The Board of Directors
An organization is presided over by the BoD, a group of persons elected by the shareholders of the organization to represent their interests through the proper governance of the organization (BambooWeb Dictionary Open Con-tent Encyclopedia, 2005a). The BoD comprises the chairperson, the Chief Executive Officer (CEO) and various executive and non-executive directors (Thomson & von Solms, 2003). The establishment of organizational vision, principles and the strategy that realizes the vision is a key responsibility of the BoD (King Report, 2001). The BoD’s fundamental obligation is to demonstrate their fiduciary duty towards upholding the best interests of the organization and stakeholders (TIAA-CREF, 1998). The BambooWeb Dic-tionary Open Content Encyclopedia (2005d) describes fiduciary duty as being grouped into three broad categories, namely, duty of loyalty, duty of candor and the duty of care.
• Duty of loyalty is achieved by acting in accordance with a beneficia-ries best interests and not their own;
• Duty of candor is achieved by being open and transparent in terms of the disclosure of information to a beneficiary, specifically with regard to transactions between the fiduciary and the beneficiary;
• Duty of care is achieved by demonstrating prudence with regard to the interests of the beneficiaries.
The BoD exercises their fiduciary duty by defining various processes and procedures aiming to protect organizational assets and corporate reputation (King Report, 2001). These include efforts to ensure the organization com-plies with any regulatory and legislative mandates and other codes of good business practice appropriate to the organization (King Report, 2001). Addi-tionally, the BoD is required to recognize significant aspects of organizational risk and key performance indicators to enhance shareholder value by gener-ating acceptable profits (King Report, 2001).
Board Committees
Board committees, according to the King Report (2001), facilitate the BoD in fulfilling their responsibilities sufficiently and appropriately. Board commit-tees are more focused and dedicated to dealing with specific issues in greater detail. Therefore, board committees are able to ensure that particular is-sues receive enough consideration enabling the full BoD to reach impartial and unbiased decisions (King Report, 2001). Board committees facilitate the BoD significantly in addressing the interests of the shareholders.
There are a variety of board committees. Some are standing committees which perform ongoing functions on behalf of the BoD (King Report, 2001).
The Risk Management committee is an example of a standing board com-mittee. It assists the BoD in corporate accountability and any risks related to management, assurance and reporting (King Report, 2001). Its terms of reference include disaster recovery risk, technology risk, operational risk, and compliance and control risks (King Report, 2001). There are also tem-porary board committees, which are assigned unique once-off tasks and are disbanded upon their completion (King Report, 2001).
The Chairperson
The BambooWeb Dictionary Open Content Encyclopedia (2005b) states that a chairperson “is the presiding officer of a meeting, organization, committee, or other deliberative body”. It is the responsibility of the chair to pro-vide the BoD with sound leadership guaranteeing the smooth functioning of the BoD to promote good governance. The chair must ensure that the BoD receives adequate information enabling them to make informed deci-sions (King Report, 2001). The chair must ensure that good relations are
maintained between the organization and its shareholders and act as the pri-mary link between the BoD and management, and between the BoD and the organization’s CEO (King Report, 2001). The chair may be given various other executive powers to achieve these relationships (BambooWeb Dictio-nary Open Content Encyclopedia, 2005b).
The Chief Executive Officer
The Chief Executive Officer (CEO) is the top ranking executive in terms of the management of organizational daily operations and has executive au-thority within an organization (BambooWeb Dictionary Open Content En-cyclopedia, 2005c). The CEO is the primary organizational representative, acting as chief spokesperson and key role-player in the implemention of or-ganizational strategy to achieve operational business success (King Report, 2001). The CEO is required to develop and propose the high-level strat-egy and vision that will best benefit the organization to produce significant shareholder returns and nurture good relations with other appropriate stake-holders (King Report, 2001). Furthermore, the CEO must ensure the daily business operations are suitably monitored and managed. He/She must plan and supervise the implementation of significant corporate policies (King Re-port, 2001). The CEO is commonly a member of the BoD and reports back to the BoD on the operational affairs of the organization. It is not uncom-mon for the CEO to act as Board Chairman, however, these positions are often kept separate to avoid an imbalance of power and the domination of a particular individual which helps to thwart conflicts of shareholder interests (BambooWeb Dictionary Open Content Encyclopedia, 2005c).
The Shareholders
A shareholder can any entity i.e. an organization or person that legally holds possession of one or more shares of stock in an organization. Shareholders may hold special rights depending on the type of stock they own. For instance such rights may include:
• The right to vote on who may represent their interests on the BoD;
• The right to claim a portion of the organization’s profits;
• The right to buy more shares in the organization if they so wish;
• The right to claim various organizational assets should the organization fall into liquidation (BambooWeb Dictionary Open Content Encyclo-pedia, 2005e).
There are essentially three types of shareholders, shareowners, contractual shareholders and non-contractual shareholders.
• Shareowners include those parties who legitimately own stock, through mutual funds (New York Stock Exchange, 2001);
• Contractual shareholders include those individuals that have a rela-tionship with an organization based on some contract or agreement, for example the personnel, suppliers and customers (Thomson & von Solms, 2003);
• Non-contractual shareholders are those parties having a relationship with the organization which is not based on some contract or agree-ment. Typical examples of non-contractual shareholders include the government and other authorities (Thomson & von Solms, 2003).
It is important to emphasize that there should exist a clear and constant channel of communication between the BoD and the shareholders in the in-terests of good Corporate Governance (Thomson & von Solms, 2003). The BoD is responsible for presenting the shareholders with a detailed organiza-tional performance report which should include both successes and failures (BDO, 1999).
The unified and harmonious functioning of these concerned parties can create an effective approach to Corporate Governance that strikes a balance between organizational performance and conformance. Corporate Gover-nance serves as the mechanism that ensures the best interests of the share-holders are upheld. However, a fundamental aspect of satisfying shareholder expectations involves risk control as part of the broader Corporate Gov-ernance function. The King Report (2001) states that “enterprise is the undertaking of risk and reward” and Risk Management features strongly in Corporate Governance because it controls enterprise risks and increases or-ganizational and shareholder returns. An organization must understand its
risks while fulfilling its business objectives and the various strategies imple-mented to address risks for the BoD and stakeholders to understand organi-zational affairs (King Report, 2001). For this reason, the controlling of risks plays an important role in implementing Corporate Governance and preserv-ing shareholder interests, therefore, it is necessary to explore the relationship between Corporate Governance and Risk Management. It is also necessary to highlight the BoD’s Risk Management responsibilities which form a com-ponent of the Corporate Governance function.
2.5 Risk Management and Corporate Gover-nance
The process of preserving shareholder interests would be ineffective where Risk Management does not form a fundamental component of Corporate Governance. It is necessary to clarify this point by exploring why and what can be done to ensure that Risk Management is adequately integrated into the Corporate Governance function.