THE CHANGING

FACE OF
CORPORATE
BOARDS
EDWARD E. LAWLER III AND DAVID L.
FINEGOLD

PRESENTED BY –

GROUP 20
NIHARIKA GAIKWAD (2002142)
NITIN NIRANJAN (2002146)
RAJDEEP PODDAR (2002171)
RAHUL VERMA (2002168)
RACHIT KHANDELWAL (2002167)
 BOARDS IN THE UNITED STATES ARE UNDERGOING REFORMS IN LEADERSHIP, MEMBERSHIP AND
PERFORMANCE EVALUATION. BUT ARE ALL THE CHANGES FOR THE BETTER?

About the Research:

Introduction of significant
reforms in the rules • A study was conducted that compared the board practices and effectiveness of Fortune 1000
governing Boards companies in 1998 versus 2003 in US.
in the US :
• Sarbanes-Oxley Act of • Longitudinal survey data was collected from the board members focusing on the issues of
2002 – By the US board leadership, board membership and performance evaluation processes.
Congress
• New York Stock • In 1998 study, slightly more than 1,000 board members responded as compared to 324
Exchange & NASDAQ responses in 2003. Lower response rate likely reflecting the growing workload for directors
adopted new listing and the greater number of other surveys being conducted of board members.
requirements
• U.S. Securities and • A five-point scale from “very ineffective” to “very effective” was used by the board members
Exchange Commission to evaluate the overall performance of their boards in three major areas: financial monitoring,
proposed new reforms strategic effectiveness and compliance effectiveness.
for outside shareholders
• The overall results of the research provide valuable insights into which practices tend to lead
to greater board effectiveness.
BOARD LEADERSHIP
Experts agree that boards should have clearly developed governance standards.
However, there's little consensus about the chair being an executive or not.

Types of Board
Perceived Benefits of Non-Executive Chair:
Leadership
 Such a person can provide the board with independent leadership and prevent any
one individual from having too much power. • CEO as the
 Enhances the board’s ability to evaluate managerial performance, to choose a new Chairman (Mostly followed
CEO when necessary and to lead in the event of a crisis. in The US Companies)
Research Stats (on fortune 1000 companies) • Non-Executive
 64% companies had formal governance guidelines in 1998 rising to 87% in 2003 Chairman (Followed mostly
in the UK and other
 6% of companies had non-executive chain in 1998, doubling to 16% by 2003
countries)
 25% of companies had presiding directors in 1998, and by 2003 it came upto 50%
• Lead or Presiding Director :
Findings of study on relationship to Board Effectiveness an independent board
 Only adoption of formal corporate governance guidelines was significantly related to member (an alternative
board effectiveness. No significant relation was found with non-executive practice to non-executive
chairmanship. chair)
LIMITS ON BOARD MEMBERSHIP

Increasing Workload: With increasing workload, individuals

wont be able to devote sufficient time to perform effectively.

Power centricity: Small number of people holding multiple

board seats will govern large US corporations, losing
objectivity & independence.

Loss of objectivity: Remaining for long tenures makes

individuals too close to senior management and tends to
become comfortable with status quo.

Decreasing performance: Working without a mandatory

retirement age, the performance ability will decrease for aged Argument: CEOs and directors serving numerous companies
individuals will limit their time devotion

Counter-argument: CEOs and directors serving numerous

Effect of limitations:
❖ Turnover among directors will increase. companies will gain valuable experience
❖ Total number of individuals on US corporate boards will
increase Several outside boards could easily have an overall negative
❖ Board members having more time to spend for each impact as the time demands outweigh the learning
opportunities.
company
PERFORMANCE EVALUATIONS
I mportance of performance evaluation comes from the fact that many boards fail to operate
effectively, and lack emphasis on evaluating themselves and the top management
Need for evaluating:
• To check
Evaluation Methods:
performance of
• Self-Evaluation
the CEO
• Written Feedback
• To understand
• Feedback to the entire Board
weaknesses of
To conduct feedbacks companies, hire external consultants who interview every member
board themselves
of the board as well as the CEO and provide feedbacks
and adjusting
them
What results suggest?
• To evaluate the
• The routine conduct of CEO evaluations was not, related to overall board performance.
performance of
This can be attributed to the fact that evaluating CEOs is one of many jobs of the Board.
every board
Hence its impact on low Board performance might be plausible.
member
• Boards that did conduct CEO evaluations were rated more highly on their strategic
individually
performance, these boards used performance reviews to hold CEOs accountable for
strategic goals and outcomes. Thus, such evaluations helped to ensure that strategic
decisions were translated into action.