The Economic Efficiency Principle Underlies Management Effectiveness Essay Sample

Before any treatment on schemes the Board undertakes to properly direct and command an entity it will be prudent to hold an apprehension of the function and duties of the Board. It is besides of import to observe here that the function of the Board of Directors has changed significantly since the Enron Scandal of 2001. Far more duties have been placed on the Board after the Enron Scandal in USA than earlier.

The Sarbanes/Oxley Act of 2002. which was America’s response to the Enron Scandal. introduced what is possibly one of the most important pieces of statute law associated with the inadvertence of corporate moralss – which sets guidelines and demands for Accounting. fiscal revelation. and the ethical behaviour of corporations.

Other dirts that have contributed “positively” to corporate administration in entities include the Worldcom Scandal and the Parmalat Scandal. Both of these dirts. along with the Enron Scandal. led to significance alterations on the composing. construction. ethical behaviour. functions and duties of Boardss of Directors over the past decennary. Detailss of these dirts and what part they made to corporate administration will be discussed in this paper.

Through Board determinations and determinations of Sub-Committees of the Board. control is exercised in an administration. However. as shall be discussed subsequently in this presentation. the unity of the single Directors and Managers and their committedness to good corporate administration is indispensable for the success of these controls.

The failure and bankruptcy of cardinal planetary endeavors including Enron. Parmalat and WorldCom between 2001 and 2003 point to a entire deficiency of ethical behavior by Board and Management despite the being of Sub-Committees of the Board.

Traditional Role of Boards

“At the nucleus of corporate administration. of class. is the function of the board in supervising how direction serves the long-run involvements of portion proprietors and other stakeholders. An active. informed. independent and involved board is indispensable for guaranting the company’s unity. transparence and long-run strength…” General Electric. 2002 Annual Report.

Boardss have ever been expected to play important functions in the direction of an entity. How efficaciously Boards play these functions is dependent on a assortment of factors including its composing. whether its members are non-executive or executive. and whether or non the CEO plays the function of chair as good.

As I indicated earlier. these functions are rapidly altering and germinating.

• The Oversight Role of the Board

The function of the Board has traditionally been understood to be one of inadvertence. The Board is expected to oversee top Management of an entity on behalf of stockholders ( some could be portion of the board as non executive managers ) . Stockholders appoint the Board and depute certain authorization. including oversight authorization. to the Directors to “direct” and “control” the entity on behalf of the stockholders. Their function hence. is non merely limited to taking attention of shareholders’ wealth and guaranting a good return on investing but besides oversing the top Management to guarantee prosperity and endurance of the entity.

In this function the Board is held accountable to the stockholders.

• Focal Point for Corporate Governance

Conflict of involvement between sitting Directors and the company on whose Board they sit is discouraged. The Board is meant to guarantee that there exist no concern involvements and struggle between their private companies or those of Management and the company. Proper division of the functions and duties of the Board and Management is besides enforced. In order to heighten good corporate administration the Board formulates policies and oversees their execution by Management.

This is of import as it ensures independency of the Board. Involvement in concern association with the company frequently erodes the independency of the Board in decision-making.

• Guaranting Financial Reporting and Ethical Performance

Disproof of an entity’s histories so as to reflect a better fiscal place to the share-holders goes to the nucleus of sound corporate administration of an endeavor. Very frequently. this is done to conceal the directors’ or the Management’s ain misdirection.

It is hence the Board’s function to guarantee proper accounting is done and the audited histories are presented to the share-holders by the Board.

• Ensure the entity’s Future Survival

Adoption of policies and preparation of schemes that guarantee strategic aims are achieved is a cardinal map of the Board. Achievement of strategic aims is of import in guaranting endurance of an endeavor.

