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Corporate Governance: Role of non-Executive Directors - Essay Example

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Introduction A non-executive director of an organization is not a part of the management of the organization. What distinguishes a non-executive director from an executive director is the fact that he or she is not an employee of the organization neither is related with the organization in any other manner…
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Corporate Governance: Role of non-Executive Directors
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Download file to see previous pages It is critical to understand that NED is different from independent directors as NED can own shares of the firm whereas independent directors need not to have the shares. It is critical to note however, that the overall independence of NEDs is often based upon two important criteria of exercising independent business judgment and non-subservience to any influence of the management of the organization. (Cray, 1994) One tiered board of directors are unique in the sense that the overall control of managing directors of the firm is in the hands of a different supervisory board whereas in two tier system this is an additional responsibility of the existing board of directors. Over the period of time, the role of NEDs has increased specially in single tiered boards with non-executive directors taking independent view of the overall governance mechanisms within the organization. This paper will review the role of non-executive directors in single tiered boards and how it has evolved over the period of time. Corporate Governance Before discussing the role of non-executive directors and how their role has evolved during the recent past, it is critical to present an analysis of corporate governance. The issue of corporate governance and how companies should be governed started to emerge after the large scale corporate scandals of Enron and WorldCom. The recent failure of financial institutions and resulting economic downturn has further fueled the debate about whether the companies are being managed in their right sprit or not. The losses incurred by shareholders due to practices of managers therefore outlined that corporate governance should be strengthened while at the same time ensuring that companies meet a certain criteria against which their performance is measured.( Gay, 2001) Corporate governance therefore emerged as a system to control and direct firms. It therefore not only defines the relationship of firms with that of the shareholders but with the employees and other stakeholders also. Corporate governance as a mechanism also outlines ways and means through which the conflict of interest between different stakeholders is actually prevented. By setting out clear and vivid boundaries for each of the stakeholders, corporate governance provides a mechanism through which the interests of each stakeholder are monitored and governed. It is also important to note that recent debate has also focused on the overall economic efficiency of implementing corporate governance and whether the implementation of corporate governance codes is just a cost or it could also lead to the benefits for all the stakeholders also. Corporate governance as a mechanism is based upon certain principles which govern as to how the corporations should be governed while the stakes of all the stakeholders are protected. First principle outlines that firms should give right and equitable treatment to shareholders suggesting that organizations should develop mechanism to facilitate the rights of the shareholders and how such rights can be exercised. It also suggests that the interest of other stakeholders such as creditors, debtors, government, employees and society as a whole should also take into consideration when managers manage the firms. (Hall, & Liebman,1998). One of the key and most important principles outlined by the corporate governance is the roles and responsibilities of board of directors. Corporate governa ...Download file to see next pagesRead More
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