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GLG 4040A: BOARD LEADERSHIP AND GOVERNANCE:

TYPES OF BOARD COMMITTEES

A board accomplishes its work through a variety of smaller groups. Associations need to regularly
evaluate their existing committee structure and be ready to adjust it based on the organization’s
changing governance needs. There are generally two types of board committees:
1. Standing (or operating) committees
They are used by the board on a continual basis.
They can be set forth in association’s bylaws or its board operations & policy manual or
may be established by custom. The bulk of board’s work is done through these committees.
Some boards have development plans where members rotate in different committees to
gain broad understanding of company. Others allow members to stay with same committee
each year to develop deeper knowledge of the subject area to provide greater service to the
association. A balance of the two strategies allows board members to gain experience with
different committees and to develop some expertise with the work of one or 2 committees.
2. Ad hoc committees
They are formed for a limited period of time to address a specific need.
When the work is completed, it is dissolved. It may exist for less than a year or for a year
or more depending on the extent of the work assigned to it. Ad hoc committees are often
formed to amend the bylaws, recruit a new CEO, develop a strategic plan, form a new
subsidiary, launch a new division, consider whether to sell a building, or work with other
associations or coalitions. Could also be formed to study and find creative solutions to a
particular challenge an association is facing, such as falling membership levels or a
particular challenge its members are facing.

Other Options
A board does not always need to add new committees to get its work done, nor must committee
members always be members of the board. Task forces and advisory councils can be useful tools.
• A task force can be formed if there is an objective that can be achieved in a relatively short
period of time. Work handled e.g. planning a special event or analyzing a merger proposal.
• Advisory councils assist boards in carrying out their work by providing expertise and
advice in selected areas. Advisory councils do not have any governance responsibilities
and are a good way to include former board members, potential board members, subject
matter experts, and others in the work of the board without placing them on the board.

Types of Board Standing committees

1. Executive committee
It is a small group of board directors appointed to act on behalf of the entire board. It serves as
the steering wheel for the board and facilitates decision-making in meetings, crises and urgent
matters. It typically includes the chairperson, vice-chairperson, treasurer and secretary.
2. Audit committee
It is created to supervise financial statements and reports. In order to run successfully, it must
also include those well-versed in finance and accounting outside of the board of directors.
3. Compensation committee
It’s usually made up of independent directors. Its role is establish pay rates for senior managers
and manage all aspects of overall compensation, including profit sharing, stocks and bonuses.
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4. Nominating and corporate governance committee

A nomination & corporate governance committee is established to assess corporate governance
exercised by board of directors. It is also responsible for determining skills and characteristics
necessary to serve on the board. These committees can fulfil other roles depending on the
organization. They often include the chair, deputy chair and the CEO.
5. Finance and risk committee
It is responsible for supervising financial management & risk control practices of organization.
It offers guidance to the board to ensure company resources are utilized efficiently and in line
with the company’s objectives and policies. Usually consists of executive and non- executive
directors of the board, especially those with finance and risk management expertise.

Functions of board committees

Board committees offer an organisational capability — a practical way to give order to the board’s
purpose. Simultaneously, they offer flexibility and allow the board to adapt to the fluctuating needs
of the environment. The core functions of board committees are:
1. Oversight responsibilities
The BOD performs oversight functions through well-planned board committees. Oversight
responsibilities of board committees involve evaluating projects, policies and plans to
ensure they comply with organization’s goals, exhibit value for money and deliver results.
2. Decision-making powers
Board committees are essential decision-making entities. Their purpose is well-understood
when the board has a lot of members & is unlikely to make effective choices. This is often
undertaken by executive committee, handles most of policy decisions in business meetings.
3. Recommendations to the board
One of primary functions of board committees is to give advice & make recommendations
to the board concerning capital distribution, risk indicators, needs of the board and more.

Membership of board committees

Members of board committees can be chosen by the chair of the board or by the entire board. The
protocols for the membership of board committees include:
1. Composition of committee members: Committee members composition should be an
optimal combination of skills & knowledge while considering varying ages, ethnicities &
genders. It’s crucial to include individuals well-versed in business, accounting, law and
marketing, depending on type of committee.
2. Appointment of committee chairs: The nominations & corporate governance committee
is responsible for reviewing the candidates based on their skill set and experience and
finalizing the eligible ones for the position of chair. The board votes for their preferred
candidate, and the person with the most votes is taken to the Trustees for final approval.
3. Role of independent directors: To appoint the role of an independent director, the board
first verifies the candidate possesses right skill set & experience to carry out the designated
duties efficiently. The appointment is then approved at the meeting of the shareholders. An
explanatory statement and a letter of appointment are issued to finalize the process.

Structure of Board Committees

1. Committee composition: Committees are comprised of a smaller group of board
members, often 3-7 individuals. This allows for focused discussions and in-depth analysis.
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2. Committee Chair: Each committee has a designated chair, who is responsible for leading
meetings, setting agendas and ensuring the committee fulfills its mandate.
3. Committee charter: A formal document outlining the committee's purpose,
responsibilities, authority and operating procedures.
4. Committee meetings: Committees meet regularly, typically more frequently than the full
board. These meetings allow for deeper dives into specific topics.
5. Reporting to the full board: Committees regularly report their findings and
recommendations to the full board for discussion, approval and action.

Benefits of Utilizing Board Committees

1. Enhanced expertise: Committees allow board members with specific expertise to focus
on relevant issues, leading to more informed decisions.
2. Increased efficiency: By delegating specific tasks and diving deeper into complex
matters, committees streamline board meetings and improve efficiency.
3. Improved oversight: They provide a closer look at critical areas e.g. financial reporting,
risk management and executive compensation, strengthening overall board oversight.
4. Enhanced accountability: Committee members are directly accountable for their
designated areas, promoting board ownership and responsibility.
5. Succession planning: Committees can help identify and groom potential board
candidates, ensuring a robust pipeline for future leadership.

Factors that contribute to an effective board committee structure:

1. Clear committee charters: Charters should be clearly defined, outlining the
committee's purpose, responsibilities and authority.
2. Qualified committee members: Board members appointed to committees should
possess relevant expertise and experience.
3. Regular committee meetings: Meetings should occur frequently enough for
committees to thoroughly address their assigned tasks.
4. Strong communication: Committees need to maintain clear communication channels
with management and the full board.
5. Ongoing review and assessment: Board committees should be periodically reviewed
and adjusted to ensure alignment with evolving needs.

