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
However, according to Agency theory, agent has the duty to act in the best interests of the principal, but in order to reduce the risk that managers might undertake risky decisions, boards should monitor and control the agent’s behavior. In addition, the risk are treated by internal audit as monitorial or manageable may not be documented and assessed, which is increasing the cost of company(Spira & Page, 2003).
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).
"Principles of Corporate Governance." 2012. The Harvard School of Law Forum. Ed. Noam Noked. Web. 2 April 2014. .
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...
There are many similarities and differences in the way that companies, in both the United States and the United Kingdom, are owned and operated. One of the main issues to look at between companies in these two countries is the roles and responsibilities of their board of directors. The board of directors of any business plays a crucial role in the success of the company. Although there are many similarities in the board of directors in these two countries, a few key differences can change the aspect of the company’s oversight.
The Board of Directors is the highest governing authority in a professional management structure. It is made up of two tiers of individual members who are elected by the shareholders of the corporation to establish corporate management related policies. These two tiers include individuals chosen from within the company such as manager, CEO or other daily worker of the company. The next tier involves chosen individuals that are outside of the company and considered to be independent. These individuals are also elected to make decisions on behalf of the corporations, more importantly public companies must have a Board of Directors in place. The Board of Directors mission is to set a fair representation of management and interests of shareholders for the corporation. The responsibility of the Corporate Director is to act on behalf of the corporation and make sure he/she is presenting its best interests at all times, participating in regular meetings of the Board of Directors, amending the Corporation’s bylaws or articles of incorporation, acting with the loyalty to the corporation and its members, approving some corporate activities which include contracts and agreements, asset purchases, and the election of new corporate officers. When electing personnel into these positions there is an invisible line that needs to be addressed regarding who will serve as a member on the Board. If you have too many internal representatives for the company serving as Directors, the Board will tend to make decisions more beneficial to management. On the other side, having too many external Directors may mean management can be left out of the decision-making process that in turn, will cause managers to feel alienated and leave, instead of a fai...
The first one is on the percentage of non-executive directors (NXRATIO). There are many studies that support the use of non-executive directors as they are more likely to act on behalf of shareholders. As a consequence, the greater the percentage of non-executive directors on the board, the lower Agency costs, as the first hypothesis. Secondly, duality (DUALITY) is unenviable as it gives one person a potential ability to disrupt the decision-making process of the firm, hence the separation of CEO and chairman should reduce agency costs. Thirdly, the setting up of board subcommittees. There are several board subcommittees, but only nomination committee, which contains non-executive director(s), will be focused on. As mentioned previously, a non-executive director should acts on behave of shareholders, the presence of a nomination committee (NOMCOM) and the presence of an executive director on the nomination committee (NOMXD) should reduce agency costs. The length of the CEO tenure (CEOTENURE) is considered as the longer term he/she is in the office the more power will be, agency costs are escalated as a result. The last hypothesis is the higher the number of additional directorships held by the CEO (BUSYCEO), the lower agency costs because of the higher reputation and the positive impact on firm performance. McKnight and Weir (2009) do not construct hypotheses only on board characteristics,
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.
They showed that the composition of the board is an important factor in determining CEO pay. Specifically, their research proved that CEO remuneration decreases with ownership of the largest stockholder, increase in risk of bankruptcy and the board of director’s ownership, while it increases with the tenure of the CEO, the percentage of independent directors on the board and CEO ownership. But, their findings provide no statistical evidence that a large board leads to an overcompensation of the CEO, while the CEO pay is higher if the CEO is also the chairman of the board in the same firm. Their findings also remain unchanged after holding constant other determining factor of CEO remuneration, such as company size, accounting and market based performance metrics. Moreover, empirical evidence from Cyert, Kang and Kumar (2002) research established a negative link between CEO remuneration and the ownership of members’ remuneration committee i.e. expanding their ownership decreases CEO’ s equity and option remuneration by 4 to 5
The Asian Financial Crisis which exposed the corporate governance weaknesses was a wake-up call for all the policymakers, standard setters as well as the companies (OECD, 2014). The parties that involved and affected from the crisis started to realize the importance of having strong corporate governance practices in their countries. Consequently, the Asian economies along with the OECD established the Asian Roundtable on Corporate Governance in 1999, in order to support the enhancement of corporate governance rules and practices (OECD, 2014).
The Role of the Directors in a Company is of a paramount importance in the discourse of the proper running of the company. Directors are the spirit of the company .The company is merely a legal entity, governed by its directors. These directors have certain duties and responsibilities. These are mainly governed by the Corporation Act, 2001. Section 198A (1) of The Corporations Act, 2001(The Corporations Act 2001 s 198A (1)), clearly states that, ‘The business of a company is to be managed by or under the direction of the directors’.
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.
“A strong internal control system which includes an independent and efficient internal audit function contributes to an efficient and reliable governance”. (Andrei, 2015). Corporate governance is defined as “the ways in which suppliers of finance to corporations assure themselves of getting a return on investment. (Hamza, T., & Mselmi, N.,2017) In an effort to accomplish a stronger system, the Institute of Internal Auditors created a new concept called the “three lines defense model.” (Andrei, 2015) With this model, the first line of defense consists of the management and support functions. The second line of defense is the control function. Finally, the third line of defense is the internal audit function, which “verifies all the other control functions and to give assurance over the internal control system in place.” (Andrei, 2015) The Institute of Internal Auditors or IIA regulate internal auditors with a set of standards called the International Standards for the Professional Practice of Internal Auditing. The IIA does not discriminate against companies who want to utilize outside sources to perform internal audits if it is done efficiently. “The IIA’s Code of Ethics requires internal auditors to evaluate information objectively, while not being unduly influenced by their own interests.” (Stefanick, Houston and Cornell, 2012) On the other hand, “the IIA believes that oversight and responsibility for the
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.
According to Carol Padgett (2012, 1), “companies are important part of our daily lives…in today’s economy, we are bound together through a myriad of relationships with companies”. The board of directors remain the highest echelon of management in any company. It is the “group of executive and non-executive directors which forms corporate strategy and is responsible for monitoring performance on the behalf of shareholders” (Padgett, 2012:1). Boards are clearly critical to the operation of companies and they are endowed with substantial power in the statute (Companies Act, 2014). The board is responsible for directing and steering the company. The board accomplishes this by business planning and risk management through proper corporate governance.