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Intan, Emelyn BSAcT-3

Tayad, May Lousette
Financial Experts on the Board of irectors! "ood or #ad thin"$
In a corporation, there are "o%ernin" #odies &hich is called the Board of irectors' There
are some de#ates on &hat types of director fits the position, &hether he(she is a financial expert
or not' In the past years, there &ere accountin" issues and scandals on this matter, if it)s "ood or
not to ha%e a num#er of directors that is capa#le of analy*in" or ha%in" an expertise in the
financial field' Some says that ha%in" an understandin" of the financial statements and most
especially the "enerally accepted accountin" principles +,AA-. may lead to #etter "o%ernance
of the company interest especially to the shareholders +Lo%eTo/no& 0orp', 1o%em#er 2343.'
Financial expertise is one of the %ery important thin"s that a mem#er of #oard may possess'
Financial experts, ho&e%er, mi"ht affect firm policies #eyond more accurate disclosure
and #etter audit committee performance' irectors spend a si"nificant portion of their time
ad%isin" rather than monitorin" +Adams et al, May 25, 2336.' The ad%isory influence can #e
pro#lematic if directors are united &ith financial institutions and pursue the interests of those
institutions rather than maximi*in" shareholder %alue' 0onnection &ith financial institutions has
raised concerns in se%eral areas of financial intermediation, such as analyst recommendations
and I-7 allocations +Malmendier et al, 2336, p'86.' 1e%ertheless, recent re"ulatory efforts to
increase financial expertise on #oards do not pre%ent such conflicts' Accordin" to 9enner Bloc:,
as Sar#anes-7xley +S7;. enacts a %ery #road definition of financial expertise, #an:ers remain a
common type of financial expert on corporate #oards +9enner Bloc:, 9anuary 2333.'
In the corporate &orld, there are terms that a normal mem#er of the society doesn)t :no&
&hat they sym#oli*e, li:e &hat are financial experts and &hat it does' Accordin" to 9enner
Bloc:, financial experts are associated &ith policies that may create %alue for their financial
institutions, #ut not necessarily for shareholders +9enner Bloc:, 9anuary 2333.' In this case, if
there are financial expert on #oard, they may find &ays on ho& to "i%e %alue to shareholders
&ithout losin" the %alue of the institution' Financial experts may lessen the ris:s in ma:in"
The method used in this study is descripti%e analysis' escripti%e analysis is used to
descri#e the attri#utes of a system' A typical procedure is to first identify the attri#utes present,
and then rate these attri#utes' Ma"nitude estimation can #e used to correlate each of the
attri#ute<s relati%e contri#ution to the final system' 7ne &ay to achie%e this is to use preset or
a"reed upon conditions or terminolo"ies +=iley Blac:&ell, 2338.' This type of method aims to
summari*e data'
7ur results ans&er to the follo&in" ?uestions!
=hat are the attri#utes should a director ha%e to #e ?ualified as a financial expert$
The Securities and Exchan"e 0ommission issued a corrected final rule implementin"
Sar#anes-7xley Section 536, &hich re?uires a pu#lic company to disclose that it has at least one
@financial expert@ on its audit committee or, other&ise, to explain &hy it does not' Ander this
rule, the #oard of directors determines &hether or not the #oard should include a financial expert
as part of the #oard' Ander the rule, as adopted, to ?ualify as a financial expert the director must
ha%e +4. an understandin" of ,AA- and financial statementsB +2. the a#ility to assess the "eneral
application of such principles in connection &ith the accountin" for estimates, accruals and
reser%esB +3. experience preparin", auditin", analy*in" or e%aluatin" financial statements that
present a #readth and le%el of complexity of accountin" issues that are "enerally compara#le to
the #readth and complexity of issues that can reasona#ly #e expected to #e raised #y the
re"istrant<s financial statements, or experience acti%ely super%isin" one or more persons en"a"ed
in such acti%itiesB +5. an understandin" of internal controls and the procedures for financial
reportin" +Smart-ros Ltd, 9uly 2333.'