BOARD POLICIES
• A policy is a statement of ‘value or perspective’ that once articulated causes or underlies action
• A Board Policy is a value or perspective developed and agreed upon by the Board that
articulates the Board’s values (on behalf of the owners) on a topic or issue.
• Board policies are statements which set forth the purposes and prescribe in general terms the
organization and program of a school system. They create a framework within which the
superintendent and staff can discharge their assigned duties with positive direction.
• Board policies are those policy decisions made by the Board – they should encompass those
decisions that may need to be made by everyone else in the organization.
• Everyone makes policies. Policies may be more or less encompassing.
• Policies may be written or unwritten. If you expect people to implement policies, they need to
be written down. Board policies provide written direction. They tell what is wanted.
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• Certain board policies provide direction to the CEO who can then interpret the Board policy in
order to “operationalize” it and make all the needed decisions under the Board policy
direction. Other Board policies direct the Board’s actions.
• Policy Governance recognizes that the Board should be leading their organization.
• Boards are the link between the wishes and desired outcomes of those they represent – the
owners – and the operational organization that will accomplish the desired outcomes.
• The Board has a responsibility both to direct organization to achieve desired outcomes and to
ensure it avoids imprudent or unethical behavior or actions that would put the organization at
undue risk or that would offend the values and trust of those the Board represents – the owners.
• The significance then of Board creating Board policy is that it can lead and direct achievement
of desired organizational outcomes & the avoidance of undue risk without having to make each
individual decision or even specific big decisions along the day-to-day journey of organization.

Types of Policies
• There are 4 categories of Board policies called “policy quadrants”. These were designed to
encompass all the types of or topics for which any Board may need to give direction.
• By setting polices in each quadrant, Board creates a complete framework of values and
perspectives to guide all areas of further organizational decision making. They include:

1. Ends Policies [Governing outcomes/directions]

These deal with the issue of defining the reasons for organization’s existence. Specifically, they
define what benefit or outcome/result is to be created, for what group of people & at what value
or ROI. They are always stated in terms of the customer or beneficiary who receives the benefit.

2. Executive Limitation Policies [Governing prudential and ethical risk]

These policies allow the Board to direct the choice of operational methods & organizational
conditions. Rather than telling the CEO what to do, these policies tell the CEO what methods
cannot be chosen in pursuit of the Ends and what organizational conditions or states would be
unacceptable to the Board, even if the Ends could be achieved using that method.
The Executive Limitations should reflect the owners’ values concerning prudent and ethical
organizational behaviour or conditions, Executive Limitations do not list preferred methods of
‘how to’ do the job or provide management with consulting advice about “how to”.

3. Board CEO Linkage Policies [Governing Board conduct]

These policies describe & define how the Board’s authority is passed to the CEO, how the board
will check up on organization & how the board will exercise direction to & authority over CEO.
Linkage policies spell out the roles of the two and the relationship that they will have.

4. Governance Process Policies [Board/CEO relationship]

These are the explanation of, & agreement to, methods the Board will use to accomplish its own
work. They define board’s value-added job, style of interacting, and decisions-making process

Characteristics of Board-set Policies

• Actively embrace or encircle or guide or inform everything that could happen in the
organisation, and do so proactively rather than ‘after the horse has bolted’
• Be formally expressed, consolidated, easily visible & accessible to those expected to comply
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• Convey the board’s expectations in a consistent and continuing manner, the latter being
particularly important to smooth out transitions when board membership changes
• Be actively applied, reinforcing & operationalizing the board’s primacy in chain of command
• Be well supported through active monitoring and review, and through processes such as
induction and board and staff training
• Be respected and consistently applied allowing those who must comply a reasonable
interpretation of them, until there is an explicit change in policy

Benefits of Board Policies

• Greater delegation is possible thus making board 'approval' unnecessary!
• Opportunities for Individual board members to exercise undue influence on specific
proposals instead have to exercise influence by convincing their colleagues about the
provisions of a generally applicable policy
• By its existence a policy establishes a clear reference point for implementation
(compliance) monitoring which increases the likelihood that staff actions will be true to
the intent of the board’s policy

BOARD COMPENSATION
• Board Compensation means cash paid, stock options & other equity-based awards
granted, & any other Compensation granted or paid for service as a director of company.
• It means the remuneration, expressed in terms of a cash amount, earned by a Director for
service on the Board including, without limitation, a retainer, meeting fees & chairperson’s
fees. Board compensation is typically structured around cash and equity components.
• Cash compensation can involve meeting fees, annual retainers, and travel reimbursement.
Equity compensation include company stock, stock option grants, or restricted stock units.
• In public and larger private companies, committee chairs, committee members, lead
directors, and non-executive chairs often receive cash compensation in addition to an
annual retainer or per-meeting fees. Private company board compensation is more
difficult to discern due to the lack of mandatory public disclosures.
• Director compensation for private companies also varies greatly based on the size and stage
of the company. Moreover, compensation structures can differ significantly based on
whether the company is venture capital (VC) - or private equity (PE)-backed.
• Fair and transparent compensation practices are of utmost importance for effective
corporate governance. When it comes to non-executive directors, these practices play a
vital role in ensuring board dynamics and company performance.
• By implementing fair compensation strategies and maintaining transparency, companies
can foster trust, attract top talent, and overall enhance board effectiveness.
• Fair compensation practices involve providing non-executive directors with remuneration
that aligns with their responsibilities and contributions to the company.
• It is essential to consider factors such as industry standards, company performance and
comparable positions in order to determine a fair and competitive compensation package.
• By doing so, companies can ensure that non-executive directors are motivated to fulfill
their duties and make valuable contributions to the board.
• Transparency is another crucial compensation practice aspect for non-executive directors.
• Companies must openly communicate their approach to setting director compensation,
including the rationale behind decisions and the process followed.
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• This transparency helps build trust among shareholders, employees & other stakeholders, &
instills confidence in the company's governance practices and decision-making processes.
• Fair & transparent compensation practices for non-executive directors adhere to corporate
governance guidelines and also contribute to the long-term success of the company.
• By prioritizing fairness & transparency, companies can create positive & inclusive board
culture, attract experienced directors, and foster sustainable growth and profitability.

Who pays Non-Executive Directors

• The responsibility of paying non-executive directors falls upon the company they serve.
• As integral members of the board, non-executive directors contribute their expertise to
strategic decision-making process and bring an objective perspective to corporate affairs.
• In recognition of their invaluable contributions, companies ensure they are fairly
compensated for their services.

Board of Directors' Involvement in Setting Remuneration

• Setting the remuneration for non-executive directors is a collaborative process that
involves the board of directors. The board, consisting of both executive and non-
executive members, is responsible for determining the appropriate level of compensation.
• This ensures the remuneration aligns with industry standards, reflects skills & experience
of non-executive director, & maintains a fair balance within firm's financial capabilities
• In summary, non-executive directors are paid by the company they serve, and the board
of directors plays an essential role in establishing their remuneration. By recognizing the
responsibility of the company and the involvement of the board in setting compensation,
transparency and fairness are maintained in the process.

