There is much debate about the role of outside directors as effective monitors of the firm. Two early studies that address this issue are Fama (1980) and Fama and Jensen (1983). Fama (1980) in their seminal work show that board of directors can be efficient monitors of an organization. Fama and Jensen (1983) argue that outside directors have the incentives to develop reputation and signal the markets as efficient monitors of the firm . The crux of the argument on outside directors are whether the outside directors, support the shareholders or are likely to be aligned with the interests of the management. Studies such as Mace (1986), Patton and Baker (1987), and Jensen (1993) argue that since top management can influence the appointment of an …show more content…
Also in an event study the authors show that firms announcing the appointment of multiple directors for the first time experience higher abnormal returns. Beasley (1996) finds that firms whose outside directors hold more board seats are less likely to commit fraud because inclusion of outside members on the board of director increases the board 's effectiveness at monitoring management for the prevention of financial statement fraud. Cotter, Shivdasani, and Zenner (1997) examine the role played by independent outside director during tender offers and they report that target firm with independent boards commands higher merger premium, because the authors find that target shareholder gains are higher in resisted offers also having majority outside directors. Similarly, Brown and Maloney (1999) find higher acquirer returns when directors with multiple board seats serve on the acquirer’s board. These studies all provide ample evidence that outside director has avital role not only in the corporate governance of the firm but also are beneficial for firm …show more content…
The Council of Institutional Investors (1998) documents that full-time directors should not serve on more than two other boards. The National Association of Corporate Directors (1996) suggests that full-time directors should not serve on more than three or four other boards. In contrast The Principles of Corporate Governance issued by The Business Roundtable (1997) believes that limits on the number of directorships are not required. Further a survey of directors of Fortune 500 companies by Korn/Ferry International (1998) shows that too many board appointments place an excessive burden on a director. Fifty-six percent of outside directors report that they declined an invitation to serve on an additional board, sharing the view that it is not feasible to serve too many boards. Because the directors in the survey believed that too many board appointments might distract them, thereby making them inefficient monitors. There is ample evidence that suggest the US market has efficient infrastructure and established institutions that has well-functioning capital, labor and product markets. The transaction cost theory proposed by Coase (1937) and Williamson (1985) suggests that the optimal structure of a firm depends on its institutional context . However, in emerging market
Ralph Nader, Mark Green and Joel Seligman, in an excerpt from Taming the Giant Corporation (1976, found in Honest Work by Ciulla, Martin and Solomon), take the current role of the company board of directors and suggest changes that should be made to make the board to be efficient. They claim the current makeup of the board does not necessarily do justice to the company because “in nearly every large American business…there exists a management autocracy” (Nader, Green and Seligman, 1976, p.570). The main resolution they present is to make the board more democratic with the betterment of the company as its first priority. Currently the board no longer oversees operations, or elects top company executives and they are no longer involved in the business operations to the extent they should be. Nadar, Green and Seligman argue that that all of these things need to be changed. For a corporation so large to be successful there must be separation of powers just as there is in any current government system ( p.571). They claim this is the only and best way to success (Nader, Green and Seligman, 1976, p.570-571).
Shivdasani, A., & Zenner, M. (2004). Best practices in corporate governance: What two decades of research reveals. Journal of applied corporate finance, 16(2/3), 29-41.
There had been 12 members on their board which compared to other firms was large. Having too many members on a board may cause disagreements of the company’s ethics. The more people in a room running a company may have many opinions and suggestions for which route the company should move to. All these members of an independent board are responsible in monitoring the finances of a firm. A member’s action sequence may motivate other board members in persuading them on the direction they want the firm to go. With so many people on a board laziness may take in effect and expect others to do the wor...
With good corporate governance, the costs of capital are lowered, transaction costs are reduced and firms are encouraged to use resources optimally (Balgobin 2008). The board comprises of 11 members, the chairperson, seven independent directors, two non-executive director, and one executive director (Chief Executive Officer). This is reflective of a unitary board with majority non-executive directors which is typical of significant listed companies in the United States of America and is in compliance with NYSE requirement for listing. In addition, the size of the board is similar to most publicly-traded companies in the US which was discovered to have between 8-11 members. By-law of the Company however, provides for a larger number at the discretion of the board.
As a consequence of the separate legal entity and limited liability doctrines within the UK’s unitary based system, company law had to develop responses to the ‘agency costs’ that arose. The central response is directors’ duties; these are owed by the directors to the company and operate as a counterbalance to the vast scope of powers given to the board. The benefit of the unitary board system is reflected in the efficiency gains it brings, however the disadvantage is clear, the directors may act to further their own interests to the detriment of the company. It is evident within executive remuneration that directors are placed in a stark conflict of interest position in that they may disproportionately reward themselves. The counterbalance to this concern is S175 Companies Act 2006 (CA 2006) this acts to prevent certain conflicts arising and punishes directors who find themselves in this position. Furthermore, there are specific provisions within the CA 2006 that empower third parties such as shareholders to influence directors’ remuneration.
