CORPORATE

GOVERNANCE

Kenneth Kim,
John Nofsinger &
Derek Mohr

3rd Edition
Pearson Prentice Hall

CHAPTER 4The Board of Directors

 Chapter Overview
2

Overview of boards
More attention on directors
What is a “good” board?
Potential problems with today’s 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 firm’s activities and financial
condition are accurately reported to its stakeholders
 Overview of Boards
4

Model Business Corporation Act

The board’s 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 & Poor’s 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
 Compensation
 averaging more than $56,000 per year
 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

gy
n

t
en
nk
llio
llio

lo
m
Ba
bi
bi

no
in
0
$3

ch
rta
$2

Te
te
<

>

En
ze

ze
Si

Si
 Average Board Size and Independence Around
the World, 2004
13

Insiders
16
Outsiders

14

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 Today’s Boards
15

For many firms, the board’s chairman is also the

firm’s 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 firm’s
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 firm’s 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.