CORPORATE GOVERNANCE

Kenneth Kim, John Nofsinger & Derek Mohr 3rd Edition Pearson Prentice Hall

CHAPTER 4

The Board of Directors

Chapter Overview
2

Overview of boards More attention on directors What is a good board? Potential problems with todays boards International perspective - boards in Western Europe

Board Functions
3

To act as shareholders agent with fiduciary responsibility To hire and evaluate management To approve major operating proposals To approve major financial decisions To offer expert advice to management To make sure the firms activities and financial condition are accurately reported to its stakeholders

Overview of Boards
4

Model Business Corporation Act The boards legal duties (owed to shareholders):
fiduciary duty duty of loyalty and fair dealing duty of care duty of supervision

Business judgment rule protects board members from liability if they make reasonable decisions

Board Committees
5

Most common sub-committees include:

Audit committee Compensation committee Nomination committee

Other sub-committees may include:

Executive committee Finance committee Community relations committee Corporate governance committee Stock options committee

Board Structure Regulations

6

NYSE and NASDAQ impose their own set of regulations. The Sarbanes-Oxley Act
Made audit committee more independent

Historical Perspective
7

In 1934, William O. Douglas, a law professor who later served as an SEC chairman, and then as a U.S. Supreme Court justice for 36 years, claimed that directors do not direct. One director boasted in 1962, If you have five directorships, it is total heaven, like having a permanent hot bath. No effort of any kind is called for. You go to a meeting once a month in a car supplied by the company, you look grave and sage, and on two occasions say, I agree. In summary, a board of directors was often simply been something that corporations had for show rather than for a real purpose.

More Attention on Directors

8

Increased pressure on the board of directors to provide better corporate governance was probably caused by the following:

The tidal wave of mergers and acquisitions in the mid 1980s and late 1990s The continuing stream of corporate scandals that destroyed shareholder value The rise of active shareholders who began pushing for more accountability from directors

Who are Directors?

Standard & Poors 500 firms have about 11 directors each.
Experiences
10 to 20 years of experience in a business leadership role be a current COO or CFO of a large company or be one of the top 15 executives at a very large corporation

Typical board make-up

95 percent of firms have a retired executive serving as a director 82 percent have an executive from another firm 58 percent have an academic 58 percent have a former government official 82 percent of boards have a woman as a director 76 percent have a member of an ethnic minority
9

Is Being a Director Worth It?

10

Shareholders have become increasingly more demanding of directors.

working longer hours taking more stock ownership in the firm challenging the CEO more often taking their duties more seriously 60 percent of nominated directors are turning down appointments averaging more than $56,000 per year

Compensation

What Is A Good Board?

11

Given the assumption that all public firms have experienced and successful experts serving on their boards, a good board
has a higher fraction of non-insiders with fewer members

Not all countries share the U.S.s emphasis on independent directors Companies in different countries also seem to have differing views on board size

Average U.S. Board Size and Independence by Company Size and Industry
12
14 Insiders Outsiders 12

10
Number of Board Directors

0
s bi llio n Ba nk rta in m bi ch no Te lo gy llio n en t En te

<

ze

Si

Si

ze

>

$2 0

$3

Average Board Size and Independence Around the World, 2004

13
Insiders Outsiders 14 16

12
Number of Board Directors

10

0 Australia France Germany Japan Non-Japan East United Kingdom Asia

Good for the Goose, Good for the Gander?

14

Should every board consist of outsiders and have few members?

Firms might have to decide what experience and expertise is optimal for their firm. Each firm would decide on its own what is the best board.

Is there a positive correlation between board quality and firm performance?

Hard to say.

Potential Problems with Todays Boards

15

For many firms, the boards chairman is also the firms CEO. So-called outside board members might have some sort of business or personal tie to the CEO Directors do no have a significant vested interest in the firm. Some directors may be overextended Some directors do not have the expertise to be a board member Some boards are too large

International Perspective
16

Two-Tier Boards For example, Germany, the Netherlands

German firms have: A management board that runs the business A supervisory board that appoints and supervises the management board. The supervisory board also controls the firms compliance with the law and articles of the corporation and its business strategies.

Western European board regulations on independence

17

The U.K. is very similar to the U.S. in its emphasis on independent directors. The governance codes for the rest of the European countries do not explicitly require a specific number or fraction of independent directors.
The recommendations pertaining to director independence seem vague.

Summary
18

A firms board of directors plays an important role in solving agency problems. Shareholders and regulators have recently started paying more attention to the activities of boards of directors. There are many potential problems with the organizations of many corporate boards. However, the recent attention directed to boards has caused some changes to occur.