Board, management have different roles

The board’s role and responsibilities differ from those of management. To cover a company effectively, journalists must figure out how authority is shared in the manage¬ment suite, and keep close track of changes among executives. The relationship between the board and man¬agement is equally important.

The management team starts with the CEO, who runs the day-to-day business of the company and sets its business strategy. It may also include a COO (chief operating officer), CFO (chief financial officer) and CIO (chief information officer), in addition to other top management roles, depending on the industry.

For definitions of each role within a corporation, see “The Basics of Corporate Structure,” on Investopedia, a financial education website that commissions specialists in various financial fields to write explanatory articles on topics of interest to investors, and describes itself as an unbiased investing resource:

Power struggles and internal changes, such as the promo-tion, demotion or departure of an heir apparent, signify shifts in a company’s hierarchy and future direction. Changes in the board, including director resignations and appointments, may signal important changes, too. That’s why journalists should pay close attention to any such moves, which nearly always deserve a story. This means going well beyond the company press release, which may not clearly spell out the real reasons for personnel changes.

When boards have close connections to management, and few independent directors, corporate governance advocates see the potential for problems. In some of these cases, CEOs become dominant and the board may rubber-stamp management activities and proposals. A survey in 2011 by J.P. Morgan’s Depositary Receipts (DR) business found this problem was acute in Latin America, where boards have a low level of independence.

“…Concentrated leadership can lead to increased risk exposure,” wrote Nathaniel Parish Flannery, research analyst, in a posting about the J.P. Morgan survey for GovernanceMetrics International (GMI), which provides analysis and data on more than 20,000 companies world-wide to sovereign wealth funds, institutional investors and other clients.

Among companies cited were those in Mexico owned by billionaire Carlos Slim, the chairman and chief executive of telecommunications companies and other Mexican firms through his Grupo Carso SAB. His vast family empire controls more than 200 companies spanning industries including banking, telecoms, road-building and restau¬rants, according to newspaper accounts.

For more on Slim and his holdings, see:

Potential conflicts

Journalists may come across the term “agency dilemma,” used to describe the potential conflict between the shareholders’ interests and those of the board. The board, persuaded by management, may be encouraged to seek short-term gains at the expense of the shareholders’ longer-term interests in the company. Shareholders may be reluctant to assume risks, and that reluctance can be construed by management to stifle growth or make the company less competitive.

This is where directors play a key role, by thinking strategically and ensuring that the shareholders’ best interests are represented by the board and that management is aligned with those interests. (See chart, next page.)