Directors. An A‐Z Guide

Citation

Peris‐Ortiz, M. and Peris Bonet, F.J. (2010), "Directors. An A‐Z Guide", Management Decision, Vol. 48 No. 8, pp. 1326-1329. https://doi.org/10.1108/00251741011076825

The book by Bob Tricker Directors (An A‐Z Guide), published in 2009, under the guise of a modest paperback (entitled Pocket Directors in its first edition) addresses one of the most important topics in economy and business management: the actions of managers and the role played by the board of directors and the principles and regulations that, both within and outside the board, go to make up corporate governance.

Economic circumstances and facts make it patently obvious that there is a need for firms and large corporations, and particularly for the latter, to develop within a framework of principles and rules that make good practice among their top‐level managers more likely. Berle and Means (1932) underline this need in their study by showing the separation between ownership and control in large corporations, and the same problem is addressed for models of managerial discretionary behavior in the 1960s (Williamson, 1964). However, these studies, and other initial studies on the agency theory, are mainly based on pointing out the problem, not on indicating the solutions on an internal level within the firm and/or via the corresponding social institutions.

Tricker (pp. 18‐19) highlights the agency theory and the stewardship theory as the two main theoretical contributions to corporate governance, making brief allusions to their contents. The opposing ideas that underlie the two theories refer to the essential question of the behavior of managers and whether they tend towards the pursuit of their own interests or look to serve those of the firm's shareholders. The extent to which managers or the CEO may lean towards one or the other is the essence of the value of Tricker's study. Among many other questions, all of which are of interest and aimed at a practical application, the author describes different board models and their relation to the firm's hierarchy (as ways of organizing top management that make good governance more likely (pp. 48‐52)), provides examples of significant differences in boards in terms of structure and composition (in the cases of the UK, Germany and Japan), establishes the relation between the codes of good governance or best practice (pp. 65‐6), gives a brief description of the forms of management in some of the better known large corporations in advanced economies and shows the games played in pursuit of self‐interest, the coalitions and half truths that should be neutralized for good governance (pp. 117‐19).

In general, as the author says (pp. 18‐19), “there is a positive link between what is perceived as good corporate governance and better performance”, and consequently, “many institutional investors pay a premium for companies with acknowledged good governance”.

The strength of this book lies in its descriptive, pragmatic nature, and from the author's desire not to stray from this objective by entering into the theories involved. The accumulation, among others, of concepts such as board, board structures, corporate entity, corporate governance policies, directors' contract, directors' remuneration, dual voting rights, duty of care (imposed on directors), employee share ownership, ethics codes, executive chairman, executive director, family company or fiduciary duty, all of which are succinctly defined. This, along with the multiple examples of firms, where some of these concepts are applied, plus the possibility of obtaining additional information the author includes in Appendix 7. All provide the reader with an extraordinarily useful book for those who wish to know particular aspects of firm management in some of the most important capitalist countries, or for company directors who would like to have an overview of managers, the board, and the principles and rules that should govern them.

However, there is a theoretical dimension, which the author cannot, nor wants to avoid: what should the structure of the board be and what principles should be followed in order to enable good corporate governance? There is no extensive theoretical development in this sense, nor does the author insist on normative recommendations, but he does show how the structure of the board and the principles that underpin it must be combined in order for good governance to arise and the consequent recognition on the part of stakeholders.

In this sense, Tricker first (p. 5), underlines the desirability of the board having both executive directors and outside directors, the latter being charged with exercising an independent and objective judgment on top executive managers. Knowing that few things are obvious within an organization, the author consequently goes on to add to the definition of outside manager with the opinion of Peter Drucker on the difficulty inherent in carrying out that function without possessing sufficient specific knowledge of the firm (p. 178). The desirability of the board being made up of executive directors and non‐executive directors is maintained, but sound functioning is dependent, in many cases, on how skills, relationships of trust and the level of transparency in actions are combined (stewardship theory). On the other hand, in the case of Germany, the board corresponds to the two‐tier model, in which there is a separation between the supervisory outside directors and the executive directors. Here the composition is maintained but the structure changes.

As Tricker explains, the primary role of the board, in which executive directors, non executive directors and managers should all collaborate, is to determine the corporate mission, agree on the strategy for reaching objectives and to establish the values and policies to guide management in running the business. In this way, high‐ranking managers are soundly guided and the board has all the elements it needs to evaluate the action of its managers and accept or reject their proposals. To this we should also add the external control provided by governance codes (Tricker, p. 13). In the case of the US, external control is greater because codes of conduct are norms that must be strictly complied with, while in Europe and many commonwealth countries, complying with the principles contained in the codes is voluntary.

