The Role of Board
According to Jensen (1993), the board has the final responsibility for the function of the board. The job of the board is to hire, fire and compensate the CEO and to provide high level council. More precisely, the board has two major jobs: to monitoring the decision making of management as a representative of shareholders and to initiate and implement of decisions. The board of directors is a major mechanisms used to solve agency problem, which arises when the management and ownership is separated in the company. The board of directors is an internal control mechanism to make sure the company’s decision making is align with the interest of shareholders. In US and UK, in order to improve the effectiveness of corporate governance, both internal control and external control mechanism has been applied. The active market for corporate control in these countries forces the managers to improve firm’s performance for the threat of possible takeover. This essay will describe the nature of board of directors and then evaluate whether it is effective as a corporate governance mechanism.
The UK and US board is characterized as a unitary board, which is consisted of executive and non-executive directors. The executive directors should use their skills, experience and judgment to be involved in the operations of the company. The non-executive directors have dual roles. On the one side, they are part of top management team with same responsibilities as executive. For instance, the city group in 2009 appointed three new outsider directors. It aims to bring deep and valuable experience in various dimensions of financial services. On the other side, they should supervise the executives to ensure they act in the interest of shareholders. They can discipline underperforming executives and ensure reliability of information disclosures. There are two different types of NEDs: affiliated outsiders who have the business connection with the firm such as former...
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