Boards of Directors are expected to manage companies effectively. However, corporate boards sometimes fail to manage companies effectively. Recent corporate scandals have highlighted key weaknesses of Board of Directors.
Required:
Explain FIVE common weaknesses of Board of Directors. (10 marks)
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- Domination by a single individual
A feature of many corporate governance scandals has been boards dominated by a single senior executive with other board members merely acting as a rubber stamp. Sometimes individual may by pass the board to action their own interests. Even if an organisation is not dominated by a single individual, there may be other weaknesses. The organisation may be run by a small group centred round the chief executive and chief finance officer, and appointments may be made by personal recommendation rather than a formal objective process. - Lack of involvement of board
Boards that do not meet regularly or that fail to systematically consider the activities and risks of an organisation are clearly weak. Sometimes the failure to carry out proper oversight is due to a lack of information being provided, or the directors lacking the knowledge or skills necessary to contribute effectively. - Lack of supervision
Employees who are not properly supervised by the board can create large losses for the organisation through their own incompetence, negligence or fraudulent activity. - Poor oversight of accounts and audit
A lot of governance guidance has been concerned with defining effective internal control. Inevitably, many companies involved in scandals have had glaring weaknesses in internal control, weaknesses that have not been picked up by those monitoring control. - Lack of adequate control function
An obvious weakness is a lack of internal audit. Another important weakness is lack of at equate technical knowledge in key roles, for example in the audit committee or in senior compliance positions. A rapid turnover of staff involved in accounting or control may suggest inadequate resourcing, and will make control more difficult because of lack of continuity. - Misleading accounts and information
Often misleading figures are symptomatic of other problems but clearly poor quality accounting information is a major problem if markets are trying to make a fair assessment of the company’s value.
The ultimate risk is of the organisation making such large losses that bankruptcy becomes inevitable. The organisation may also be closed down as a result of serious regulatory breaches, for example, by misapplying investors’ monies.
(Any 5 points)