📘 1.
Learning Outcomes
By the end of this lesson, you should be able to:
Understand how directors are appointed.
Know the duties and powers of directors.
Identify the different roles directors play.
Describe what a board of directors does.
Explain the functions of the board.
Understand how boards balance their performance and conformance roles.
Describe board committees and corporate transparency.
🧑⚖️2. Appointment of Directors
Directors are the key decision-makers in a company. They are appointed in several
ways:
At the start of a company (first directors).
By re-appointment after their term ends.
To fill vacancies or create new positions.
According to Sri Lanka’s Companies Act No. 07 of 2007, this process is covered
in Sections 201–209.
There are differences between private and public companies:
In private firms, dominant shareholders appoint directors.
In public companies, a nomination committee recommends names, and
shareholders vote (as per Section 205).
⚠️A key issue: Boards can become self-perpetuating – the same people keep re-
electing each other, limiting new ideas.
📜 3. Legal Duties of Directors
Directors have two main duties:
a. Duty of Trust (Fiduciary Duty)
Be honest and loyal to shareholders.
Act in good faith and avoid conflicts of interest.
Don’t use company info or assets for personal gain.
Treat all shareholders fairly – including minority ones.
🧠 Example: In Aberdeen Rly Co. vs. Blaikie Bros (1854), the court ruled a
contract invalid due to a director's conflict of interest.
b. Duty of Care
Use reasonable care, diligence, and skill.
Think like a "reasonably diligent person" with the right expertise.
Also:
Insider trading (using secret company info to make profit in shares) is
illegal and unethical.
The UK Companies Act 2006 clearly lists duties like:
o Acting within powers.
o Promoting company success.
o Avoiding conflicts and declaring interests.
🧠 4. Roles of the Board of Directors
Think of the board as the brain and spine of a company – guiding and supporting
it. Their roles include:
Strategic: Set long-term goals.
Oversight: Watch over management.
Governance: Ensure the company follows rules and policies.
Fiduciary: Protect shareholder interests.
Accountability: Be answerable to stakeholders.
They act as a bridge between shareholders and management.
🔧 5. Functions of the Board
Roles are about what they are responsible for. Functions are about what they
actually do. These include:
Formulating Strategy – Setting direction.
Policy Making – Creating systems and rules.
Monitoring & Supervising – Ensuring management performs well.
Accountability – Reporting to stakeholders and being responsible.
There are two sides of board functions:
Performance: Driving the company forward.
Conformance: Ensuring rules, ethics, and controls are followed.
🔁 A good board does both: performs and conforms.
🎭 6. Roles Directors Play (Individually)
Each director may play multiple roles:
Performance Roles:
Offer experience, insight, and connections.
Represent the company to outsiders.
Contribute to new strategy and innovation.
Conformance Roles:
Be an independent judge of management.
Monitor performance.
Be a watchdog – especially protecting minority interests.
🎯 7. Strategy Formulation
Boards should help shape the company’s direction using tools like:
Mission/Vision Statements – What the company stands for.
SWOT Analysis – Strengths, Weaknesses, Opportunities, Threats.
Porter’s Five Forces – Understand industry pressures.
Resource-Based View – Use internal resources for advantage.
They should evaluate, approve, and monitor strategies, not just leave it to
executives.
📋 8. Policy Making
Policies are rules and systems set by the board to guide management. Types
include:
Financial (e.g., investment rules)
Operational (e.g., processes)
HR & labor (e.g., recruitment, safety)
Marketing (e.g., pricing, branding)
Risk management
The board can delegate some policy-making to management but must review
regularly.
🛡️9. Conformance Functions
These are about supervising, controlling, and being accountable:
Ensure managers are doing their jobs.
Review budgets, performance reports.
Follow governance standards and laws.
They use financial and non-financial measures (like customer satisfaction) to
assess success.
📢 10. Accountability
Boards are accountable to:
Shareholders
Regulators
Other stakeholders (employees, community)
They must provide:
Transparent reports
Accurate financial statements
CSR (Corporate Social Responsibility) information
🔎 11. Corporate Transparency
Good companies disclose:
Business performance
Risks
Stakeholder relations
Sustainability practices
This builds trust and long-term support.
⚖️12. Balancing Board Efforts
Boards have limited time. They must balance:
Time spent on performance (future focus) vs. conformance (past & present).
Outward focus (strategy, stakeholders) vs. inward (internal controls).
Two-tier boards (common in Europe):
One board does supervision (conformance).
Another does management (performance).
📘 13. Sri Lankan Code of Best Practices
This code provides best practices for boards:
Appoint capable CEOs and management.
Ensure succession planning.
Approve big decisions (e.g., budgets).
Ensure compliance, ethics, and risk management.
Promote sustainability and integrated reporting.
🧾 14. Board Committees
Specialized groups within the board:
Audit Committee: Checks financial integrity.
Remuneration Committee: Decides salaries and bonuses.
Nomination Committee: Recommends new directors.
Others: Risk, Governance, Ethics, Strategy
These help divide work and focus on key areas.
📚 Summary
In essence, a Board of Directors:
Provides leadership and direction.
Ensures compliance and accountability.
Balances performance and conformance.
Makes decisions in the best interest of the company and stakeholders.
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