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Corporate governance under English common law: The respective roles of executive and non executive directors

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  1. Introduction
  2. Motivations for a board reform
    1. The unitary board model and its influence on the role of directors
    2. The board's responsibility as the management organ of the company
    3. The monitoring role of non-executive directors
  3. Clarification on directors' duties
    1. Statutory codification or self-regulation?
    2. The board reform in the light of the higgs report
    3. Composition of boards
    4. The role of non-executive directors
    5. Closer discussion boards
    6. Independent monitors
    7. Remuneration and audit committees
    8. Critical view of the reform
  4. Conclusion
  5. Bibliography

The role of boards and its relationship to management must be clearly identified. The Companies Act provides that companies must have directors but does not define their functions. This is left to the articles of association, where the most undertaken practice consists of vesting the board of all the powers necessary for the management of the business, apart from those reserved by the Act to be exclusively exercised by the shareholders in general meetings. Thus, the need for a statutory statement of directors' duties makes no doubt. Derek Higgs has issued a review on the role and effectiveness of non-executive directors. The recommendations were introduced in the revised Combined which came into effect in November 2003. Nearly all of the 50 recommendations made in the Higgs Report were incorporated into the revised Code. The terms of reference of the Higgs review included an assessment of the population of non-executive directors in the UK, the process of appointment, the extent to which they are independent, their effectiveness, their accountability including their relationship with institutional investors and issues relating to their remuneration and the role of the Combined Code on Corporate Governance.

[...] An issue of wide significance is whether the role of non-executive directors as a matter of best practice of corporate governance is best characterised as that of a monitor of the executive management, or of a contributor to overall strategic planning and direction, or as some mix of the two. Some commentators have queried whether it is really possible for one person effectively to be at the same time someone who monitors the executive directors and someone who co-operates with them in the company's strategic development[24]. [...]

[...] p See Weil, Gotshal & Manges LLP, on behalf of the European Commission, Internal Market Directorate General, Comparative Study of Corporate Governance Codes Relevant to the European Union and its Member States (January 2002) available at at p.43. J.E. Parkinson, op. cit., at p.192. The American Law Institute, Principles of Corporate Governance: Analysis and Recommendations (St Paul, Minn.: American Law Institute Publishers, 1994) vol p.77. PRO NED, Code of practice on non-executive directors (1987). J.E Parkinson, op. cit., p Dr Rita Esen, ?Managing and monitoring the role of non-executive directors on U.K. [...]

[...] Under the second there is a single board made up with a majority of ?supervisory' directors, with executive directors constituting the remainder[13]. Where a company has a single-tier board the division of responsibilities between the two types of director is a matter to be determined by the board itself nevertheless the practice is moving to bring a stronger scrutiny of managerial actions The board's responsibility as the management organ of the company Efforts in recent years to reform corporate governance have focused primarily on structural means to strengthen the board's oversight role. [...]

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