How Non-Executive Directors Are Compensated

• Non-executive directors can receive different forms of compensation for their
contributions; can vary depending on various factors. Types of Compensation:
• Retainer fees: Non-executive directors are often paid a retainer fee, which is a fixed
amount paid regularly to compensate for their time and commitment.
• Meeting fees: They may also receive fees for attending board or committee meetings.
• Share-based compensation: In some cases, non-executive directors may be offered
share options or other equity-based incentives as part of their compensation package.
• Bonuses: Non-executive directors may be eligible for performance-based bonuses linked
to specific targets or company performance.

Factors Influencing NED Compensation Levels

• Company Size & complexity: Non-executive directors serving boards of large, multinational
corporations may receive higher compensation compared to those serving on smaller boards.
• Industry sector: Compensation levels may also vary depending on the industry sector in
which the company operates.
• Experience and expertise: Non-executive directors with extensive experience or specialized
expertise relevant to the company may command higher compensation.
• Time commitment: The amount of time required and the workload associated with the non-
executive director role can impact compensation levels.
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• Market benchmarks: Companies often benchmark their non-executive director

compensation against comparable roles in the market to ensure competitiveness.
• Legal, governance frameworks & Shareholder Approval: Companies adhere to corporate
governance guidelines & fulfill legal obligations in determining & approving non-executive
director compensation including compliance with relevant legislation, such as Companies Act.
These require companies to establish fair and reasonable compensation policies and practices
that align with the company's financial performance and industry standards. Also, shareholder
approval is often required for the appointment and remuneration of non-executive directors.

Corporate Governance Guidelines

• These guidelines serve as a framework for companies to ensure transparency,
accountability and ethical conduct in their operations.
• They provide guidance on various aspects of corporate governance, including the structure
and composition of boards, board responsibilities and decision-making, and executive and
non-executive director compensation.
• By following the guidelines, companies can enhance their governance practices, strengthen
board oversight, and promote the interests of shareholders and other stakeholders.
• Shareholders play a key role in ensuring the compensation arrangements for non-executive
directors are appropriate and in line with company's performance and shareholder interests.
• They’ve right to vote on matters related to director compensation during general meetings.
• By obtaining shareholder approval, companies demonstrate commitment to transparency &
accountability, enhancing the trust and confidence of shareholders and the wider public.

Challenges in Remunerating non-executive directors

Balancing fair compensation with company performance while meeting transparency
requirements and satisfying shareholder expectations.
• These directors play a crucial role in providing independent oversight and guidance to the
board. However, determining their compensation can be complex, as it needs to reflect
their expertise, responsibilities, and the value they bring to the company while aligning
with the company's financial performance.
• Companies must consider various factors, such as industry benchmarks, market conditions,
and the financial stability, growth, and profitability of the organization.
• The compensation structure should incentivize non-executive directors to fulfill their
responsibilities effectively and contribute to the long-term success of the company.
Transparency and Shareholders Expectations
• Transparency is a vital aspect of remunerating non-executive directors. Shareholders and
stakeholders expect fair and transparent practices in determining director compensation.
• Companies are under increasing pressure to disclose detailed information about director
remuneration to ensure accountability and build trust. Shareholders often scrutinize non-
executive directors’ compensation packages, particularly if they perceive them to be
excessive or not aligned with company performance.
• It’s crucial to have clear & transparent processes for setting director compensation,
including involvement of independent remuneration committees & regular communication
with shareholders regarding the rationale behind the compensation decisions.
• By embracing transparency, companies address shareholder expectations, enhance
corporate governance, & strengthen relationship between the board and shareholders.
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BOARD AND MANAGEMENT PERFORMANCE

• In today's rapidly evolving business landscape, the effectiveness of a board of directors is
fundamental to an organization’s success. A board performance review serves as a critical
tool, enabling an in-depth evaluation of the board's operational effectiveness, strategic
contributions and governance practices. By using performance management, boards of can
help ensure company is moving in the right direction & taking necessary steps to succeed.
• Performance management, key organization aspect, involves to set clear goals, monitor
progress, and providing feedback to help employees and teams to reach full potential.
• For a board of directors, performance management is crucial as it ensures organization is
moving in right direction. It is a process that is used to assess and improve employees’
performance. It also ensures organization connects company mission with employees work
• It aims to develop employees to perform to the best of their ability; thus good performance
management concentrates on improving employee’s skills to perform their jobs better.
• This demands a good alignment between each worker’s effort and the organization’s goals.
• Performance management is characterized by good and continuous communication
between managers and employees.

Goal of performance management

• The goal of performance management is to improve the employees’ skill sets that are
directly related to improving their jobs. This includes:
• Measuring or evaluating employee performance against set standards, and
• Helping employees to have opportunity to improve themselves in their work going forward
• Performance management is often discussed at the level between employees & managers.
• The process aims to align individual, team & organization goals; however, it is also a
strategic process. It is equally important that this is functioning higher up in the
organization, being in the board.
• Ultimately it is the board’s strategies and goals that trickle down to the rest of organization.
If board creates clear goals & overall understanding of what is prioritized for organization,
good opportunities are also created for employees to elevate and do their best work.

Application of performance management for boards of directors

• Performance management is applicable for boards of directors, even though it is more
commonly discussed in the operational levels of an organisation.
• As the governing body of a company, it is the responsibility of the board of directors to
ensure that the company is meeting its goals and objectives. This can be done through use
of performance management techniques, such as setting performance targets and regularly
monitoring and evaluating the company’s progress towards achieving those targets.
• By using performance management, boards can help to ensure that the company is moving
in the right direction and taking the necessary steps to succeed. The main benefit is that it
can help to improve the overall effectiveness of the board.
• By setting clear goals & regularly evaluating performance of board members against them,
organizations can ensure their board is working towards organization’s strategic objectives.

Steps to Building Effective Performance Management:

1. Create the vision-list
• What do we as a team or board of directors want to achieve?
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• At this stage, it is important that all members of a team or board highlight their insights on
what is working and what is not.
• Everyone should participate and give at least one thing that needs to be done or could be
done more efficiently. Second step is to rank what’s most important for company right now
2. State your objectives
• What do we need to do in order to achieve the goals on our vision-list?
• Actionable objectives are written for each of the goals.
• These objectives should ensure the gap between vision and reality, namely what we
actively do to achieve our goal and ultimately our vision.
• Ideally, these are specific enough to be written as to do’s and can be attributed to one or
more people with a timeframe so that it is clear when the goal is supposed to be achieved.
3. Measure your results
• In this step we should have a list with actionable to do’s and everyone should know what
they are doing to achieve the goals.
• Once goals/objectives have been established, it’s important to regularly monitor & evaluate
the board’s performance to ensure it is on track to achieve those goals. This can be done
through use of performance metrics, eg. financial indicators or customer satisfaction levels.
4. Having performance discussions, provide feedback and support
• This step monitors work process & can be done by organized & constructive meetings. In
all board meeting should describe how their work process has gone since last meeting.
• They should also report whether objectives have been followed up as planned. purpose of
these meetings is to lower the threshold to reach the goals. They provide room to reflect of
unforeseen events. Finally, new objectives with targets should be set for the next meeting.
Tips how to make the meetings have a real impact:
✓ Meetings need to take place on a pre-determined and regular basis.
✓ For some boards, a lot needs to be done in a short period of time. Then it might be good
to have such a conversation once a month. For other objectives and boards, a longer
period of time is needed and once a quarter might be sufficient.
✓ Each objective needs to be owned by someone, who is responsible for its completion.
✓ It must be possible to measure the results of an objective.
5. Recognition and celebration
It is very instructive to have a system where successful solutions are recognized & together in the
board. This concept has the good quality of creating a positive process going forward. celebrated
Board effectiveness
• Board effectiveness relates to the performance of the directors individually and collectively
relating to their roles and responsibilities.
• Stakeholders might only have been concerned with the profitability of the business, and
that would have been the most important measure of board effectiveness.
• However, non-financial metrics are now similarly important, esp given the rise of investing
decisions surrounding environmental, social and corporate governance (ESG) matters.

