Ch5 - Board of Directors Flashcards
Board of Directors - Competences & responsibilites
- Strategic decisions making: ultimate authority. This should not be delegated
- Supervision: overseeing operations, hire and fire of CEO
- Support & Consulting of execs
One-tier vs two tier BoDs
- One tier: CH, UK, US
(can) contain executives & on-executives board members
-Two tier: AUT, DE, NL
Supervisory board is completely separate from executive board. employee representative in it
BoD independence vs effectivness
- independence is crucial
- too much independence can hinder information flow and thus good advice from board is missing
Dual mandates
Position of chairman of BoD & CEO by same person
-> potential conflict of interest -> common in US
Interlocked CEOs
When CEO of different companies serve on the same boards
- reciprocal favours
- inflated compensation
Employee representation in BoD
- promoting interest of employees
- not interested in shareholder value
Director network BoD
- connections & shared affiliations
- old boys club
- less monitoring
-> interlocked CEOs
Possible BoD characteristics & performance
- Busy Boards
- Board Size
- Locally rooted directors
- Over confident board
Busy Board
members on the multiple boards, less time for supervision -> worse company performance
Board Size
Debated, smaller more agil, larger more expertise and perspective
Locally rooted director
+ valuable connection to company
- rent extraction
- reduced independence
Over confident board
especially for mergers and acquisitions
- poor decision making
- destruction of shareholder value
Female Quotas for BoD
+ lead to gender diversity
- short run: less experience female members on board and thus worse business performance
+long term benefit: improved strategic decision making & organisational change
Types of BoD members
Inside Director
Dependant outside Director
Independent outside Director
Inside Director
Individuals with direct ties to the company, such as CEOs, top executives, former executives, and family members of employees.
Dependant outside Director
Those with connections to the company through business relationships, social networks, or other affiliations. Examples include CEOs of other firms with business ties, company lawyers or consultants, and recipients of corporate charitable donations.
Independent Outside Directors
Directors with no pre-existing relationships with the CEO or the company.
Interlocked CEOs
CEOs are called interlocked if they are both on the board of the other CEOs company
Negative aspects of firms with more interconnected directors
– CEO compensation levels are higher,
– CEO compensation packages have lower performance sensitivity,
– CEO turnover is less sensitive to firm performance
– the CEO is less likely to be sacked.
