Abstract
Boards exist because they are an optimal response to the conflicts of interests between shareholders and managers, and between types of shareholders. While there is a wide consensus on this point, the literature is more divided on how directors should split their time and energies between monitoring and advising the managers. The monitoring role has been considered the primary duty of the directors for a long time, but recent studies show that directors devote a fair share of their time to advising managers. However, directors can effectively advise managers only when managers share information . Managers are reluctant to do this because directors can use the shared information to monitor them. The chapter also presents the main difference between one-tier and two-tier boards and discusses director election .
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Notes
- 1.
The other three are the capital markets, the legal/political/regulatory system, and the product markets.
- 2.
The lack of proper incentive s for executives who do not own enough shares in the company has also captured the attention of film-makers, not just finance scholars. In fact, a famous quote of the greed-is-good speech delivered by Gordon Gekko to the Teldar Paper’s general meeting in the movie Wall Street stresses how little equity the managers have in the company: “Today, management has no stake in the company! All together, these men sitting up here [Teldar management] own less than 3 percent of the company”.
- 3.
However, Hermalin and Weisbach (2003) argue that this is not the only reputation concern that outside directors have: a reputation as someone who is nice to the CEO can also be valuable for an outside director.
- 4.
Schwartz-Ziv and Weisbach (2013) also recognize the limits of their work, most notably the fact that they examine government-owned companies where directors are appointed and not elected.
- 5.
The two-tier board structure is not mandatory for companies that adopt the legal form of Societas Europaea, SE.
- 6.
https://www.cii.org/zombie_directors. See also “The ‘zombie directors’ who lurk on corporate boards” by Jena McGregor, The Washington Post, November 7, 2016.
- 7.
- 8.
Many firms also have a director resignation policy which addresses the issues of “holdover directors”, who are those incumbent directors who do not obtain the 50% of votes cast in the true majority voting standard but still hold the board seat until the election of a new director. The term of holdover directors is often limited, and the policy allows the board discretion regarding the acceptance of the resignation. Thus, even if an incumbent director is not elected to the board, he or she may still serve on the board for a period of time until a new director is elected.
- 9.
Fos et al. (2018) report that according to the Institutional Shareholder Services (ISS) Director Data, the director turnover rate is 12%.
- 10.
To mitigate the concern that these results are affected by endogeneity concerns such as omitted variables and self-selection , the authors provide a battery of tests to support a causal interpretation of their results.
- 11.
See Sect. 1.7 for a more in-depth discussion of the topic.
- 12.
The papers mentioned in this section are not summarized in a table because they are discussed in other sections.
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Croci, E. (2018). The Board of Directors. In: The Board of Directors. Palgrave Pivot, Cham. https://doi.org/10.1007/978-3-319-96616-8_1
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