Assessing Overall Board Effectiveness

Beyond the mere execution of core fiduciary obligations, a high-functioning governing body will
be a key strategic asset in moving an organization forward. Seven key elements include:

1. Board structure and composition

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• A streamlined board and committee structure, with clear delegations of authority, provides
the foundation for effective and efficient governance. An overly complex core structure can
lead to confusion and duplication of efforts for trustees and management teams.
• Well-crafted committee charters not only outline the key roles of the committees but also
specify authorities delegated to them by the board of trustees. With an efficient structure in
place, the composition of the board can then be optimized. A plan aligned to strategy will
optimize governing body makeup: key competencies, diversity & community representation.

2. Leadership
• One of the most critical decisions board & CEO makes is selection of a board chair who can
provide guidance & direction in times of calm and crisis. As most chair positions have term
limits, board leadership succession planning is critical.
Identifying potential board leaders should include three key components.
✓ First, there should be clear understanding of most important competencies for the next
board chair. These are shaped by organization’s strategic direction and board’s culture.
✓ Second, candidates should’ve demonstrated ability to lead effectively, perhaps through
formal committee leadership or as an informal leader and influencer among trustees.
✓ Third, candidates must have passion for organization’s mission & vision, deep
organization knowledge & willingness to commit significant time & attention to the role.
A strong board leader will partner with the CEO to move the board and the organization
forward, continuously improving and adapting to the changing environment.

3. Roles and responsibilities

• Distinguishing between the roles of management and the governing body is imperative for
high-functioning boards and leadership teams. Well-defined role clarity balances fiduciary
& strategic oversight with operational management
• Board leadership plays a key role in maintaining the right balance between management and
governance, clarifying and redirecting the board if needed.

4. Transparent relationships
• A trusting and transparent relationship between the board & senior management team fosters
high-performing governance. Building this requires time, intentionality and vulnerability.
• Management teams must be willing to engage in dialogue with trustees, using the boardroom
expertise to shape strategic initiatives. In transparent & collaborative board culture, trustees
build knowledge along the way, clearly see their value & further engage with organization.
• In contrast, when this relationship lacks transparency, it can breed distrust & disengagement.

5. Board development
• Most board members begin their board service without a deep knowledge of the industry or
the individual organization. Management teams must ensure the board has the information
and resources needed to effectively carry out its fiduciary duties.
• Having clear understanding of board’s needs is essential to creating meaningful development
plans. Use periodic board self-assessments to gather information regarding education needs.
• Provide a menu of development offerings, including general governance education and
organization-specific content, thus comprehensive approach for new & experienced trustees
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6. Meeting optimization
• Time is a precious commodity for volunteer board members & must be used wisely; calls for
commitment & effort by the management team to maximize board and committee meetings.
• Well-planned agendas are fundamental to ensuring the most important topics are brought
forward for awareness, discussion and action. Streamlined materials, provided in advance
with ample time for review, allow members to come prepared for discussion.
• Strong meeting facilitation skills enable a chair to redirect the group as needed to accomplish
the meeting objectives.

7. Robust support
• Investing in “behind the scenes” support is essential in delivering on the other 6 elements.
• High-functioning boards are backed by strong administrative support & well-defined
processes. A robust governance support infrastructure will enhance the work of the
management team and accelerate the efforts of the board.

Steps to improve board effectiveness

These can help to increase effectiveness of board and help them lead the business towards its goals.

1. Clearly define roles and responsibilities

• Each director should have their own particular strengths and skills that they bring to the
boardroom. This should be reflected in their clear, defined role on the board.
• Every member of the board must understand their key performance indicators (KPIs) and
how they tally up with helping the business work toward its strategic goals and mission.
• They should gain focus on what they need to achieve from their board work to contribute
effectively to the governance of the organization.

2. Examine board structure

• Getting board structure correct is difficult balancing act, but essential for board effectiveness.
• There is no ideal board size that suits every company because it depends on your specific
circumstances. Think about the roles that you have defined.
• If there’s too much overlap, board might be too big. If you still have gaps or require directors
to work outside of their core skillset, you might need to recruit more board members.
3. Revise formal operating procedures
• Another example to improve effectiveness by not being afraid to challenge traditions is the
formal operating procedures of your board. You may well have run your meetings in a certain
way for decades, but if it is not the most effective way possible, you should make a change.

4. Keep track of decisions and actions

• There should be a frictionless procedure that translates decisions made into actions carried
out afterwards. Ensure the chair communicates action points that arise from decisions on key
issues and that the directors responsible for those actions understand their obligations.

5. Evaluate board composition

• There are a number of different considerations to make with regard to board composition.
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• You need a balance of skills, experience, outlooks and attitudes. In addition, gaining better
board diversity in terms of gender, race and other considerations helps you to avoid
groupthink that fails to fulfil the potential of the business.
• The better the balance, the more board members can challenge each other knowledgeably.
• Can offer innovative solutions, making better-informed debate & stronger decision-making.
6. Understand board culture
• The culture of the board has a bearing on its effectiveness.
• Are the meetings too formal or too informal?
• This is an element of board culture that could determine how effective those meetings are.
• In addition, a culture of development shows a board is willing to commit to change and adapt
to new ways of working if they will benefit the organisation.
• If this is not the prevalent culture, it will rarely be able to be as effective as possible.
7. Engage board members
• The chair or CEO can improve effectiveness of board by making efforts to engage members.
• Includes reaching out between meetings(develop personal connections), organizing informal
meet-ups to encourage team building, making time to celebrate wins & other such exercises.
• These develop connection between board members, encouraging to give more of themselves
to their work on the board and increasing the effectiveness of the board at the same time.
Factors contributing to board effectiveness:
✓ The identified factors are cohesiveness
✓ Presence of knowledge and skills
✓ Use of knowledge and skills
✓ Effort norms
✓ Cognitive conflict
✓ Task performance
✓ Information architecture.

