thereby performing a communications function which is essential to corporate democracy. Complete candor is the vital ingredient in any company-shareholder relationship and shareholders should be quickly given the full details of significant corporate developments. Directors must insist that an appropriate disclosure policy be maintained. It is gen. erally preferable to release too many details rather than too few. F. Consulting the Shareowner. Legally, directors have authority to act on a great many matters without referring them to shareowners for approval. These days, however, many directors feel that solicitation of shareowner views via the proxy route is a desirable procedure where matters of unusual importance are involved. The Exchange believes that an extension of this philosophy would make a valuable contribution to THE CORPORATE DIRECTOR and THE INVESTING PUBLIC Part II Selected Excerpts* from CORPORATE DIRECTORSHIP PRACTICES Prepared jointly by National Industrial Conference Board, Inc. *Note: The chapter on Legal Responsibilities appearing in this booklet differs from the original chapter as it appeared in Corporate Directorship Practices. The revision gives consideration to the impact of new legislation and other pertinent developments since the Functions and Duties of Directors State laws under which the businesses are incorporated hold boards of directors responsible for the welfare of their companies. Directors are not only trustees of the business, and have a fiduciary relationship to stockholders, but also have a responsibility to the company's employees, its customers, and to the general public, upon whose good will the well-being of the enterprise depends. Failure to take cognizance of the responsibility to each of these four groups can adversely affect the solvency of the corporation. The laws do not spell out the duties of directors other than that they should manage the affairs of the company, so there are wide variations in the functions actually performed by boards of directars. However, there are seven areas of responsibility that appear to have general acceptance. 1. To establish the basic objectives and broad policies of the corporation. 2. To elect the corporate officers, advise them, approve their ac. tions, and audit their performance. 3. To safeguard and approve changes in the corporate assets (issuance of securities, pledge of assets on loans, declaration of dividends, and conveyance of property). 4. To approve important financial matters (such as budgets, capital appropriations, officers' pay, financial audits), and to see that proper annual and interim reports are given to stockholders. 5. To delegate special powers to others to sign contracts, open bank accounts, sign checks, issue stock, make loans, and such other activities as may require board approval. 6. To maintain, revise, and enforce the corporate charter and bylaws. 7. To perpetuate a sound board through regular elections and the filling of interim vacancies. Board's Relationship to General Management Broadly, the board concerns itself with basic as opposed to operat ing policy, with abnormal as opposed to normal problems, and with. Many companies point out that it is difficult, if not impossible, to delineate with precision the boundaries between the functions of the board of directors and the corporate management. Often broad gen. eralizations are made, such as "It is the function of the board to formulate policies, and the function of management to put these policies into effect. 'What should be done' is the concern of the board. 'How it is done' is the responsibility of management." Such distinctions between the functions of the board and of management are particularly hard to make in companies having boards composed largely of inside directors. Composition of Boards In recent years there have been a number of moderate but nevertheless significant trends in the composition of boards of directors. There has been some movement away from very small or very large boards to a size that seems, from experience, to be more workable. There has been a shift toward greater outside representation: in a few instances attempts have even been made to include directors who can represent the viewpoint of the general public or consumers rather than the owners alone. There has been a movement to keep boards young and vigorous. To this end, companies have established retirement policies and honorary positions for older directors who have served with distinction but are no longer fully active in company affairs. Furthermore, many companies are selecting board members with greater care, giving particular attention to the experience and skills that new directors can bring. Manufacturing Companies. Most manufacturing companies strive for a balanced board. Although they have varying definitions of what a balanced board is, there appears to be substantial agreement that it is composed of men having varied skills and experience, and of both management and outside directors, including representatives of large ownership |