• Hiring and Puting the Wage of the Chief executive officer

“Hiring and firing” the Chief Executive Officer of a company is besides the function of the Board. The Board is besides responsible for the hire of Senior Management staff of an endeavor. However. as shall be discussed subsequently in this presentation. complications arise when the sitting CEO is besides the Chairman of the Board. Although the Board may depute of its maps to the CEO. such deputation does non intend stepping down of duty.

• Risk Anticipation and Management

Survival of the endeavor is one of the cardinal functions of the Board. as stated earlier. In order to make this. the Board needs to be able to buttockss and manage hazards that face the endeavor.

This function is comparatively new and does non purely fall within the traditional functions of the Board. Increasingly. boards and direction squads are encompassing the construct of endeavor hazard direction ( ERM ) to better link their hazard inadvertence with the creative activity and protection of stakeholder value.

ERM is a procedure that provides a robust position of cardinal hazards confronting an organisation.

In today’s environment. the acceptance of ERM may be the most effectual and attractive manner to run into of all time increasing demands for effectual board hazard inadvertence. If positioned right within the organisation to back up the accomplishment of organisational aims. including strategic aims. effectual ERM can be a value-added procedure that improves long-run organisational public presentation.

ERM can. therefore. help direction and the Board in doing better. more risk-informed. strategic determinations.


From the treatment so far. we notice that the Board has assorted responsibilities and duties to fulfill share-holder outlooks. guarantee the endurance of the endeavor. mitigate hazards and control. hire and fire the CEO and top direction. Let us now discuss how the Board exercises way and control of an entity.

Assorted mechanisms and schemes are at the disposal of the Board in this respect. We shall discourse each one of these schemes in bend. However. it must be noted that personal unity of the Board Members and Management is critical in the success of these mechanisms and schemes.

I ) Decisions of the Board as a Mechanism / Strategy

The Board is the supreme policy doing organ in an entity. It meets quarterly. normally. or as the demand may originate to reexamine the public presentation of the administration. Through Board determinations Management is left with small or no leeway but to implement Board determinations. In this manner. the Board exercises control of what may or may non be done by direction. The Board is responsible for internal control in company and for reexamining its effectivity. Procedures are frequently designed for safeguarding assets against unauthorized usage or disposal ; for keeping proper accounting records ; and for the dependability and utility of fiscal information used within the concern or for publication. Such processs are designed to pull off and extenuate the hazard of failure. At Board meetings. Management presents its ain proposals for blessing or rejection. Rejection or blessing is the Board’s privilege and an option the Board exercises in order to command what happens in an entity. Control is exercised through:

O Approval. rejection or varying of the entity’s budgets.

O Approval. rejection or varying of departmental budgets.

O Approval or rejection of contracts.

O Hiring or / and fire of the CEO and top direction.

o Adoption of Audited Accounts of the company.

o Formulation of policies and schemes for their execution.

I ) Board Sub-committees as a Mechanism / Strategy

For specialised examination. control and way. Boardss organize themselves into Sub-Committees of the Board. These sub-committees may be lasting or ad hoc.

What is indispensable is that they are chaired by a Board member with alone makings. experience and apprehension of the nature of the undertaking. The bomber –committees besides have within its rank Board members with the needed experience. preparation and professionalism.

Examples of Sub – Committees of the Board may include:

o The Audit / Risk Monitoring Sub Committee

o The Staff Sub-Committee/ Remuneration Sub-Committee

o The Nomination Sub – Committee

o The Corporate Sustainability Sub-Committee

In order to to the full understand how Boards exercising control through sub-committees. we need to analyze the functions of these sub-committees.

a ) The Audit/ Risk Monitoring Sub Committee

The constitution and care of appropriate systems of internal control is chiefly the duty of the Audit Committee. The Internal Audit map. which is centrally controlled. proctors the effectivity of internal control structures across the whole administration and studies to the Audit Sub-Committee.

Even though the Internal Auditor is a cardinal member of staff. the resident of this office does non describe to the CEO but instead. to the Audit Sub – Committee. In this manner. Board exercises control.

