Dr Dhiman Chowdhury :
During early 1990s there emerged two governance principles around the world in the corporate sector. One is the role of nonexecutive directors (NED) in corporate governance and second is the split of Chairman and CEO positions in the Board. In around 2005, these two principles were being applied in the public sector organizations including the ministries and its various agencies. The corporate board around the world nowadays is composed of executives who are an organization’s internal and nonexecutives who are its external. NEDs are part time and do not take part in day to day activities of the company, they attend company board meetings usually once or twice in a month and particularly look at the strategic issues including if the executives are taking good care of the shareholders’ money. NEDs are usually distinguished lawyers, university teachers, social workers, and other intellectuals of independent mind who must be free from any undue influence from the executives and the management. They are not only experts but also celebrated people who bring name and fame for the country.
Split of Chairman and CEO. Split of Chairman and CEO positions is an established governance practice both in corporate and public sector around the world and the Chairman usually is a part time nonexecutive. Cadbury’s Report and Committee on Corporate Governance (UK) reason and recommend that when Chairman and CEO positions are full time jobs, there should be a senior non-executive director to whom concerns can be conveyed (Committee on Corporate Governance 1998). With a single executive holding the positions of the Chairman and CEO, or two separate executives holding the titles, the company’s entire decision-making process lies in the hands of executives, and there is little in the way of checks and balances. The Sarbanes-Oxley Act requires the Audit Committee consists only of external board members. This means that no member of the executives (for fixed term or permanent) can sit in the audit committee.
Independent nonexecutives are more important in the government agencies than in the corporate sector. Independent nonexecutives are more important in the public sector than in the corporate sector. In the corporate sector, there are institutional shareholders who have large stakes in the companies and therefore, have higher incentives to monitor the management. But in the public sector, such an incentive for monitoring is largely absent particularly in a non-functioning parliament. Also, shareholders in the corporate sector can simply ‘exit’ by selling their shares if the share prices are not satisfactory. Thus unlike the corporate sector, government organizations do not have many control mechanisms available for pursuing the management for working in the citizens’ best interests. Therefore, inclusion of independent outside experts is a little hope left for good governance in the government organizations.
True independence. Full-time executives remain busy and bogged down with own organizations and they are usually not critical of their own decisions and actions. But nonexecutives are part time and they think beyond one organization and their main purpose is to bring alignment of country’s interests. True independence has the following broader meaning. Let us ask a question-why, when, and how do we influence others? One way by information and knowledge, that is good. But we can also influence others out of self interest and specific single narrow identity. Therefore, for free, fair, and independent decision one has to avoid narrow specific identity. An independent man has plurality of identities. But Adam Smith in his Theory of Moral Sentiment (1759) required for independence the ‘impartial spectators’. Thomas Nagel (1986) expressed independence as ‘view from nowhere than view from delineated somewhere’. Governance is thinking of things, critical thinking, epistemic and adequate justifications, making of new ideas, independent reasoning, purifying reason (Immanuel Kant), greatest good for greatest number, and aesthetics or the sense of proportions. A full-time executive usually does not have time for thinking all these virtues. An intellectual, a celebrated professor and a lawyer, a social thinker who has enough time for thinking of things works as a part time independent board member for check and balance in governance.
Tax Administration. UK Inland Revenue has part time nonexecutives from 2008. Its Chairman is a nonexecutive. The Board has five full time Commissioners and eight nonexecutive members. The executives give the internal perspective and the nonexecutives give the external perspective of the concerned organization. There is a Cabinet Office Guidelines for public appointments as nonexecutives. Government departments or agencies advertise the posts on the Cabinet Office website there is a selection panel with a Chair and an independent nonexecutive. Ministers may choose to interview appointable candidates prior to coming to a final decision. The selection is finally approved by the Prime Minister. In USA the Internal Revenue Service’s Oversight Board is a nine-member independent body responsible for budget review and long-term planning, and ensuring the proper treatment of taxpayers by the employees of the Internal Revenue Service. Six Board members are part time nonexecutives appointed by the President of the United States and confirmed by the Senate for five-year terms. These members have professional experience or expertise in key business and tax administration areas. This is an honorary position rather than a commercial position.
Governance by independent nonexecutives in some important agencies is yet to be accepted and applied in Asia including India, China, Malaysia, Sri Lanka, Philippines, Thailand and Bangladesh. Indian Department of Revenue has two Boards: the Central Board of Direct Taxes (CBDT) and the Central Board of Excise and Customs (CBEC). Both the Boards have six executives. The Chairman is the ex-officio Special Secretary and all members are ex-officio Additional Secretaries of various ministries.
In China, the head office of the State Administration of Taxation (SAT) has a Commissioner and four Commissioners who are appointed by the State Council (the Cabinet). Its Chief Economist, Chief Auditor, Chief Accountant and the Discipline Inspector are also the members. They are all full-time executives. Bangladesh National Board of Revenue has seventeen permanent executive members including the Chairman and do not have a single nonexecutive. Singapore and Hong Kong are exceptions. The Internal Revenue Authority Board of Singapore has nine members of which seven are nonexecutives. The Hong Kong Board of Inland Revenue has an executive Chairman and three nonexecutive commissioners.
