Board Composition
Board composition
The board of directors plays a central role in the corporate governance mechanism. The board is responsible for directing and controlling the business and is accountable to shareholders for its performance. High profile failures such as Enron have underlined the dangers of an ineffective group of non-executive directors and the severe problems that can arise when their independence is compromised through conflict of interest. The cadbury recommendations had substantial impact on the board structure in UK, where although the average size of board has fallen from 8.93 in 1991 to 7.89 in 2010, the average number of non exec on the board has increased from 3.61 to 4.95 for the same period. So in light of academic literature on this subject, I will discuss whether having non exec on board encourage more shareholder-oriented approach?
The cadbury report recommended that the board of directors should include a minimum of three non-exec directors who are able to influence the board's decision. These non executive directors have dual role i.e. strategic and monitoring. Firstly, the non-exec bring with themselves fresh perspective and often possess breath of expertise and knowledge because they often hold non exec directorship in number of other companies. So therefore, they can help excecutives by advicing and discussing with them strategies which will maximise the shareholders wealth. Being independent, they can challenge or reject management's strategic proposals without fear of losing their job if they believe that the proposal put forward is against the shareholders interest. In addition, these non exec might have been former politician which can help the company to secure new governmental contracts or help them with regulation. Secondly, in large organisation, there is potential conflict of interest between the management and shareholders due to dispersed ownership structures. Management might act in their own self interest at the expense of
The board of directors plays a central role in the corporate governance mechanism. The board is responsible for directing and controlling the business and is accountable to shareholders for its performance. High profile failures such as Enron have underlined the dangers of an ineffective group of non-executive directors and the severe problems that can arise when their independence is compromised through conflict of interest. The cadbury recommendations had substantial impact on the board structure in UK, where although the average size of board has fallen from 8.93 in 1991 to 7.89 in 2010, the average number of non exec on the board has increased from 3.61 to 4.95 for the same period. So in light of academic literature on this subject, I will discuss whether having non exec on board encourage more shareholder-oriented approach?
The cadbury report recommended that the board of directors should include a minimum of three non-exec directors who are able to influence the board's decision. These non executive directors have dual role i.e. strategic and monitoring. Firstly, the non-exec bring with themselves fresh perspective and often possess breath of expertise and knowledge because they often hold non exec directorship in number of other companies. So therefore, they can help excecutives by advicing and discussing with them strategies which will maximise the shareholders wealth. Being independent, they can challenge or reject management's strategic proposals without fear of losing their job if they believe that the proposal put forward is against the shareholders interest. In addition, these non exec might have been former politician which can help the company to secure new governmental contracts or help them with regulation. Secondly, in large organisation, there is potential conflict of interest between the management and shareholders due to dispersed ownership structures. Management might act in their own self interest at the expense of