Question

In the typical corporate form of organization shareholders elect the Board of Directors, which subsequently "hires" managers. In a brief essay, discuss the importance of choosing an external Board of Directors to oversee a firm's management when separating ownership (shareholders) and control (managers). Discuss the concerns of many shareholders with respect to 'chummy' Boards of Directors.

Answer 1

The board of directors has the vital role of overseeing the company’s management and business strategies to achieve long-term value creation. Selecting a well-qualified chief executive officer (CEO) to lead the company, monitoring and evaluating the CEO’s performance, and overseeing the CEO succession planning process are some of the most important functions of the board. The board delegates to the CEO—and through the CEO to other senior management—the authority and responsibility for operating the company’s business. Effective directors are diligent monitors, but not managers, of business operations. They exercise vigorous and diligent oversight of a company’s affairs, including key areas such as strategy and risk, but they do not manage—or micromanage—the company’s business by performing or duplicating the tasks of the CEO and senior management team. The distinction between oversight and management is not always precise, and some situations (such as a crisis) may require greater board involvement in operational matters. In addition, in some areas (such as the relationship with the outside auditor and executive compensation), the board has a direct role instead of an oversight role.

Concerns of Shareholders with respect to chummy Board of Directors

Shareholders expect corporate boards and managers to act as long-term stewards of their investment in the corporation. They also expect that the board and management will be responsive to issues and concerns that are of widespread interest to long-term shareholders and affect the company’s long-term value.

Some shareholders may seek a voice in the company’s strategic direction and decision making—areas that traditionally were squarely within the realm of the board and management. Shareholders worry about chummy board of directors in as regards their degree of responsibility towards the goal of long-term value creation for the company and all of its shareholders. Basically, shareholders want results and would appreciate seeing a disciplined and results-driven board of directors