During early 1990s there emerged two governance principles around the world in the corporate sector. One is the role of nonexecutive directors (NED) in corporate governance and second is the split of Chairman and CEO positions in the Board. In around 2005, these two principles were being applied in the public sector organizations including the ministries and its various agencies. The corporate board around the world nowadays is composed of executives who are an organization’s internal and nonexecutives who are its external. NEDs are part time and do not take part in day to day activities of the company, they attend company board meetings usually once or twice in a month and particularly look at the strategic issues including if the executives are taking good care of the shareholders’ money. NEDs are usually distinguished lawyers, university teachers, social workers, and other intellectuals of independent mind who must be free from any undue influence from the executives and the management. They are not only experts but also celebrated people who bring name and fame for the country.
Split of Chairman and CEO. Split of Chairman and CEO positions is an established governance practice both in corporate and public sector around the world and the Chairman usually is a part time nonexecutive. Cadbury’s Report and Committee on Corporate Governance (UK) reason and recommend that when Chairman and CEO positions are full time jobs, there should be a senior non-executive director to whom concerns can be conveyed (Committee on Corporate Governance 1998). With a single executive holding the positions of the Chairman and CEO, or two separate executives holding the titles, the company’s entire decision-making process lies in the hands of executives, and there is little in the way of checks and balances. The Sarbanes-Oxley Act requires the Audit Committee consists only of external board members. This means that no member of the executives (for fixed term or permanent) can sit in the audit committee.
Independent nonexecutives are more important in the government agencies than in the corporate sector. Independent nonexecutives are more important in the public sector than in the corporate sector. In the corporate sector, there are institutional shareholders who have large stakes in the companies and therefore, have higher incentives to monitor the management. But in the public sector, such an incentive for monitoring is largely absent particularly in a non-functioning parliament. Also, shareholders in the corporate sector can simply ‘exit’ by selling their shares if the share prices are not satisfactory. Thus unlike the corporate sector, government organizations do not have many control mechanisms available for pursuing the management for working in the citizens’ best interests. Therefore, inclusion of independent outside experts is a little hope left for good governance in the government organizations.
True independence. Full-time executives remain busy and bogged down with own organizations and they are usually not critical of their own decisions and actions. But nonexecutives are part time and they think beyond one organization and their main purpose is to bring alignment of country’s interests. True independence has the following broader meaning. Let us ask a question-why, when, and how do we influence others? One way by information and knowledge, that is good. But we can also influence others out of self interest and specific single narrow identity. Therefore, for free, fair, and independent decision one has to avoid narrow specific identity. An independent man has plurality of identities. But Adam Smith in his Theory of Moral Sentiment (1759) required for independence the ‘impartial spectators’. Thomas Nagel (1986) expressed independence as ‘view from nowhere than view from delineated somewhere’. Governance is thinking of things, critical thinking, epistemic and adequate justifications, making of new ideas, independent reasoning, purifying reason (Immanuel Kant), greatest good for greatest number, and aesthetics or the sense of proportions. A full-time executive usually does not have time for thinking all these virtues. An intellectual, a celebrated professor and a lawyer, a social thinker who has enough time for thinking of things works as a part time independent board member for check and balance in governance.
Tax Administration. UK Inland Revenue has part time nonexecutives from 2008. Its Chairman is a nonexecutive. The Board has five full time Commissioners and eight nonexecutive members. The executives give the internal perspective and the nonexecutives give the external perspective of the concerned organization. There is a Cabinet Office Guidelines for public appointments as nonexecutives. Government departments or agencies advertise the posts on the Cabinet Office website there is a selection panel with a Chair and an independent nonexecutive. Ministers may choose to interview appointable candidates prior to coming to a final decision. The selection is finally approved by the Prime Minister. In USA the Internal Revenue Service’s Oversight Board is a nine-member independent body responsible for budget review and long-term planning, and ensuring the proper treatment of taxpayers by the employees of the Internal Revenue Service. Six Board members are part time nonexecutives appointed by the President of the United States and confirmed by the Senate for five-year terms. These members have professional experience or expertise in key business and tax administration areas. This is an honorary position rather than a commercial position.
Governance by independent nonexecutives in some important agencies is yet to be accepted and applied in Asia including India, China, Malaysia, Sri Lanka, Philippines, Thailand and Bangladesh. Indian Department of Revenue has two Boards: the Central Board of Direct Taxes (CBDT) and the Central Board of Excise and Customs (CBEC). Both the Boards have six executives. The Chairman is the ex-officio Special Secretary and all members are ex-officio Additional Secretaries of various ministries.
In China, the head office of the State Administration of Taxation (SAT) has a Commissioner and four Commissioners who are appointed by the State Council (the Cabinet). Its Chief Economist, Chief Auditor, Chief Accountant and the Discipline Inspector are also the members. They are all full-time executives. Bangladesh National Board of Revenue has seventeen permanent executive members including the Chairman and do not have a single nonexecutive. Singapore and Hong Kong are exceptions. The Internal Revenue Authority Board of Singapore has nine members of which seven are nonexecutives. The Hong Kong Board of Inland Revenue has an executive Chairman and three nonexecutive commissioners.
(Dr Dhiman Chowdhury, Professor of Accounting, Dhaka Universiuty. Email: [email protected])