Co& can financial experts affect on the operations of the firm$
=e searched for the impact of all financial experts, #ut focus in particular on commercial
#an:ers, &ho can affect firms) access to capital' If firms are financially constrained due to lac: of
information, #an:ers may ena#le firms to finance additional %alue-creatin" proDects and decrease
the sensiti%ity of in%estment to internal funds' 7r, they may pro%ide loans, e%en &hen it is not in
the interest of shareholders' =hen commercial #an:ers enter the #oard of a firm, the firm
displays less in%estment-cash flo& sensiti%ity and o#tains lar"er loans' Moreo%er, lendin"
increases only for firms that are least financially constrained' These firms ha%e &orse in%estment
opportunities and lo&er profita#ility, e%en se%eral years after the loan' 0onstrained firms recei%e
no such assistance +Alri:e Malmendier, May 23, 2336.' =e also consider external in%estment,
such as mer"ers and ac?uisitions, and financin" &ith pu#lic securities' =e find that firms &ith
in%estment #an:ers on their #oards underta:e &orse ac?uisitions' In the fi%e days around
ta:eo%er #ids, such firms lose 4E more than firms &ithout in%estment #an:er directors' They
also lose si"nificantly more %alue o%er the three years follo&in" an ac?uisition' Firms &ith
in%estment #an:ers on their #oard are also associated &ith lar"er #ond issues, particularly if the
director)s #an: is in%ol%ed in the deal +Bura: ,Fner, ecem#er 2, 233G.'
Co& much influence does a finance expert can exert on ma:in" decisions to impro%e
firm policies$
Financial experts on #oards, therefore, exert si"nificant influence on corporate decisions,
#ut mainly in the interest of their financial institutions' The results challen"e common
explanations for addin" financial experts to #oards, such as facilitatin" more efficient access to
capital mar:ets or impro%in" compensation policy' 7ur results do not imply, ho&e%er, that
financial experts destroy shareholder %alue on net' Thou"h, companies may #enefit from
financial expertise on their #oard throu"h other opportunities +Alri:e Malmendier, May 23,
Financial experts are more :no&led"ea#le on &hich path the entity &ill #e ta:in"' They
can si"nificantly influence firm)s policies and ma:in" decisions' =e ha%e %ie&ed that the more
financial expertise on corporate #oards clearly impro%es firm policies' Financial experts are
associated &ith policies that may create %alue for their financial institutions, #ut not necessarily
for shareholders' 0ommercial #an:ers pro%idin" loans and financin" %alue-creatin" proDects
effects stron"ly depend on connection, that is, directors &hose #an: has a lendin" relationship
&ith the firm' These results su""est that #an:er directors are "uided #y creditors) interests rather
than shareholders) interests' Li:e commercial #an:ers, in%estment #an:ers also ha%e impact on
corporate decisions, #ut still not necessarily in the interest of shareholders'
Financial Experts on the Board of irectors! "ood or #ad thin"$
7n &hat &e ha%e searched and understood, if &e ta:e the side of the firm or the other
#oard mem#ers, it &ould #e a "ood thin" #ecause financial expert can impro%e the firm policies,
he can also ma:e decisions that are at lo&-ris:' The #ad thin" is if that finance expert is
connected to the creditors of the firm, &hich can cause of concernin" too much only on the
entity)s interest and set aside the shareholders) interest' 7n the part of the shareholders, it is a #ad
thin"' Shareholders can only &ait until &hen &ill #e the entity "ain profit' E%ery shareholder
&ants to recei%e "reater di%idends than the pre%ious he recei%ed'
=7>/I1, BIBLI7,>A-CH
Adams, Ferreira' Financial Expertise of irectors' May 25, 2336' emla#'#er:eley'edu'
Fe#ruary 4G, 2345
Almendier, Shanthi:umar and >euter' Financial Expertise of Board Mem#ers' Else%ier Science
B'I' 2336' -a"e 86'
Fich and Shi%dasani' Finance Experts' April 28, 233G' emla#'#er:eley'edu(Julri:e(-apers'
Fe#ruary 23, 2345'
9enner Bloc:' Financial Experts' 9anuary 2333' Denner'com(system(assets' Fe#ruary 4G, 2345'
Lo%eTo/no& 0orp' Financial Expert K In%estment and Finance efinition'
1o%em#er 2343' yourdictionary'com' Fe#ruary 4G, 2345
Smart-ros Ltd' SE0 0entral, The Financial Expert' 9uly 2333' accountin"'smartpros'com'
March L, 2345'
Alri:e Malmendier' Finance Experts on Boards' May 23, 2336' ' March L, 2345'
=iley Blac:&ell' escripti%e Analysis' 2338' ans&ers'com(topic' Fe#ruary 4G, 2345'