The debate whether diversity is beneficial to corporate governance or not has persisted over the years. In this context, the concept of diversity relates to boardroom composition and the wide-ranging blend of characteristics, expertise, and attributes supplied by individual board members (Grosvold, Brammer and Rayton, 2007, p. 344). What is more, diversity in corporate boards of directors can assume a variety of forms, counting individual demographics such as, nationality, race, ethnicity, and gender (Singh, Terjesen, and Vinnicombe, 2008, p.48). Boardroom diversity in listed companies is dictated by an array of diverse factors, including profitability, company size, as well as the size of the board (the number of non-executive and executive directors) (Grosvold, Brammer and Rayton, 2007, p.346). In listed companies, the board of directors usually serves at least four significant roles i.e. controlling as well as monitoring managers, providing counsel and information to managers, ensuring conformity with relevant laws as well as regulations, plus connecting the corporation to the external business environment (Carter et al. 2010, p.398).
Organizations that only have top management as the board members are more susceptible to accounting malpractices. Members of the board should preferably own shares in the company to ensure diligence when it comes to the interests of the company. Apart from the Board of Governors, there should also be an audit committee in place to oversee the financial dealings of the bank. Members of the board and the audit committee should have basic financial knowledge. Some of the members should also be experts in finances so that they can detect any anomaly that may take place in terms of financial reporting. An overhaul of the regulatory framework is required to empower authorities to intervene immediately, and make improvements. New technology is required. Manual antiquated processes should be eliminated because this causes greater human error and poor
The board membership, irrespective of executive or non executive membership, is very crucial in the governance and management of the company. However, as the duties and responsibilities of directors vary according to their type of directorship; the rewards should also match the responsibilities carried out and be in line with the performance shown over period of time.
Nottingham Trent University. (2013). Lecture 1 - An Introduction to Corporate Governance. Available: https://now.ntu.ac.uk/d2l/le/content/248250/viewContent/1053845/View. Last accessed 16th Dec 2013.
Many organizations utilize consultants to address problems and improve business practices. A consultant is hired to advise organizations based upon their professionalism and expertise (“Consultant”, 2017). External and internal consultants work with a client organization to achieve the client’s objectives. External consultants are non-members of the organization and have the responsibility of advisement from a neutral perspective (Stryker, 2012). Internal consultants are members of the organization and have a great understanding of the internal operations of the organization (Miller & Subbiah, 2012). While organizations may use consultants internally and externally, the both types of consultants differ
...r importance in corporate governance. The roles and responsibility of the independent directors shows how they perform their work in the organization and independent directors presence in board of director are very important in the organization and by giving the example of absence of independent director in kingfisher airline tells that they don’t have adequate number of independent directors because their financial crisis and example HCL Infosys shows need of the independent director because they have appoint new IDs in the organization. Despite having such function there is believe that independent directors have been failed. Therefore I have come to the conclusion that independent director plays a crucial role and if they gets good chances to show their skills then their will a phase when every companies will need independent director in their boards.
K, . N., ER, w., DAVID, K., PAUL, M., WALTER, O., & EVANS, A. (2012). Corporate governance theories and their application to boards of directors: A critical literature review . Prime Journal of Business Administration and Management (BAM), 2(12)(2251-1261), 782-787.
The aim of this essay is to study the function of external auditors in order to analyze why it is important to be independent. The primary mission of external auditors is to review and evaluate all the financial records of a company or corporation. They provide an objective opinion on the organization’s financial statement and effectiveness of the accounting polices in order to help management to make decisions. If the independence of the external auditors is impaired, the public will doubt the quality of professional auditing services, and the consequence would be very serious, just like the bankruptcy of Enron led to the disorganization of Arthur Andersen, once a giant accounting company in the world. In order to maintain and increase the independence of external auditors, some activities should be undertake to avoid the overdue market competition in professional accounting industry and enhance the supervising ability of the regulators. .What follow is a detailed analysis of the association between external auditors and companies.
...eve efficient resource allocation. Failure to achieve appropriate and efficient corporate governance could result in sub-optimal allocation of resources, abuses and theft by management, expropriation of outside shareholders and creditors, financial distress and even bankruptcy. While evaluating the role of corporate governance, it is imperative to also consider the levels of development of market institutions and other legal infrastructure including laws and enforcement that provide good standard for investor protection as well as ownership structures.
Both Beasley (1996) and Uzun et al (2004) demonstrated that larger proportion of independent non-executive directors on the board for US listed companies could reduce the likelihood of corporate fraud. These findings indicate that independent directors are more likely to represent shareholders’ interests. Thus, higher proportion of independent non-executive directors on the board could increase board’s effectiveness as a monitoring mechanism over management.