Subject 3: Board of Directors

Question 1

What is the primary role of a Board of Directors?

Answer 1

To provide oversight, strategic direction, and ensure accountability in managing a company, including hiring top executives and approving major business decisions.

Question 2

What are the core responsibilities of the Board in corporate governance?

Answer 2

Key responsibilities include hiring/firing managers, performance assessment, major decision approvals, and risk management oversight.

Question 3

What is board duality?

Answer 3

Board duality occurs when the CEO also serves as the Chairman, which may lead to strong leadership but could reduce board independence.

Question 4

How does board duality impact corporate governance?

Answer 4

It can consolidate leadership but also reduce board independence, potentially increasing CEO entrenchment and reducing effective monitoring.

Question 5

What is the difference between a one-tier and a two-tier board?

Answer 5

A one-tier board combines executives and non-executives, while a two-tier board, common in Germany, separates the management and supervisory boards.

Question 6

What is meant by “board independence”?

Answer 6

It refers to having directors who are not financially or familiarly tied to the company, enabling objective decision-making.

Question 7

How can social ties influence board independence?

Answer 7

Directors with social ties to the CEO may be less effective in monitoring, as friendships or shared backgrounds can reduce objectivity.

Question 8

What did Hwang & Kim (2009) find about social ties and board effectiveness?

Answer 8

They found that social ties between directors and CEOs can weaken monitoring, reducing pay-performance sensitivity for CEOs.

Question 9

Why might smaller boards be advantageous?

Answer 9

Smaller boards facilitate faster decision-making, reduce coordination problems, and minimize free-riding.

Question 10

What benefits do larger boards offer?

Answer 10

They provide diverse perspectives, more monitoring capacity, and a broader range of expertise.

Question 11

What are the drawbacks of having a large board?

Answer 11

Large boards may face coordination issues, slower decision-making, and increased free-rider problems.

Question 12

How does forced board size expansion affect firm performance?

Answer 12

Studies show that forced increases in board size can reduce ROA and Tobin’s Q, indicating potential inefficiencies.

Question 13

What is Tobin’s Q?

Answer 13

Tobin’s Q is a measure of firm value, comparing a company’s market value to the replacement cost of its assets.

Question 14

What was Norway’s gender quota law of boards?

Answer 14

Norway mandated minimum female representation on boards in 2003 to promote gender equality and social fairness.

Question 15

What was the impact of Norway’s gender quota on firm value?

Answer 15

The quota led to a decrease in firm value, particularly in firms that had to make the most significant adjustments.

Question 16

Why did mandated female representation affect firm risk?

Answer 16

Firms increased leverage and acquisition spending post-quota, reflecting a rise in riskier financial strategies.

Question 17

How did the Norwegian quota affect board demographics?

Answer 17

New female directors tended to be younger and had less CEO experience, altering board dynamics and decision-making.

Question 18

What is an endogenous factor in board composition?

Answer 18

Endogenous factors, like firm size or industry needs, influence board characteristics, affecting studies on board impacts.

Question 19

Why are “natural experiments” valuable in studying boards?

Answer 19

They help isolate specific effects, like quotas, providing insights into how mandated changes impact firm performance.

Question 20

How does board size vary with company needs?

Answer 20

Companies with complex operations, like M&A, often have larger boards to leverage diverse expertise.

Question 21

What effect does social independence have on executive compensation?

Answer 21

Studies indicate weaker pay-performance sensitivity when CEOs are connected socially to board members.

Question 22

How does board independence impact executive turnover?

Answer 22

Independent boards are generally more willing to hold CEOs accountable, potentially leading to higher turnover to underperformance.

Question 23

What is the “optimal” board size?

Answer 23

Optimal size depends on the firm’s needs, balancing monitoring capacity with decision-making efficiency.

Question 24

Why might a forced increase in board size reduce Tobin’s Q?

Answer 24

Larger boards can become less effective due to coordination issues and increased costs, impacting firm value negatively.

Question 25

How does a chairman-CEO dual role impact monitoring?

Answer 25

It reduces the board’s ability to effectively oversee the CEO, potentially leading to conflicts of interest.

Question 26

What are some common social ties that might influence board independence?

Answer 26

Ties include shared educational backgrounds, military service and regional origins.

Question 27

What is the impact of board composition on company value?

Answer 27

Diverse, well-composed boards can improve oversight and decision-making, but excessive or forced diversity may impact firm performance negatively.

Question 28

Why might directors with social ties to the CEO hesitate to act independently?

Answer 28

Personal ties may reduce their willingness to challenge the CEO, affecting their objectivity.

Question 29

What role does the compensation committee play in board governance?

Answer 29

The compensation committee sets and reviews executive pay, ideally aligning it with company performance and shareholder interests.

Question 30

How did firms respond to the 2003 Norwegian gender quota law?

Answer 30

Many firms initially resisted, citing a lack of qualified female candidates and concerns about the impact on board performance.

Question 31

What are the challenges in studying the effects of gender quotas on boards?

Answer 31

Separating quota effects from other factors, like firm-specific characteristics or economic conditions, is complex.

Question 32

What does the term “reverse causality” mean in the context of board research?

Answer 32

It refers to the possibility that poor firm performance could lead to changes in board size or composition, not the other way around.

Question 33

Why is board diversity important?

Answer 33

Diversity can improve decision-making by bringing varied perspectives and expertise, though forced diversity may disrupt effectiveness.

Question 34

What does the two-tier board system aim to achieve?

Answer 34

It separates management oversight from executive decision-making, enhancing checks and balances.

Question 35

How did Ahern & Ditmar (2012) assess the impact of Norway’s quota on firm value?

Answer 35

They analyzed firm valuation changes, finding a decrease in Tobin’s Q for firms with the largest adjustments, reflecting potential disruption from the quota.