4. Board of Directors Flashcards
1
Q
LOs of the Board of Directors
A
- Explain executive and non-executive directors and their responsibilities.
- Understand the role of the board of directors.
- Explain why BoD exists using agency theory
- Explain why BoD exists using resource dependence theory,
2
Q
Executive Directors and Non-Executive Directors: Executive Directors Characteristics
A
- CEOs, CFOs
- Elected by shareholders to the board.
- Concerned with day-to-day operations and involved in major strategic decisions.
- Provide board with information to facilitate NEDs role.
3
Q
Executive Directors and Non-Executive Directors: Non-Executive Directors Characteristics
A
- Not contracted as employees, they are contracted to provide services.
- Board involved with finding suitable NED candidates, appointment approved by shareholder election.
- Have no role in day-to-day operations.
- Appoint and monitor senior executives.
- Scrutinise major strategic decisions M&A Divestment
4
Q
Role of BoD: Overview of Roles
A
- Board at the apex of internal control system.
- Directors have a fiduciary duty to shareholders and the firm.
- Hire and fire senior executives.
- Monitor senior execs performance.
- Provide counsel on strategic decisions: corporate restructuring.
5
Q
Theoretical Perspectives to do with BoD
A
- Agency Theory
- Resource Contingency Theory
6
Q
Theoretical Perspectives: Agency Problem in BoD
A
- Separation of ownership and control.
- Execs employed to use skills, experience, and judgment on behalf of shareholders.
- Decisions are non-routine - require judgment.
- Incomplete contracts - makes it difficult to hold execs to account
- Disperse share ownership - shareholders do not monitor because costs > benefits.
7
Q
Theoretical Perspectives: Agency Perspective
A
- The purpose of the board
- BoD monitors execs on shareholders behalf to reduce the agency problem.
- To promote value maximising behaviour by execs.
8
Q
Theoretical Perspectives: Resource Dependency Theory
A
- BoD provide four types of resources
- Advice and counsel - human capital (skills, expertise, knowledge)
- Legitimacy - based on independence from senior execs.
- Channels of communication between firm and external organisations.
- Assistance in obtaining resources from outside the firm
- Last two points are networking.
9
Q
Theoretical Perspectives: Resource Dependency Theory (Evidence)
A
- Lynell, Golden and Hillman 2003, AMR
10
Q
Theoretical Perspectives: Summary
A
- NEDs are important in establishing the board as an effective governance device and as a resource to improve strategic decision-making.
- Effectiveness of board associated with NEDs independence and their human and social capital.
11
Q
What are certain Board Characteristics?
A
- Outside directors
- Independence
- Size
- Diversity
- Female directors
12
Q
LOs of Board Characteristics
A
- Explain how board characteristics impact on board effectiveness.
13
Q
Board Characteristics: NEDs
A
- Appointed for expertise to monitor execs and advise on strategy,
- With no exec function, they can fulfil their duties independently.
- Do not rely on firm as their main source of income (in large FTSE PLCs they are paid about £78k)
- Play a crucial role in scrutinising execs because we cannot rely on execs to scrutinise themselves.
- Expect more NEDs on a board to lead to higher performance.
14
Q
Board Characteristics: Board Independence
A
- NEDs need to be independent to fulfil their fiduciary duty to shareholders.
- Questionable if they are affiliated outsiders, boards are interlocked, entrenched or rely on execs for information.
- Lab market for NEDs disciplines those who have operated on boards whose firms have underperformed.
15
Q
Board Characteristics: Size (Args for Larger Boards)
A
- More resources for monitoring and advice.
- More diverse expertise allowing members to specialise on committees.
- Complex firms benefit from larger board containing diverse expertise.
