How effective is a board of directors at overseeing company executives?
Highly ineffective, according to a study co-authored by a Texas A&M University professor, which finds boards cannot effectively monitor executives due to barriers that reduce their ability to process information.
“The purpose of the board is to protect shareholder interests from managers who may not always have the same interests as shareholders,” says Steven Boivie, a professor of management at Texas A&M’s Mays Business School. “For public companies, the board of directors is the highest legal authority of the firm and has the legal responsibility to protect shareholder interests by hiring and firing the CEO, setting the CEO’s compensation, approving or disapproving of major strategic decisions, and providing advice and counsel to the top managers.”
In their paper “Are Boards Designed to Fail? The Implausibility of Effective Board Monitoring,” published in the Academy of Management Annals, Boivie and his co-authors argue that boards are likely to be ineffective at regular monitoring of company executives because there are too many barriers.
“These barriers include the size and complexity of the firm, the number and difficulty of directors outside job demands, and group-level factors that impede effective functioning,” Boivie explains, adding that such barriers make it unrealistic to expect boards to effectively engage in ongoing monitoring.
The source of many of the problems is information. Directors are limited in their ability to monitor executives due to difficulties acquiring, processing and sharing adequate information, the authors assert. Directors from outside the organization often have time and attention limitations, along with limited access to company information. And, notes Boivie, directors may feel they don’t want to “rock the boat” by pointing out problems or challenging executives.
So are boards designed to fail?
“If we keep insisting that the true purpose of the board is regular monitoring of the CEO’s choices, then yes, boards are designed to fail,” says Boivie. “Even the most motivated and qualified directors will not be able to consistently watch over the CEO.”
And, he adds, any expectations otherwise are unfair. “If there are structural reasons why boards can’t do their jobs effectively, we should stop blaming individual directors for bad outcomes,” he notes. “We believe that most directors are good people who are trying their best. However, they are in a situation that makes it very unlikely that they can do exactly what shareholders want them to do.”
Then what are boards good for? “We can still count on the board to fire the CEO if the firm does very poorly. But outside of that, we think directors can provide useful strategic advice,” Boivie says. “Let’s focus on that as their primary role and not expect them to police executives.”
He notes that boards are only required to consider shareholders, so as far as looking out for consumer and employee best interest, “we think it is the role of legislation and the government to protect consumers and employees more so than the board.”
Boivie’s co-authors are Michael K. Bednar and Ruth V. Aguilera, College of Business at University of Illinois at Urbana-Champaign, and Joel L. Andrus, Texas A&M University.
Source: Texas A&M University