The duties of the Board of Directors are dictated by regulatory requirements and given that these regulations differ from country to country or state to state, such as in the US, the duties of Board of Directors may also vary37. Since it is impossible to list all of the company laws regarding the duties of the Board of Directors, this section discusses some major duties which are generally stated in the company laws. Those
are:
• The fiduciary duty
• The duty of loyalty and the duty of fair dealing • The duty of care
• The duty of supervision
The Fiduciary Duty
The fiduciary duty is central to the role of a director. A fiduciary is someone who has legal responsibility to care for something held in trust for someone else (Blair, 1 995: 56) . To fulfil a fiduciary duty, directors must make decisions on an informed basis, in good faith, with the best interests of the company in mind and importantly be disinterested and independent (Jonhson et al, 1 996: 4 1 2). Hence, directors must consider that the objective of the corporation is to enhance shareholders interests. According to Maw ( 1 994: 16) , a director's fiduciary duties to the company require him or her to not:
place him/her self in a position where his/her duties as a director might conflict with his/her or his/her family's private interests;
37 The regulatory requirements can be in the form of company laws, Stock Exchange rules and regulations (for the public company whose shares are traded in the capital market) and any other regulations such as the investor protection legislations
act in bad faith or contrary to what he/she honestly believes is in the best interests of the company; or
exercise the powers conferred upon him/her as a director otherwise than for the particular ('proper') purpose for which those powers were conferred.
In addition, he or she must not exercise such powers for any extraneous purpose, even though he/she may honestly believe that he/she is doing so in the best interests of the company.
The Duty of Loyalty and the Duty of Fair Dealing
The basic principle of the duty of loyalty is that the director should not use his or her corporate position to make a personal profit or to gain other personal advantages; this duty 'prohibits self-dealing and the usurpation of corporate opportunities' (Johnson et al. , 1 996: 4 1 2-4 1 3) . The duty of loyalty addresses the issues of conflict of interest, corporate opportunity and confidentiality (Sison and Kleiner, 200 1 : 1 58) . With respect to conflict of interest, a director is required to acknowledge that the best interests of the company and its shareholders must prevail over any personal or individual interest. If an opportunity arises, for example to acquire property or to market new products, the director must first present it to the company. Thus, whenever a conflict of interest exists, a director must favour the company. Likewise, the director may pursue the opportunity for self-interest only
if
the company, after being informed of such an opportunity, decides not to pursue it (!bid) . A commonly noted conflict of interest documented in the literature is in a takeover situation (e.g. , see Bebchuk, 1 992). Directors of targeted company, for instance, may reject a takeover bid which is beneficial to shareholders for fear of losing their pOSition with the firm. An example was a case between North Fork Bancorp. and Dime Bancorp Inc. where Dime's directors were accused of ignoring shareholders' interests by rejecting to North Fork's bid takeover that could increase the wealth of Dime's shareholders (see Engen, 2000 for a detail review) . Last but not least, the duty of loyalty requires that directors must keep all matters involving the corporation confidential untilthere has been a general public disclosure or until the information becomes public knowledge (Sison and Kleiner, 200 1 : 158) . Breach of confidentiality may result in exposure to improper use of 'inside information' for personal gain or may jeopardise the company in terms of competitive advantage (e.g. , Martha Stewart's insider trading practice) .
The duty of fair dealing can be viewed as a component of the duty of loyalty. requiring that all transactions with the corporation be handled in a forthright and open manner that is fair to the interests of the corporation
(Colley Jr. et al, 2003: 24) .
The Duty of Care
In general, the duty of care requires a director to act in the best interests of the corporation and with the care reasonably expected of 'an ordinary
. prudent person.' (Colley Jr. et aI, 2003: 23, Johnson et al, 1 996: 4 1 2) . In performing this duty, the director also has the duty to be informed and to make necessary inquiries to make him or her well-informed. One of the key skills of an effective director is to understand what is relevant and to persistently seek that information, particularly when he or she has or should have a feeling of discomfort with the situation. This duty, however, allows the Board to delegate functions to and rely on others, including other directors, officers, employees, experts, and Board committees. Hence, a director has to be able to choose competent and trustworthy managers and advisers (Colley Jr. et aI, 2003 : 24) .
The Duty of Supervision
The duty of supervision is an element of the duty of care; it deals with the effectiveness with which directors exercise their oversight responsibilities. The duty of supervision requires directors to know about the operations of management (Colley Jr. et al, 2003: 25) . As an initial step in fulfilling this duty, the Board must establish policies of ethics and disclosure that set the standards for behaviour of directors and senior executives. The Board also must ensure that there are internal controls in place to provide accurate reporting of what is going on in the corporation. This control function is generally the responsibility of the Audit Committee of the
Board. The Board also must establish policies addressing which decisions require Board approval and what information the Board should regularly receive about the performance of the corporation and its various entities (!bid: 25)
As described by Colley Jr. et al. (2003: 25) , the most important task associated with the duty of supervision is the regular meeting of the Board to discuss the performance of the organisation. One of the critical skills for a director is the intuitive sense of what needs to be questioned and the willingness to be perSistent in pressing for access to relevant information. Directors must know what they need to know and insist that it be provided
Board Activities
Tricker ( 1 994) provides a simple matrix that classifies Board activities in four dimensions: inward, outward, past/present and future. According to Tricker ( 1 994) , the Board of Directors needs to focus internally on the operations of the businesses within the company and externally on the environment in which the company exists. In addition, the Board of Directors must have the ability to look forward while at the same time, to review the company's past and present performance. Central to this matrix is the fact that the Board of Directors has to work with and through the CEO.
The activities of the Board can also be viewed from three philosophical perspectives: strategiC, policy making or operational which produces different outcome and benefits (Sison and Kleiner, 200 1 : 1 58) .
The outcome of a strategic board is an organisation with strong core values and a clear mission, understood and championed by the Board members. A Board with a strategic philosophy is concerned with what matters to their profession, industry or cause. A policy-making Board defines limitations for the staff and addresses the short-term and long-term financial needs of the organisation. This Board tends to review reports and ratify the recommendations of the executive management. An operational Board tends to take a more hands-on approach to managing the activities and programmes of the organisation. An operational Board should pay attention to the fact that an overly active Board in day-to-day management
can reduce the effectiveness of the organisation. Figure
3.3
presents a framework for Board Activities.Figure 3.3 A Framework for Board Activities
Providing Strategy
Outward Accountability formulation
looking
Approve and work with and through CEO
Inward Looking
Monitoring and Policy making
su pervising
Past and present oriented Future oriented
Source: Tricker