Iskander and Chamlou (2000) stated that corporate governance is about maximising value subject to meeting the corporation’s financial and other legal and contractual obligations. This inclusive definition stresses the need for boards of directors (board) to balance the interests of shareholders with those of other stakeholders in order to achieve long-term sustained value for the corporation.
Zahra and Pearce (1989) pointed out that boards are among the most venerable instruments of corporate governance. Directors can protect the interests of shareholders through effective controls of managerial actions, and also have the potential to render valuable services to the firm in the shaping of its strategic posture.
Boards are at the forefront of corporate governance reform, considering and resolving a host of issues related to: executive compensation; accounting treatment of options; director ties and conflicts of interest; composition, function, and efficacy of board committees; provision of consulting services by external auditors; promulgation of ethical conduct; and so forth. Strengthening the role of the board is particularly critical in countries that lack corporate control activity, stakeholder monitoring, or activist institutional investors. Better corporate governance may also result from improved internal corporate governance mechanisms and enhanced accounting, disclosure, and auditing standards (Limpaphayom and Connelly, 2004).
Pease and McMillan (1993) stated that for a board to be effective it must be composed of individuals who have a diverse range of skills and backgrounds appropriate to the needs of the company. They point out that separation of the roles of board chairman and chief executive officer is desirable for several reasons including that concentration of power in the hands of one individual raises concerns about objectivity. Combining the roles of chairman and CEO results in a compromise between executive and board power; and separation of positions enhances the independence of the board whilst maintaining a series of checks and balances.
Corporations in most countries of the world have boards of directors. In the USA, the board is specifically charged with representing the interests of shareholders. The board exists primarily to hire, fire, monitor, and compensate management, all with an eye towards maximising shareholder value (Denis and McConnell, 2002).
Kaplan and Minton (1994) studied the effectiveness of boards in the Japanese system. They concentrate on the appointment of outside directors to Japanese boards. They found that such appointments increase following poor stock performance and earnings losses, and that they are more likely in firms with significant bank borrowings, concentrated shareholders, and membership in a corporate group. They also found that outside directors are effective corporate governance mechanisms. They showed that on average, such appointments stabilise and modestly improve corporate performance, measured using stock returns, operating performance and sales growth.
Wymeersch (1998) reported that in most European states the role of the board has not been prescribed in law. In many European countries shareholder wealth maximisation has not been the only – or even necessarily the primary – goal of the board. Codes of best practice have been issued in a number of European countries, starting with the UK in 1992. Common to most of these codes is a requirement for specified numbers or percentages of independent directors on the boards of firms in the country. The codes are typically voluntary in nature and the degree of compliance with them varies across countries.
Dahya, McConnell, and Travlos (2002) investigated the effect on board effectiveness of the UK Code of Best Practice promulgated by the Cadbury Committee. The Code recommended that boards of UK corporations include at least three outside directors and that the positions of chairperson and CEO be held by different individuals. The LSE requires that all listed companies explicitly indicate whether they are in compliance with the Code. If a company is not in compliance, an explanation is required as to why it is not.
Nam and Lum (2005) studied a minimum requirement for the number of independent directors serving on the board in Korea, Thailand, Malaysia and Indonesia. In Indonesia, independent commissioners should make up at least 30 percent of the total number of board members. In the Korean banks, at least 50 percent or at least three of the board members must be independent directors. The requirement in Malaysia is that at least one-third or at least two members of the board must be independent directors. In Thailand, the board should have at least three independent directors or at least one-fourth of the board should be independent directors.
Nam and Lum (2005) also reported restrictions on the maximum number of boards on which a bank director can serve. In Indonesia, members of the Board of Commissioners may only hold concurrent positions as member of commissioners of one bank and as director or executive officer at not more than two non-bank firms. An outside director in a Korean bank is not allowed to serve on more than two boards of listed companies. In Malaysia, an executive director cannot serve in another listed company and a non-executive director cannot serve at more than 25
firms (10 listed and 15 unlisted firms). In Thailand, a bank director is not permitted to serve in more than three business groups.