The Board of Directors

The board of directors is the body that oversees the management of a publicly traded firm. As elected representatives of the stockholders, the directors are obligated to ensure that managers are looking out for stockholder interests. They can change the top management of the firm and have a substantial influence on how it is run. On major decisions, such as acquisitions of other firms, managers have to get the approval of the board before acting.

The capacity of the board of directors to discipline management and keep them responsive to stockholders is diluted by a number of factors.

(1) Most individuals who serve as directors do not spend much time on their fiduciary duties, partly because of other commitments and partly because many of them serve on the boards of several corporations. Korn Ferry4, an executive recruiter, publishes a periodical survey of directorial compensation and time spent by directors on their work illustrates this very clearly. In their 1992 survey, they reported that the average director spent 92 hours a year on board meetings and preparation in 1992, down from 108 in 1988, and was paid $32,352, up from $19,544 in 19885. While their 1998 survey did not measure the hours directors spent on their duties, it does mention that their average compensation has climbed to $ 37,924. As a result of scandals associated with lack of board oversight at companies like Enron and Worldcom, directors have come under more pressure to take their jobs seriously. The Korn-Ferry survey in 2002 noted an increase in hours worked by the average director to 183 hours a year and a corresponding surge in compensation.

(2) Even those directors who spend time trying to understand the internal workings of a firm are stymied by their lack of expertise on many issues,

4Korn-Ferry surveys the boards of large corporations and provides insight into their composition.

5 This understates the true benefits received by the average director in a firm, since it does not count benefits and perquisites - insurance and pension benefits being the largest component. Hewitt Associates, an executive search firm, reports that 67% of 100 firms that they surveyed offer retirement plans for their directors.

especially relating to accounting rules and tender offers, and rely instead on outside experts.

(3) In some firms, a significant percentage of the directors work for the firm, can be categorized as insiders and are unlikely to challenge the CEO. Even when directors are outsiders, they are not independent, insofar as the company's Chief Executive Officer (CEO) often has a major say in who serves on the board. Korn Ferry's annual survey of boards also found, in 1988, that 74% of the 426 companies it surveyed relied on recommendations by the CEO to come up with new directors, while only 16% used a search firm. In its 1998 survey, Korn Ferry did find a shift towards more independence on this issue, with almost three-quarters of firms reporting the existence of a nominating committee that is, at least, nominally independent of the CEO. The 2002 survey confirmed a continuation of this shift.

(4) The CEOs of other companies are the favored choice for directors, leading to a potential conflict of interest, where CEOs sit on each other's boards.

(5) Most directors hold only small or token stakes in the equity of their corporations, making it difficult for them to empathize with the plight of shareholders, when stock prices go down. In a study in the late 1990s, Institutional Shareholder Services, a consultant, found that 27 directors at 275 of the largest corporations in the United States owned no shares at all, and about 5% of all directors owned fewer than five shares.

The net effect of these factors is that the board of directors often fails at its assigned role, which is to protect the interests of stockholders. The CEO sets the agenda, chairs the meeting and controls the information, and the search for consensus generally overwhelms any attempts at confrontation. While there is an impetus towards reform, it has to be noted that these revolts were sparked not by board members, but by large institutional investors.

The failure of the board of directors to protect stockholders can be illustrated with numerous examples from the United States, but this should not

Greenmail: Greenmail refers to the purchase of a potential hostile acquirer's stake in a business at a premium over the price paid for that stake by the target company.

blind us to a more troubling fact. Stockholders exercise more power over management in the United States than in any other financial market. If the annual meeting and the board of directors are, for the most part, ineffective in the United States at exercising control over management, they are even more powerless in Europe and Asia as institutions that protect stockholders.

Stocks and Shares Retirement Rescue

Stocks and Shares Retirement Rescue

Get All The Support And Guidance You Need To Be A Success At Investing In Stocks And Shares. This Book Is One Of The Most Valuable Resources In The World When It Comes To

Get My Free Ebook

Post a comment