Description

Corporate governance issues are at the center of the current financial meltdown. These issues, however, are hardly new. Almost a decade ago, the corporate world witnessed renewed interest in the stewardship and monitoring role of the board. The recession of the early 2000s and the occurrence of major scandals contributed to this. Grave concerns about the state of corporate governance were frequently raised in the media, questioning CEO compensation, as well as the independence of the board and its responsibility to shareholders. Enron, Tyco, Hollinger, Nortel, and Parmalat were among the firms that faced criticism on governance issues. A common thread was the perceived failure of the board to fulfill its fiduciary duty with regard to its control and supervision obligation. This triggered fundamental changes in the regulatory framework, including the Sarbanes-Oxley Act.

With the current crisis, however, came the realization that additional change in the existing legal framework would probably be as ineffective in the prevention of future excesses. To fulfill their fiduciary duties, board members need to be selected on the basis of criteria that do not always fit legal definitions. Indeed, the present research highlights the differences between the legal definitions of “independence” that focus on the absence of existing perceived conflicts of interest, and the definition of “independence” provided by senior executives who emphasize the ability to speak and raise difficult issues during the decision-making process. The present study is based on interviews of directors and it analyzes these current issues from a practitioner point of view.

Over the past 30 years, much has been written about the direct relationship between board composition and firm performance. However, the final results of the quest for empirical proof to measure the impact of this relationship are inconclusive. This is partly due to differences in operationalizing board composition and also partly due to the fact that various definitions of the term performance are used, including financial performance, firm performance, and market performance. More fundamentally, however, it is because a firm’s performance, no matter how narrowly this word is defined, is the end result of a large number of factors, of which board composition is only one. More meaningful, therefore, is the study of the various ways to improve board performance. Effective boards are those in which the strengths and expertise of the members match the needs of the organization at any given time. Therefore, in today’s fast-changing environment, the present research suggests a need for a proactive management of the board composition in anticipation of major external/internal organizational changes as well as during the various phases of a firm’s life cycle.

The theoretical review of the extant research on board role and composition that is covered in this book is comprehensive not only in terms of the use of major theories relevant to corporate governance but also in terms of the analysis of business scenarios that could affect the role and composition of the board throughout an organization’s life cycle. This research, which was undertaken over many years, delivers valuable insights on directors’ motivations to join a board and on the meaning of two key directors’ selection criteria (i.e., required board experience and independence). When the pool of candidates is limited, more competence and more independence become contradictory objectives, and this dilemma has not been adequately addressed by policy makers.

The board of directors represents a core component of the corporate governance system in the western economies. Anyone interested in corporate governance and research in this field would benefit from the theoretical framework developed in this book. Qualitative researchers would also be interested in the methodology used during the fieldwork. Senior executives and board members represent a notoriously challenging population to observe and interview.