Question

Answer theses question fully and in detail. These questions are related to ASX Corporate Governance Council requirement for all listed companies to have a majority of "independent" board members.

1. Why independence of a director is compromised if they are holding significant shareholdings in the company?
2. What new agency conflicts would be created if director’s independence was compromise?
3. Role of management team, and shareholders and what important role of board of directors has in-between two of these roles?
4. Statistic on corporation government failure as a result of director’s independence compromise

Answer 1

Why independence of a director is compromised if they are holding significant shareholdings in the company?

The independence of a director is compromised , as the main concern of the corporate law is to address potential conflicts of interest between the controller and public investors. The law is always relied on oversight by independent directors- those who have no ties to the controller of the company other than the service on the board, over corporate decisions where the interest of the controller substantially diverge from those of the company or its investors . Hence both court and lawmakers have sought, to use independent directors to safegaurd against such controller oppurtunism. In case a minority shareholder had a right to elect or atleast veto the appoinment of independent Directors. Such directors would have greater incentives to resist the captilisation plan that benefited the controller at the expense of the public investors. The approval of these plan by such independent directors would have been more meaningful than the independent director who has share holdings.

Hence its considered that he has to compromise , though he hold shares in company, depends the company policies and law.

What new agency conflicts would be created if director’s independence was compromise?

The issues will start ,when an agent/agency does not act in the best of the principal . When a principal i.e. director chooses to act through others and its interest depend on others -shareholders,it is subject to Agency problems. The main problem is assymetrical info between both.An agent is hired to perform tasks ,which a principal may not be able to do due to lack of time/commitment/skillsets etc. Once the agent start working ,he would have greater level of information about the company as he does tasks at regular basis. On the other hand directors will be left in Dark, as the work has been outsourced to agent. Thus when conflicts arise between both,as roles and powers were outsourced. At these times, Director's has to compromise on the independence, due to the fact that , the agency might take decisions on behalf of the director , make amendments in incentives, etc.

Role of management team, and shareholders and what important role of board of directors has in-between two of these roles?

Role of Management - Mangement's role is to development, Maintananceand allocation of resources to attain goals.Its based on four key functional areas,

• Planning
• Organise
• Leading
• Controlling.

Role of Shareholders- The share holders of any company have a responisibility to ensure that the company is running well and managed. They do this by monitoring the company's perfomance and raising objections or giving their approval to the actions of the management of the company.

Director's Role :

The director 's key role is to ensure company's prosperity by collectively directing the company's affairs, whilst meeting the share and stake holders. In addtion to business & Financial issues,directors must deal with challenges and issues relating to corporate governance,corporate and social responsibility and corporate ethics.

He has to play both Management Role & Shareholders role being a Director. He need to Establish Vision, Mission and Values.Set strategy & structure,Delegate to Management, Exercise accountability to share holders.

In this way he has to play both the roles .

Statistic on corporation government failure as a result of director’s independence compromise.

From the Agency perspective, Directors are the central resolution of agency problems between managers and share holders. Their independence from the firm places them in a good position to engage in monitoring, and enable them to exercise independent judgement in evaluvating managerial performance. While some gray directors meant to do the other way and compromise things for their own benefit, and manipulate things for their personal interest.

As per a study, a matched pairs research design using a sample of 234 companies comprising 117 Failed firms,and 117 nonfailed control firms. This findings indicate that firms with greater proportions of grey directors are less likely to fail while there is a positive association between the proportion of independent directors and the likelihood of corporate failures.