Essay
Essay Corporate Governance
- Instelling
- Haagse Hogeschool (HHS)
Essay about the importance of a good board structure and the effects it can carry. Samsung is taken as the case study.
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1The devastating impact of a faulty boardroom structure
The board room structure determines its quality, or does it?
This essay will focus on the importance of a good board structure and its effects, the focus
point in particular will be South-Korea with the Samsung scandal as the case study. As a
starting point, the question of why board structure should be studied is analysed. The board
of directors play an integral role in the functioning of a company. The board of directors
approves key decisions that are made in a company and checks its CEO. If the board of
directors is not functioning well, it will affect the company. The structure of this board is
therefore also important, if the board does not have a working structure it will be less
effective. The Lehman Brothers’ case clearly accentuates what a board of directors should
not be, and it also shows how a board of directors influences a company. The board of
directors of Lehman Brothers consisted of 10 people, only two of them had any experience in
the financial industry. They all sat on different boards as well and some even ran their own
company’s. They could therefore not devote all of their time, neither did they have enough
knowledge of the field Lehman Brothers was working in. Which is why a reliable and clear
risk assessment could not have been done. Eventually the failing of the board of directors is
one of the reasons why Lehman Brothers filed for bankruptcy in 2008. Which in turn started a
global financial crisis (Klepczarek, 2017). The case of Lehman Brothers was shocking and it
is also one of the reasons why board structure should always be studied as it not only affects
a company but also the economic situation in a country or even worldwide.
The five most common structures
As mentioned before the board structure has a big effect on how a board functions.
Therefore, it is important to research how a board of directors is structured and what the
differences are between the several structures. For the relevance of this essay which is
focused on corporate governance, the governance structures of non-profit organizations will
not be mentioned unless relevant. Corporate governance has five common but different
board models. The first one is the traditional one which backdates to the 1700’s. It is by
today’s standards a bit old fashioned. However, the template of this model is still useful
(Barlow, 2016). The structure is based on the fact that the board is the legal ownership entity.
Which means that in the eyes of the law, the board has the legal capacity to enter
agreements, pay loans etc. but the board can also be held responsible for its actions.
However, in today’s standard this has evolved so that the liabilities of both the corporation
and its directors are limited. In this structure, the board speaks as a singular voice on all
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matters. This structure usually defines that either the CEO/management or the Board
Committees is responsible. Unfortunately, this structure fails to appoint a mechanism where
reporting back is necessary and that is why this structure is flawed (Doug Macnamara &
Banff Executive Leadership Inc., 2005).
The second structural model that is common in corporate governance is the carver model.
The carver model has two main concerns. These are that the board is focused on what the
company strives to achieve, and that the board must create policies by which the
CEO/management abide. The CEO/management is given the majority of the responsibility
for the company’s achievement of its goals.
The third model is that of the Cortex board model. In this model the board clearly sets its
standards, expectations and aspirations for within the company. Clarification and setting
goals are the most important duties of the board in this model (Barlow, 2016). This model is
focused on the client, on their needs. The board must therefore seek their value in the
community, what do they bring to the table? This structure is also very clear in dividing an
accountability framework, so that people know who’s responsible for what. This model
requires a knowledgeable board, and a board that knows how to sensibly choose between
what is important and what is convenient (Doug Macnamara & Banff Executive Leadership
Inc., 2005).
The fourth model is the Consensus model, and as the name already suggests is relies
heavily on overall consent. It provides each of the board members with equal voting rights,
responsibility, accountability, decision-making power and liability (Barlow, 2016). This model
however also recognizes that board members have different areas of expertise and therefore
the decision-making process is done with a lot of collaboration from all board members. This
model may seem ideal but the process can be slow when a consensus cannot be reached
immediately and when consensus is not possible another measure needs to be in place
since a board cannot not make a decision (Doug Macnamara & Banff Executive Leadership
Inc., 2005).
The fifth and final model is the Competency model. The goal of this model is to improve the
knowledge and skills of the board members so that in the end the overall board performance
is improved (Barlow, 2016). This model is good at developing board members however this
model does not drive policy making or establishment of a strategy. Therefore, when this
model is adopted, the legal structure, by-laws or a policy will prescribe the company’s
strategy or practices (Doug Macnamara & Banff Executive Leadership Inc., 2005).
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