BOARD EVALUATION AND ASSESSMENT

• A well-performing board is essential to an organization’s success. A regular board
effectiveness evaluation helps the board improve and execute better governance.
• These evaluations can pinpoint pain areas that should be evaluated to enhance the board’s
performance and organization’s compliance purposes. Generally, board evaluation assesses
the extent to which the members fulfill their duties and contribute to the organizational goals.
• It also assesses individual directors’, board of directors’, & board committees’ performance,
covering their roles, procedures, & work culture. Board evaluations are tools for all company
types & sizes to measure a member’s accountability, transparency, and overall effectiveness.
• Typically, board assessments are conducted annually to identify strengths, weaknesses,
opportunities, and threats related to the board’s performance in the previous year.
• Board evaluation is a formal review process used to assess the effectiveness of a board of
directors, which is the governing body of an organization such as a listed company, financial
institution, NGO or a private equity firm. This process is critical for ensuring that the board
is functioning efficiently and fulfilling its roles and responsibilities effectively.

Key aspects of a board evaluation

1. Performance review
• This involves a detailed assessment of how effectively the board fulfils its central duties.
 13

• Key performance indicators might include strategic leadership, financial oversight, risk
management, and succession planning.
• The evaluation often reviews how the board's decisions have aligned with the organization’s
goals and objectives, how effectively the board responds to crises and its role in major
organizational achievements or failures.
2. Composition and diversity
• Analyzing board's composition involves assessing whether the board members collectively
possess the necessary skills, knowledge and experience to meet the organization’s needs.
• Diversity in terms of professional background, age, gender, ethnicity cultural perspectives is
also crucial. It enhances board's ability to approach problems from multiple angles/innovate.
• Evaluations may include assessments of how board members' individual strengths contribute
to the whole and whether there are gaps in skills or perspectives that need to be filled.

3. Board processes and procedures

• This section scrutinizes the structures and processes the board uses to operate.
• It looks at frequency & duration of meetings, preparation & distribution of meeting materials,
decision-making mechanisms and the effectiveness of committees within the board.
• The goal is to ensure these processes facilitate clear, efficient and informed decision-making.
• Recommendations might involve streamlining procedures, improving communication or
enhancing documentation practices.

4. Board dynamics and relationships

• The interpersonal and professional dynamics between board members, as well as between
the board and management, are critical for effective governance.
• This part of evaluation examines whether board discussions are characterized by openness
and respect, whether dissent is handled constructively and how conflicts are resolved.
• A positive dynamic encourages robust debate &collaborative decision-making, essential for
sound governance. It is important for board members to be proactive & "forward-leaning."
• Many chairs have observed that directors can sometimes be too passive, seeing themselves
more as consultants rather than active drivers of initiatives.
• Effective board dynamics should foster an environment of psychological safety, encouraging
directors to contribute actively and understand their role expectations.
• This approach ensures all members are engaged & play pivotal role in guiding organization.
5. Compliance and governance
• This area reviews the board’s adherence to legal and regulatory requirements, as well as its
commitment to best practices in corporate governance.
• Compliance is non-negotiable, and boards must ensure they are up to date with changes in
the law and industry standards.
• Governance practices are assessed against recognized standards and guidelines to ensure the
board is not only compliant but also following the best possible practices to fulfil its duties.

6. Development and training

• Board evaluations often identify needs for ongoing education and professional development.
• This can include training in specific areas such as financial literacy, legal responsibilities or
emerging industry trends relevant to the organization’s operations.
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• The aim is to continuously enhance the board’s capabilities and effectiveness through
targeted training programs and resources, ensuring that all board members are equipped to
provide high-quality governance.

Essential components of board evaluation

1. Comprehensive performance assessment: Involves evaluating the board’s effectiveness in
strategic oversight, financial management, and risk mitigation. Ensuring that the board’s
decisions align with the organization's long-term goals is key.
2. Composition and diversity review: Assessing whether board members bring a balanced mix
of skills, experiences and perspectives is essential. Diversity in these areas enhances board's
ability to address challenges and innovate.
3. Evaluation of processes and procedures: This component reviews the efficiency and
effectiveness of board meetings, decision-making frameworks, and committee functions.
Streamlined processes are crucial for making informed and timely decisions.
4. Board dynamics and relationships: Analyzing interpersonal and professional interactions
ensures that the board operates in a collaborative and constructive environment.
5. Governance and compliance checks: Ensuring adherence to legal requirements and best
governance practices is non-negotiable for maintaining board’s integrity and effectiveness.
Each of these components is vital for a thorough understanding of how the board operates and
where improvements can be made.

Who should conduct board evaluations?

Deciding who should conduct the board evaluation depends on several factors, such as the
organization’s size, complexity, and specific needs. There are several options:
1. Internal evaluations: These are managed by the board members or a designated
committee within the organization. This approach can be effective for smaller organizations
or when the board prefers a more intimate understanding of its operations.
2. External evaluations: Conducted by independent consultants who specialize in board
governance, external evaluations bring objectivity and the ability to benchmark performance
against industry standards. This option is particularly useful for larger organizations or those
looking for an unbiased perspective.
3. Hybrid approach: Combining internal insights with external expertise offer a balanced
and comprehensive evaluation, drawing on the strengths of both [Link] right
approach ensures the evaluation process is tailored to the board’s unique context and goals.

Why should nonprofits conduct board evaluations?

Beyond fulfilling internal accountability & improvement goals, non-profits face external pressures
to conduct regular board evaluations. These pressures stem from various sources, such as:
1. Regulatory Compliance: Legal obligations’ adherence often mandates board assessments
2. Investor Expectations: Even for nonprofits with donors acting as investors, expectations
for governance best practices, including board evaluations, are increasing.
3. Industry Standard: The ever-evolving frameworks & industry benchmarks often
emphasize the importance of board evaluations.
4. Internal Pressures: Refers to the growing internal demands for stronger accountability,
transparency, & improved governance within the nonprofit organization. Organizations that
neglect board effectiveness evaluation risk falling behind & missing on growth opportunities.
 15

The importance of regular board evaluations

• Regular board evaluations are crucial for ensuring that a board operates at peak effectiveness.
• These evaluations enhance board effectiveness by identifying both strengths and weaknesses,
allowing the board to refine its strategies and practices.
• Moreover, they promote accountability by ensuring that each board member is fulfilling their
responsibilities in alignment with the organization’s goals.
• Through these evaluations, boards can identify skill gaps, uncovering areas where additional
expertise or diverse perspectives are needed to enhance decision-making.
• In a rapidly changing environment, regular evaluations keep board agile & responsive to new
challenges & opportunities, ensuring it remains well-equipped to guide organization success.

