Bridge over ocean
29 October 2019 Issue Brief

Role of Board of Directors

Among its many roles, a board of directors is responsible for establishing accountability for company management and assuring reasonable internal controls through independent third-party reviews of the company.

While boards should seek members who can provide a diverse range of competent perspectives based on their experience and expertise, it is nevertheless imperative that board members are knowledgeable and conversant in the language of finance and accounting. This need is particularly acute for the audit committee.

Our work on corporate governance is built primarily on the research and principles contained in The Corporate Governance of Listed Companies: A Manual for Investors (PDF).

The difficulty for investors is in knowing what to look for and how and why to look for it, so we address three broad areas of governance: the board, management, and shareowner rights. Within each category, there are areas where we’ve done research and offered practical guidance, including discussions of the structure, independence, and responsibilities of boards and the disclosure of possible conflicts of interest that may affect investors' interests.

CFA Institute Viewpoint

Management Oversight

  • Position: A diversified and qualified board of directors that truly represents the interests of shareowners is best qualified to oversee and consider management actions and decisions.
  • Rationale: A qualified board of directors is able to balance the need to let management formulate business plans, enter into transactions and contracts on behalf of the company, and make relevant decisions.

Management’s Responsibility for Third Parties 

  • Position: The board must hold management accountable when it directs outside parties to manipulate their inventory, alter records, or take other actions designed to mislead the company’s independent auditors.
  • Rationale: The board must hold management responsible for such actions because:
    • The conveyance or withholding of information that intentionally skews the mix of information provided the auditors subverts the audit process and ultimately results in misleading financial statements.
    • While management may not be able to control the actions of individuals who are not employees, they should be held accountable for encouraging such individuals to mislead auditors. 

Internal Control Review

  • Position: Directors should regularly have to conduct reviews of the effectiveness of the company’s or group’s internal controls systems.
  • Rationale: Regular reviews performed on the board's behalf by independent third parties will focus board members’ attention on the issue and adequacy of internal controls. 

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