Mike Masoud
June 9, 2023
The board of directors’ duties is set, in most if not all countries, by commercial law.
The principal duties of the board are:
- Selection and removal of officers
- Declaring and distributing dividends
- Setting the management compensation
- Coordinating audit activities
- Evaluating, managing, and approving the company’s risk strategies
- Decisions on the company’s capital structure ( the composition of debt and equity)
- Initiation of mergers and acquisitions
Many researches and studies focused on the effectiveness of the board. However, there is a fundamental prerequisite for the board’s effectiveness: the timeliness, completeness, relevance, and reliability of the information it uses in its decisions.
Regardless of the size of the organization or the complexity of its operations, the board should make sure that it makes informed decisions. But what could lead to situations where the board makes ill-informed decisions?
Internal Control, Governance, and Accounting
Ineffective internal control, ineffective governance practices, and subpar design of accounting and cost accounting systems are significant reasons that result in low-quality or misleading information. Though effective internal audit and compliance functions will help identify these issues, the external audit role is limited. Under these circumstances, fraud and corruption risks increase. Further, when the board cannot get what it needs to oversee and monitor its strategic direction, it is a red flag for regulators, shareholders, and other stakeholders that the organization sinks!
Corporate failures, in many cases, resemble what we described above. Whenever your entity, whether a public or private sector organization, passes through such dire situations, define the problem and make well-informed decisions. Contact your trusted management advisor. Time is crucial. Most significantly, do not be the victim of your ignorance or arrogance.
###