Codes came strongly into force in the 1990s. One of the reasons for this phenomenon is the great importance of firms with a good deal of institutional influence (pension funds, mutual funds, hedge funds, exchange‐traded funds, and other investor groups or financial institutions), that incorporate a large part of public savings and require securities for good management. Another reason highlighted by Tricker (p. 13), “was a response to corporate collapses and perceived excesses by business leaders in the boardroom”. In this sense, the first code of corporate governance (p. 13) was the UK's Cadbury Report (1992), which defined corporate governance as the system via which companies are directed and controlled. This code was followed, among others, by the Hilmer Report (1993) in Australia, King (1995) in South Africa, and Viénot (1995) in France.

In these codes for good governance (Appendices 7 and 8), referring only to some of their recommendations for the board, point out that:

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  all corporations must be headed by a board, which is collectively responsible for the success and failures of the firm;

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  the board must review and guide corporate strategy, as well as business plans, policies and budgets;

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  it should meet frequently enough to be able to effectively carry out all its tasks;

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  the chairman should hold meetings with non executive directors, without the presence of the executive directors;

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  the board should apply high ethical standards, bearing in mind the interests of stakeholders; and

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  should also perform the function of authorizing management proposals and their control.

Finally, the eight appendices that make up the final part of the book are also worthy of mention. The first of these focuses on the recent world financial crisis, which has clear consequences for the corporate governance of large corporations. In many cases, and especially in the well‐known cases of Fannie Mae, Freddie Mac or the Lehman Brothers, corporate governance has not functioned satisfactorily, which underlines the importance of the recommendations contained in the codes of good governance.

The second and third appendices are precisely devoted, to summarizing the codes of corporate governance in the UK and the OECD respectively. Diffusion of these codes and the innumerable details that go to make them up (functions of the chairman and the CEO, size of the board, number of non executive directors) is important. It is a contribution to spreading a culture of good governance and it is important to stress, as Tricker does, the importance contained in these codes of measures aimed at achieving transparency with regard to all relevant information.

With regard to the fourth appendix, Tricker makes particular references to the nucleus of competences that a firm's directors should have in order to be able to manage it effectively, illustrated by the project developed by The Hong Kong Mass Transit Railway Company (MTRC). The fifth and sixth appendices provide a guide to being a good manager. In this guide, knowledge both of the firm and its environment, as well as the structure of the managerial team and strategy play a fundamental role.

The seventh and eighth appendices provide a list of different sources of information that allow the reader to broaden his knowledge on the topics contained within the book. In the case of Appendix 7, more than thirty Internet addresses allow us to access corporate governance associations in Asia, the US, or Europe, thereby broadening the contents of the codes. Appendix 8 includes a recommended list of publications for specialized reading on a scholarly, theoretical and practical level on the topics contained in this book.

An excellent book, as we have said. For anyone that wishes to become more specialized and gain more knowledge in this field.

This book is an important reference work for students of management. It should take its place in the book collections of researchers, lecturers, and students and should be consulted by any manager interested in improving their professional activity. For a PhD course on the agency theory for example, the book is extraordinarily useful for doctoral students to see the social and institutional aspects of the question. In this sense, comments on the current economic crisis and its relation with corporate governance (see Appendix 1) represent another way of illustrating the agency problem, while the codes of good governance highlight the need for the stewardship theory.

In a society where knowledge is an undoubted source of competitive advantage for organizations, and the firm must evaluate and oversee processes that are evermore complex and difficult to manage, the normative recommendations and the principles and values found in the codes on good governance are increasingly important (Clarke, 2007). In this way, we will enable the development of ethical values and the sound functioning of managerial work teams, and in a more general sense, corporate social responsibility, and the protection of the rights of shareholders.

The book by Bob Tricker, through its introduction, its countless definitions and eight appendices, opens the door to a deeper knowledge and understanding of institutional corporate governance, allowing us to reflect on how political, social and economic factors are interlinked in the firm and in its relation with the environment.

About the reviewers

Marta Peris‐Ortiz is a Lecturer in Management at the Polytechnic University of Valencia, Spain, Europe. Her PhD was on organizational design. She has published several articles in international journals such as the Service Industrial Journal or the International Journal of Manpower and is guest editor for Management Decision.

Fernando J. Peris Bonet is Professor of Management at the University of Valencia, Spain, Europe. His PhD was on organizational behavior. He has published in different Spanish and international journals and in international handbooks, and has been director of the management school of the University of Valencia.