The Audit and Risk Monitoring Sub Committee is besides responsible for reding the Board on high-ranking risk-related affairs and hazard administration and for non-executive inadvertence of hazard direction and internal controls ( other than over fiscal coverage ) .

Seasonably coverage is indispensable for the company to take disciplinary action.

B ) Staff Sub-Committee/ Remuneration Sub-Committee

The Staff/ Remuneration Committee is responsible for wage policy. As portion of its function. it considers the footings of fillip programs. portion programs. other long-run inducement programs and the single wage bundles of executive Directors and other senior company employees. including all in places of important influence.

However. for the exclusive intent of heightening unity. no managers are involved in make up one’s minding their ain wage.

This Sub Committee is besides charges with the duty of choice. short listing. recruiting and repairing wage of the CEO and Senior Staff. It besides handles issues refering to publicity. reclamation of contracts. and subject of the Staff. The Chairman of this Sub-Committee is normally a Board Member conversant with affairs of Human Resource Management and Labour Relations.

It is of import to observe that enlisting of the CEO and Senior Management is capable to their sign language of a “Performance Contract”

Findingss and recommendations of this Sub-Committee ( as all other commissions ) are so presented to the Board for blessing.

In this manner. the Board. through this scheme ensures all enlisting

( degree Celsius ) Nomination Committee
The Nomination Committee leads the procedure for Board assignments. and identifies and nominates campaigners. for blessing by the Board. with the support of external advisers as appropriate. and satisfies itself that appropriate programs are in topographic point for orderly sequence to the Board reflecting an appropriate balance of accomplishments and experience on the Board. Before urging an assignment to the Board. the Committee evaluates the balance of accomplishments. cognition and experience of the Board and. in visible radiation of this. and taking into history the demands of the company’s concerns. identifies the function and capablenesss required for a peculiar assignment. Campaigners are considered on virtue against these standards. Care is taken to guarantee that appointees have adequate clip to give to the company.

Corporate Sustainability Sub- Committee

The Corporate Sustainability Sub-Committee is responsible for supervising the company’s Corporate Sustainability policies ( chiefly environmental. societal and ethical affairs ) and for reding the Board. commissions of the Board and executive direction on such affairs. Ideally. a company should hold a Corporate Sustainability/ Responsibility section within the Head Office. In certain companies. this section is a unit in the Human Resource Department. As I mentioned earlier in this presentation. the map of this sub-committee is comparatively new and was non a traditional function of the Board. Besides the Sub Committees that I have discussed above. the Board normally has discretion to organize other sub-committees as and when it deems fit.

I ) Performance Contracts
These are normally marks set by the Board for accomplishment. The Chief executive officer and Senior Staff are given marks that are measureable and accomplishable that they must run into. Failure to run into these marks would ask for countenances against the Manager concerned. Directors. in some cases. are besides subjected to public presentation contracts by which accomplishment of set ends and aims are gauged. two ) Continuity through Retirement by Rotation

This is a mechanism where tierce of Board members retire from the Board go forthing two-thirds of Board members to go on in their functions. New Board members are so invited to replace the retiring Board Members. This mechanism ensures continuity and control of the entity as there will be more “old” Board Members to supply way. Control of the entity is non lost. hence. three ) Reporting Structures as a Control Mechanism

This is a construction in an organisation that indicates duties of every function participant and the coverage lines. It is known as an “organo-gram” or the “Organization Chart” . The Board of Directors at the top with Sub-Committees below it. It requires that the Sub-Committees study to the Board. The Chief executive officer on the organo-gram is placed below the Sub-Committees. and below him. all the other staff in order of Seniority and Responsibility. Strict attachment to the coverage structures ensures control. It besides allows the Board to give way on what should be done.