Best practices for conducting board evaluations

• Set clear objectives: by defining what the evaluation aims to achieve and ensuring it aligns
with the organization’s broader strategic goals.
• Use a structured framework: to assess all relevant areas of board performance, ensuring
nothing is overlooked.
• Encourage open feedback: by creating a safe environment where board members feel
comfortable sharing honest and constructive
• Act on findings: by implementing recommendations and regularly monitoring progress to
ensure that the evaluation leads to meaningful improvements.
• Incorporate continuous learning: by using the insights gained from evaluations to guide
ongoing board development and training initiatives.
By adhering to these best practices, boards can ensure that evaluations are not just a formality
but a valuable tool for continuous improvement.

Choosing the best platform for board evaluations

• Selecting appropriate evaluation platform is crucial for smooth effective evaluation process.
• It should offer comprehensive tools for assessing performance, composition and governance
practices. It should also facilitate easy data collection and analysis, allowing boards to
benchmark their results against industry standards, both in the past and in the future.
• A well-chosen platform can significantly enhance the evaluation process, making it more
efficient and impactful.
✓ Comprehensive tools: Look for platforms that offer detailed assessment capabilities,
covering performance, composition, and governance.
✓ Ease of use: Ensure the platform is user-friendly, with intuitive interfaces and
customizable templates to fit the board’s specific needs.
✓ Data security: Given the sensitive nature of board evaluations, prioritize platforms
with strong data protection measures.
✓ Actionable insights: The platform should provide clear and implementable
recommendations based on the evaluation results.
✓ Benchmarking capabilities: Opt for a platform that allows performance comparison
against industry standards, giving the board a clearer picture of where it stands.

Preparing for a successful board evaluation

• Define objectives: by clearly outlining what the board hopes to achieve through the
evaluation. This ensures that the process is goal-oriented and relevant.
 16

• Engage board members: by involving all members in the planning process to ensure buy-
in and comprehensive input, which is crucial for a thorough evaluation.
• Select the right tools: by choosing an evaluation method or platform that aligns with the
board’s specific needs and objectives.
• Plan for implementation: by developing clear strategy for acting on the evaluation findings
and tracking progress over time, ensuring that the evaluation leads to tangible improvements.
By following these, boards can set the stage for a meaningful and productive evaluation process
that drives continuous improvement and strategic alignment.

Board Evaluation Process

Step 1: Set clear board performance goals
• Every board assessment should have a clear and defined objective, and board members
must understand the reason for conducting it.
• This way, the evaluation will yield tangible results and be meaningful for the entire board.

Step 2: Invite a third-party facilitator

• While an external board member is in charge of the board evaluation process, having an
independent third-party facilitator can help improve the assessment further. External
evaluators provide expertise and independent perspectives essential to ensure a more holistic
board performance evaluation.
• An experienced 3rd-party facilitator, such as those of advisory or consulting firms, can lead
the process and provide the board with valuable post-survey information regarding industry
benchmarks on governance and other board qualities. The facilitator can also advise on best
practices that will help improve the board’s overall performance based on industry standards.

Step 3: Determine topics and questions for the survey

• Conducting surveys is often the most suitable approach to board evaluations. Surveys offer
quantifiable scores and ratings, making it easier to assess board performance and identify
areas for improvement. However, since no board is the same, there isn’t a single formula for
structuring board evaluation questions.
• Therefore, you need to tailor the survey questions and structure based on your board’s
unique system, goals, and requirements. Include questions that will help collect insightful
information on a wide range of board-related topics.

Step 4: Organize one-on-ones

• Questionnaires and surveys can provide a great deal of insight into the board’s workings;
however, one-on-one confidential interviews can offer more candid and detailed answers.
• This is where the help of a third-party facilitator comes in handy.
• A third-party facilitator is more likely to have no considerations or biases.
• Considering the board’s structure and needs, the facilitator will also have the know-how to
structure one-on-ones and get the most optimal answers.

Step 5: Review the evaluation data

• Whether the results of the surveys and interviews are favorable to the board’s performance
or not, it is a must to analyze and document the results.
 17

• Board assessments offer valuable insights that can guide your board to streamline processes
and workflows. Assessments also reveal the state of the board dynamics, giving members a
chance to improve their collective effort and generate better results
• Board members should also holistically analyze themselves and each other. Any issues that
arise or are discovered can lead to discussions among the members for possible solutions. In
addition, a separate meeting can serve as a dedicated session for the board evaluation analysis
• At the same time, keeping track of the process and results is as important as the assessment
itself. Documenting the findings and recommendations provides a historical record that can
be referenced for future evaluations and improvements.

Step 6: Translate evaluation into action

• The survey results should serve as the foundation for further improvement across the
board’s various areas and activities.
• That’s why scheduling separate board assessment meetings is so important.
• Such meetings give board enough time to analyze & discuss findings openly & thoroughly
• For it be effective, deliverable should be clear action plan with outlined steps & strategies.
• Try prioritize issues & develop action steps to promote improvement in board performance.

GOVERNANCE VIABILITY FOR THE LONG-TERM

Business viability refers to the ability of a business to sustain its operations and generate profits
over the long term. It is a measure of whether a business idea, product, or venture has the potential
to be successful and financially sustainable. Creating a viable business is a two-part process.
✓ First, it means creating a marketing strategy by knowing who you are, who you are
selling to, and who else is selling to them.
✓ Second, it means having good understanding of your finances & how you’ll maintain
regular income to cover costs and build over time and secure assets for the future.

To create marketing strategy to make business viable, you’ll need the following information:
1. Unique selling proposition: This is a critical factor in having a viable business. It is a
unique benefit exhibited by a company, service, product or brand that enables it to stand out
from competitors. It must be a feature that highlights product benefits that are meaningful to
consumers. Being unique keeps your business out in front of the competition.
2. Stable customer base: To be viable, you must know who is going to buy your product or
service. That means researching to find out who these people are.
3. Competitive advantage: Even if your product is unique and you know who you’re selling
to, you must always consider the competition. Find out who your competitors are and keep
them in mind as you create your marketing strategy.
• A continuing focus on your business’ financial status will help create a viable business ie:
✓ Cash stability: Most important factor that makes a business viable is it has enough assets
(cash & other reserve funds) for day-to-day operations & to weather the ups/downs that
all businesses [Link] to cash stability doesn’t happen overnight; means being
frugal, not over-spending in sales anticipation & not taking too much out of business.
✓ Continuing attention to financial status: Having viable business means always
knowing where your business is financially. Good financial software, input all business
information regularly, & analyses it against your goals for cash stability and other factors.
 18

