Board Composition

Topics: Corporate governance, Non-executive director, Board of directors Pages: 5 (1591 words) Published: May 18, 2013
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 shareholders which is known as agency problem. So in order to align the managements interest with the shareholders, non executive directors monitor and oversee the performance of the management. To be objective, the majority of non exec should be independent rather than affliated directors i.e. free from any relationship that could affect their independence such as family, business, ex-excutive relationship. Rosenstein and Wyatt (1990) examine the stock price reaction on the day of the announcement that outside directors will be added to the board. They find that on average there is 0.2 percent increase in stock prices in response to the announcement of these appointments. There is some evidence that a more independent board may benefit the shareholder in specific areas. Wiesbach (1988) found evidence that the turnover of chief executive was more strongly related to company performance in companies characterised by a majority of non executive directors. In non exec dominated boards, a CEO of bad perfoming business will be sacked and replaced by someone else and such changes are often associated with positive movement in stock price. Improvement in stock prices is due to the fact that shareholder confidence increases after such removal because they believe that the non exec are acting rightly and the replacement of the CEO will bring the company back to success.There has been significant increase in the rate of CEO turnover after the publication of the cadbury report (Dahya and Mcconnel 2005). So this provides evidence that non independent directors are in better position to remove CEO's due to the fact that they do not fear them. Moreover, board with greater presence of non exec directors are more likely to resist takeover bids and this generates higher takeover premiums for shareholders. Outside directors do a better job of negotiating on behalf of shareholders than do the insiders. However, O'Sullivan and Wong fail to find evidence that board composition has an impact...
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