Corporate Governance & Board of Directors

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Empirical evidence produced by (Dalton & Rechner, 1991) shows that of the 141 firms in their sample (21.3% of which have separate titles compared to 78.7% which have joint titles) those with separate titles consistently outperform those with dual titles when using various account-based performance measures. However, (Brickley, et al., 1997) notes that whilst these results do show strong impression to support increasing shareholder wealth by separating roles of CEO and chairman, the study does not take into consideration any of the variables that can be closely correlated between management structure and organisational performance. Further research published by (Pi & Timme, 1993) into the banking sector shows that costs are lower and return on assets is higher for those firms with separate titles even when taking into consideration those variables which could skew results[2].

An outside director is one which is not employed by the firm of which they sit on the board – they provide the necessary counterweight to those inside directors who are paid by the organisation. An outside director’s main contribution “to the organisation exists by advising management on strategy and operations, drawing on their professional experience” (Larcker & Tayan, 2016, p. 2). When you consider the authority that directors hold in relation to organisational practice it becomes clear why diverse perspectives can be essential for creating an environment where decisions are made in the interest of shareholders and towards enterprise goals rather than those of the inside directors acting in their own interest. For an outside director to be fully independent they must be free from relationships or conflicts which are in the interest of the organisation leading to negligence (Mallin, 2013). A hard definition of outside director which creates legally binding practice comes from the New York Stock Exchange as an independent director having “no material relationship with the listed company (either directly or as a partner, shareholder or officer of an organization that has a relationship with the company).” (New York Stock Exchange, 2016). Research conducted by (Brown, 1997) concludes that a majority of the chairmen in the study believe that independent directors have the capability of effectively addressing shareholders concerns directly. A conclusion which is reiterated by (Hermalin & Weisbach, 2003) as they report that outside directors act more effectively in negotiations than insiders in the interest of shareholders. Empirical evidence has therefore suggested that outside directors work more effectively in the interest of shareholders. It may be then that somewhat surprisingly it is those directors which are further removed from the organisation that provide greater value to shareholders than those which are more explicitly integrated with the organisation. That being said – it should not be underestimated the workload that inside directors put into the business. Though outside directors may be more effective at impressing shareholder’s views and ultimately their wealth – without those directors that hold implicit knowledge of the organisation the outside directors would provide nothing more than advisory information.

According to a report by (Financial Reporting Council, 2010) the development of modern UK corporate governance directive stems from a series of corporate scandals during the late 1980’s to early 1990’s. The (Cadbury, 1992) report issued a series of recommendations for UK organisations to implement ranging from the separation of chairman and chief executive, the role of non-executive directors and reporting on internal control of the company’s position. Along with the UK Corporate Governance Code, this is the foundation of the UK’s modern corporate governance. It has also been used to a wider extent across continental Europe in developing their own codes of governance. One of the initiatives taken to improve the effectiveness of board of directors is the board presenting “a balanced assessment of the company’s position” (Financial Reporting Council, 2010, p. 10). A fair, and accurate representation of the organisation is paramount for shareholders and potential investors – as many non-institutional investors can struggle to untangle the jargon found within the numerous financial performance measures and accounts that organisations need to produce to satisfy regulatory criterion. The failure of Enron Corporation in late 2001 raised serious questions about accounting practices and the effectiveness of corporate governance practices both in the US & UK (Vinten, 2002). This shows that although corporate governance can be refined many times – adapting to changes financial and business climates it is always almost reactive rather than proactive. Whilst initiatives can always be implemented to stop further scandals or failures it does nothing to compensate those shareholders who have potentially lost all of their capital in failed business.

The board of directors is able to delegate some of the key decision-making processes to the various sub-committees available to them, known as ‘standing committees’. The most common standing committees in public organisations are; audit, remuneration, nomination and risk committee (ACCA, 2012). Although having standing committees set up to address and monitor some of the most important aspects of is a key mechanism for withholding shareholder value – what it also does it add another layer between the shareholders and the management of the business. It is another potential stepping stone which can become disjointed and misaligned with shareholders’ interests if implemented incorrectly. On the contrary, the attention to detail that these standing committees can bring by having only one aspect of the business to focus on can add a genuine level of proficiency and expertise to the organisation. It is unlikely that a board of directors could carry out the tasks that are agreed to standing committees to the same standard without this delegation.

This essay has sought to discuss the key characteristics of the board of directors in effective corporate governance practice, with ultimately working towards increasing shareholder value. We’ve seen how the functions of the board of directors are aligned in the interest of the shareholders with conformance and performance perspectives both noted. Empirical evidence has been shown to demonstrate how organisations with separation between management and governance, specifically chairman and chief executive has benefitted from improved financial performance – indicating a rise in entrepreneurship. However, it must be noted that the thesis for the studies made include variables which can skew results – somewhat negatively affecting their accreditation. On