Factors in Assessing Business Viability

1. Market Demand: Is there a sufficient and sustainable demand for the products or services
the business offers? Understanding the target market and its needs is crucial.
2. Financial Sustainability: Can the business generate enough revenue to cover its expenses,
repay any loans or investments, and still make a profit? Financial projections and cash flow
analysis are often used to assess this aspect.
3. Competitive Landscape: How does the business stack up against competitors? Is there a
unique value proposition or a competitive advantage that sets it apart?
4. Operational Efficiency: Can the business operate efficiently and effectively? Are there
processes in place to minimize costs and maximize productivity?
5. Scalability: Is the business model scalable? Can it grow to meet increased demand without
a proportionate increase in costs?
6. Regulatory and Legal Considerations: Are there any regulatory or legal barriers that
could affect the business’s ability to operate or expand?
7. Management Team: Does the management team have the skills and experience necessary
to run the business successfully?
8. Capital Requirements: What are the startup and ongoing capital requirements? Can the
business secure the necessary funding to get started and continue operations?
9. Risk Assessment: What are the potential risks and challenges the business may face, and
does it have strategies in place to mitigate them?
10. ROI: Investors and stakeholders often assess business viability in terms of potential ROI.
They want to know if business can provide satisfactory return on the capital they put into it.
• Assessing business viability is a critical step in the planning and decision-making process
for entrepreneurs and investors.
• It helps determine whether it is worth pursuing a particular business idea or if adjustments
are needed to improve its chances of success. The criteria for assessing viability can vary
depending on the industry, market, and specific circumstances of the business in question.

Viability Statement
• The purpose of corporate governance is to facilitate effective, entrepreneurial and prudent
management that can deliver the long-term success of the company. The viability statement,
should in theory give investors more visibility as to the company’s long-term solvency.
• Taking account of the company’s current position and principal risks, the board should explain
in the annual report how it has assessed the prospects of the company, over what period it has
done so and why it considers that period to be appropriate.
• The board should state whether it has a reasonable expectation that the company will be able
to continue in operation and meet its liabilities as they fall due over the period of their
assessment, drawing attention to any qualifications or assumptions as necessary.’
• It is recognized that the appropriate period of time for consideration of long-term viability will
be determined by the specific individual circumstances of each organization.
• Directors must determine their projections timescale in consideration of their capital structure,
their exposure to long-term debt, nature of business operation, likelihood of continuance of their
revenue stream under different circumstances & overall financial stability, short and long-term.
• Management should approach the viability statement as a two-stage process:
✓ First, describing the long-term company prospects,
 19

✓ And then selecting a (potentially) shorter time-period to make the statement on

whether they have reasonable expectation of the company’s viability. Period selected
should be specific to company and statement should explain why that period was chosen.

POLICY GOVERNANCE
• Policy Governance defines and guides appropriate relationships between an organization's
owners, board of directors, and chief executive.
• Written documentation is essential for effective and consistent communication within
organizations, and the provision of clear, written policies and procedures that reflect current
practice and community expectations assists in accountability.
• Written policies & procedures provide tangible evidence of intended practices that are
consistent with organization’s values, and should be regularly reviewed, evaluated and updated.
• Policy is important to efficient and effective operation of the organisation. It is a tool enabling:
✓ individuals to get on with their jobs without need to discuss issues each time they arise;
✓ participants from different parts of the organisation to work towards a common goal;
✓ consistency and predictability throughout the organisation;
✓ compliance with legal and other requirements; and
✓ Quality assurance and improvement.

The Carver model of Governance

• Policy Governance is a model of governance created by Dr. John Carver. It is often referred to
as “Carver governance” or the “Carver model.”
• Policy Governance principles form a complete governance system which enables boards to
provide strategic leadership in shaping the future for their organizations.
• Policy Governance provides the role clarity necessary to ensure accountability of the board to
those on whose behalf it governs and of the CEO to the board.
• It also sets the stage for boards to use their time more effectively, allowing them to gather
intelligence about alternative future possibilities.
• This information is crucial to ensuring two critical parts of their job:
(1) ensuring organizational assets are protected, not just from current risks, but from
potential future risks, and
(2) the direction they are setting will shape a future that’s meaningful for those they serve.
• The Carver model is a complete operating system for boards, made up of a set of internally
consistent principles, all of which are necessary in order for the model to work as designed:
1. Role Clarity: Policy Governance provides clear definition of where governance stops and
management starts. This clarity frees the board from either “rubber-stamping” or “meddling.”
2. Empowerment with Rigorous Accountability: By clearly defining expected organizational
results and setting parameters within which management has freedom, the board can unleash
management creativity but still hold management rigorously accountable.
3. Strategic Leadership: Policy Governance enables your board to exercise strategic foresight
and provide strategic leadership – the board’s key responsibility – by clearly defining, on behalf
of the owners, what needs are to be met, for whom, and at what worth.
4. Accountability to Owners: Policy Governance helps board be accountable to its shareholders
(in equity corporations) or “moral owners” (in public sector and not-for-profit organizations).

The key elements for a policy on policies are:

 20

1. Policy hierarchy – sets out the documentation that defines and governs the organization’s
activities, listed in order of precedence;
2. Policy and procedure development process – sets out the requirements for creating
policies, procedures, etc., including process maps and document templates; and
3. Roles and responsibilities – information about who is involved in the process of
developing policies and what they do as well as who has the authority to approve policies
and procedures for publication and distribution.
1. Policy hierarchy
• Any policy framework within an organization will have a series of associated levels, each of
which will have different objectives. Policy documents, which includes policies, delegations,
procedural documents & local protocols, are organized within a policy hierarchy. Documents
lower in the hierarchy are subordinate to, and must align with, those higher in the hierarchy.

• Some organizations will differentiate between policies and procedures.

• Procedures generally reflect governance or operational standards, provide a specific guide to
decision making, and explain how policies are put into effect. But sometimes governing
‘policy’ and ‘procedures’ are linked in a document, which will be described as a ‘policy’.
• E.g. there may be expectation some policies, like those related to conflicts of interest, will
include the relevant procedures to be followed to manage a potential conflict when it arises.
• There are generally two categories of policies in an organisation:
I. Governance – policy with board level risk or strategic implications or with board level
statutory or regulatory requirements and relates to the processes of decision making and
the controls and behaviors that support effective accountability and performance
outcomes (e.g. risk management policy, code of conduct);
II. Operational – policy other than governance policy. These may be:
• an organisation-wide operational policy, which refers to practices across a range
of activities (e.g. travel policy); or
• a specific operational policy, which refers to matters in respect of a specific
activity and relevant to all staff (e.g. HR policy)
➢ Templates should be developed for each type of policy document the
organisation uses to ensure they are presented consistently.
➢ Information should also be provided about how to use each template
 21

2. Policy and procedure development process

• The policy framework policy should contain a trigger for a new policy and/or procedure.
• For example, this may include changes to the external operating environment, a review of
the strategic direction of the organisation, or changes to government policy or legislation.
• The development and revision of policy documents will generally comprise a process
similar to the one set out below. This should be fully explained in the procedure section of
the policy or a separate procedure document depending on the organization’s preference.
Policy development stages
i. Needs analysis for the development of a new policy/procedure or a review
ii. Appointment of a policy author and policy approver
iii. Research and data gathering
iv. Draft document
v. Circulation of draft document
vi. Consultation with stakeholders
vii. Circulation of redrafted document
viii. Policy approval
ix. Communication and implementation
x. Maintenance and review
• It is useful to establish a glossary or vocabulary of definitions to ensure consistency of term
use in your policy documents
• Policy documents with multiple words for a single concept, obscure acronyms or
technical/professional jargon can cause a great deal of confusion to users, who may
inadvertently breach a policy through a lack of understanding about what was meant.
• It is also a major reason so many employees find it difficult to read policy and procedures.