The Enron Scandal – lessons learnt
The best illustration of what Boards should non make was provided by the Enron Scandal of 2001. The Enron dirt is the most important corporate prostration in the United States. This dirt demonstrates the demand for important reforms in accounting and corporate administration in organisations. every bit good as for a close expression at the ethical quality of the civilization of concern by and large. I shall try to analyze grounds for failure of Enron. one of the most powerful corporate giants in United States history. I ) Conflict of Interest

One of the most important dogmas of good corporate administration is the riddance of struggle of involvement. There should non be any struggle between personal involvement an entity’s corporate involvements. At Enron. Arthur Andersen was the external hearer but was besides a adviser to Enron. He did concern with Enron. Enron faced a state of affairs where any payments made to Arthur Anderson in his capacity as a Consultant were subsequently audited by himself as an External Auditor. This clearly led to an unacceptable struggle of involvement.

two ) Disproof of Books of Histories
The deficiency of attending shown by members of the Enron board of managers to the off-books fiscal entities with which Enron did concern ; and the deficiency of truthfulness by direction about the wellness of the company and its concern operation led to a hapless fiscal province and near – prostration of the entity. Arthur Anderson. in his function as Auditor. admitted before a Congress Sub-Committee to holding falsified the histories and to holding shredded or concealed official histories that related to Enron. three ) The Board’s Failure to Monitor

One of the rule functions of the Board of Directors is to supervise and measure the public presentation of an endeavor to guarantee that stockholders get a just return on their investing and that the endeavor itself survives. At Enron. the Board was paid inordinate sums as wage. This gave them small motive and inducement to closely supervise what direction was making. They failed to protect share-holder wealth. The blazing deficiency of moralss at Enron was in malice of the being of a Code of Ethics. Sub – Committees of the Board. Performance Contracts. Audit and Risk Monitoring Committees and all the control measures. The deficiency of moralss and what came to be known as “reckless greed” on the portion the Board and Management continued and was abetted by the Board. The Oxley Act. 2002

Following the Enron corporate and accounting dirt in the USA. Congress passed the Sarbanes-Oxley Act of 2002 ( Sarbanes-Oxley ) . Sarbanes-Oxley established new and enhanced criterions for corporate answerability in the USA. Even where an entity’s corporate administration construction was believed to be robust and in line with best pattern. alterations were necessary to guarantee conformity with Sarbanes-Oxley. Senator Paul Sarbanes and Representative Michael Oxley. who drafted the Sarbanes-Oxley Act of 2002. sought to put farther answerability. better corporate administration and ethical behaviour in companies. The Oxley Act. 2002 had the undermentioned new steps:

1. Created a Public Company Accounting Oversight Board to implement professional criterions. moralss. and competency for the accounting profession ; 2. Strengthened the independency of houses that audit public companies ; 3. Increased corporate duty and usefulness or corporate fiscal revelation ; 4. Increased punishments for corporate error ;

5. Protected the objectiveness and independency of securities analysts ; and 6. Increased Securities and Exchange Commission resources 7.
Prohibited the allowing personal loans to members of the Board and Management Staff. Enron collapsed as a consequence of corporate misbehaviour. If anything came out of the Enron Scandal it is that the dirt itself heightened consciousness of the importance of unity in Accounting and Business in general. Ethically. the Enron Scandal led to the passage of the most important pieces of statute law associated with inadvertence of corporate moralss. The Sarbanes-Oxley Act. 2002.


Board of Directors http//Wikipedia. org ( accessed on 24th July. 2012 )

Committee of Sponsoring Organizations of the Treadway Commission ( COSO ) . Enterprise Risk Management – Integrated Framework. September 2004. New York. NY HSBC Group: Internal Control: Revised Guidance for Directors on the Combined Code: HSBC Group 1992 The Sarbanes-Oxley Act. 2002

U. S. Securities and Exchange Commission. Address by SEC Chairman: Address to the Council of Institutional Investors. 2009 Zameeruddin. R ; The Sarbanes-Oxley Act of 2002: An Overview. Analysis. and Caveats. Northwestern Illinois University. Illinois. USA

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