3. Roles and responsibilities

• Setting out roles & responsibilities is essential to an effective policy [Link] includes:
✓ the need for clear authority for the formulation of policy documents (i.e.,
delegations of authority);
✓ guidance concerning the responsibilities of policy owners and how policy is
formulated, approved and disseminated;
✓ selection of policy system manager for management of organizationl policy documents
and for setting standards as to the development, content and review of those documents.
• A policy document must be approved by the highest delegated authority.
• For example, board (for all new or any major amendments to existing governance policy
documents or to firm-wide operational policies which have significant risk, compliance or
cost implications) or the CEO or a delegated authority (for new or major amendments to
existing operational policy documents which do not require board approval).

THEORIES OF CORPORATE GOVERNANCE

1. Agency theory
• Agency theory explains the relationship between a principal and an agent in this relationship,
the principal delegates, authority and decision-making to the agent in the hope that the agent
will not attempt to maximize personal self-benefit. In a normal business setting, managers
are delegated responsibility to run business affairs on shareholders– i.e. company owners
 22

• In non-profit organizations, the Chief Executive Officers do the same in order to run the
organisation to pursue the goals of the stakeholders who are the funding partners.
• When managers’ goals are at variance with the owners’ goals, the tendency is non-
compliance to vision to maximize the organization’s interests that leads to information
asymmetry that contributes to the agency problem as managers tend to have access to more
information about the business than the owners.
• Final analysis wealth maximization goal of owners may not be realized as managers may for
example, make some decisions to disproportionately reward themselves to the detriment of
their principals as noncompliance will be manifesting in the process aggravated by unethical
dealings. The owners therefore incur agency costs and failure to combat such behaviour.
• In order to minimize agency costs, the owners should try to minimize the agency problem by
putting in place control mechanisms such as appointment of boards, audit committees and
internal auditors as well as corporate compliance officers.
• In addition, the shareholders or stakeholders may cause the organisation to adopt corporate
compliance and ethics principles, guidelines or policies that regulate management behaviour
and reduce information asymmetry.
2. The Stewardship Theory
• The stewardship theory takes a positive view of managers considering them to be “stewards”
whose interests are aligned with those of the shareholders or stakeholders.
• The theory entails that there is non-pecuniary objectives and aspirations that may motivate
people in management and so the owners would seek to empower the managers to maximize
corporate wealth creation. This is in contrary to the agency theory whereby the managers
exercise control of the company as they report once in a month or quarterly when need be.
• That is why the existence of boards, audit committees and internal auditors as well as
corporate compliance officers is vital.
• Indeed, remuneration packages may therefore be so structured as to give management a stake
in the company over time while ensuring that current remuneration is competitive enough as
to minimize pursuit of self-interest as Executive Chief Officers who are given executive
powers to perform duties with minimal or no consultation to the board of trustees and even
the shareholders or the stakeholders.
• In this theory, what the managers relay to the owners of the company is deemed correct and
final; however, there is need for the existence of the internal auditors as well as corporate
compliance officers to stand on behalf of the board and the stakeholders or the shareholders.
3. Resource Dependence Theory (RDT)
• The procurement of external resources is an important tenet of both the strategic and tactical
management of any company.
• Therefore, the RDT however, has implications regarding the optimal divisional structure of
organizations, recruitment of board members and employees, production strategies, contract
structure, external organizational links and many other aspects of organizational strategy.
• RDT holds that employment of external organizations resources affect organization behavior
4. Transaction cost theory
• Transaction cost theory tries to explain why companies exist, and why companies expand or
source out activities to and from the external environment.
 23

• The theory supposes that companies try to minimize costs of exchanging resources with the
environment, and that companies try to minimize the bureaucratic costs of exchanges within.
This is when the compliance and ethics comes in. How the services are sourced by the
company’s desire much to be considered to avoid levelling many costs to the organisation.
• That is why the Theory argues that companies are therefore weighing the costs of exchanging
resources with environment, against the bureaucratic costs of performing activities in-house
and also offering or awarding of tenders to friends or owners of the business and inflate the
prices from which to benefit from the organisation/companies resources such as liquid cash.
• The transaction costs occur when external transaction costs are higher than the company's
internal bureaucratic costs, as such the company will grow, because the company is able to
perform its activities more cheaply, than if the activities were performed in the market, my
understanding is that the company will not grow as earlier presented when there is a conflict
of interest by the internal management who connive with external suppliers to inflate the
prices using all the bureaucratic approaches.
• Therefore, every company will grow if cheaper resources are used to beef up its operations
rather than using higher costs leading to the company to failure to operate or to sustain itself.
• The transaction costs theory occurs when a good or a service is transferred across a
technologically separable interface that is the transaction costs arise every time a product or
service is being transferred from one stage to another, where new sets of technological
capabilities are needed to make the product or service.
5. The Stakeholder Theory
• The stakeholder theory derived from the works of Freeman (1984) where he identified and
modelled the groups which are stakeholders of a corporation who are deemed to be the
owners of the corporation or the company.
• This theory poses danger in term of compliance and ethics when the owners act with no due
respect to management whose power they vested to run the company and constantly
demanding dividend or profits as they are traditionally viewed as being the company owners.
• One theory aspect, it argues there are other parties involved, including governmental bodies,
political groups, trade associations/unions, communities, financiers, suppliers, employees,
and customers who also are viewed as having control over the company operations.
• That is why even the government poses regulatory measures that control the operations of
the company despite that the company was formed by a group of individuals.
• The organisation has to respect stakeholders who are, among others, funding partners as well
as the beneficiaries as well as other NGOs who are also viewed by this theory as competitors.
• All these complement the corporate governance and compliance ethics philosophy as they
monitor the activities of the so called organisation.
6. Enlightened Shareholder Theory
• “Enlightened shareholder value” concept was included in recent UK Company Law Review
that explicitly rejected notion of pluralism – where company is required to serve wider range
of interests than just those of shareholders. And whose interest is to serve the theory is best
presented by Pichet (2011). This theory was wrongly used in as to the owners thus ensuring
less maximisation of shareholder value as the principal & the only, bona fide to corporation.
• Pitchet (2011) notes that this new theoretical framework, poses first obligation of board to
become clear at all times to defend the corporate’s long-term social interests thus clarifying
the duties of board members while giving them chance to exercise control and ownership.