Course : MGMT6464005 - Corporate

Governance
Effective Period: September 2024

Board of Directors:
Selection, Compensation,
and Removal
Thank you
 Acknowledgement

These slides have been adapted from:

Larcker, D., & Tayan, B. (2016). Corporate

Governance Matters: A Closer Look at
Organizational Choices and Their Consequences.
2nd Edition. Pearson FT Press.

Chapter 4
After This session
• Learning Outcome
After studying this chapter, the students should be able to :
• LO 1 : Define Corporate Governance
• LO 2 : Basic Concept Corporate Governance
• LO 3: Review the major Corporate Governance science
disciplines t
 Market for Directors

• The typical board consists of a mix of professionals with

managerial, functional, and other specialized backgrounds.
Approximately half of newly elected directors have current
or former experience as senior management (CEO, president,
COO, chairman, or vice chairman). Twenty percent have
experience in an operational or other functional position. The
rest come from diverse backgrounds, including finance,
consulting, law, academia, and nonprofits.
Market for Directors
Market for Directors
 Market for Directors
• Companies look for a diverse mix of personal and professional
backgrounds beyond these qualifications. According to Spencer Stuart,
directors most in demand as board candidates are those with ethnically
diverse backgrounds (56 percent) and women (54 percent). Highly
sought after professional qualifications include financial, international,
risk management, information technology, marketing, regulatory, and
digital or social media experience. Because of the critical role that
board members play in the governance process, the quality of
individuals who are elected to the board should have a direct
correlation with the quality of advice and oversight the board provides
to management.
 Market for Directors

• Four specialized types of directors:

– Active CEOs,
– International experience,
– Specialized knowledge, and
– Diverse directors.
 Disclosure Requirements for Director
Qualifications

• Companies must now disclose the specific experience, qualifications,

and attributes that make an individual qualified to serve as a director.
Companies must also disclose directorships that the individual held
during the previous 5 years (instead of only current directorships),
legal proceedings involving the director during the previous 10 years,
and disciplinary sanctions imposed by regulatory bodies.
 Director Recruitment Process

• The director recruitment process differs from the recruitment process

for senior executives in two key manners:
– More informal and reliant upon professional networks.
– The sequence of steps differs.
 Direction Compensation

• Directors require compensation for the time, responsibility, and expense of serving
as directors. Recruiters suggest that most directors would be unwilling to do this
work on a pro bono basis. (Directors at nonprofits is one exception.)
• Investors should remember that directors are not managers and that their
compensation mix should be consistent with their serving an advisory and oversight
function (see the following sidebar).
 Direction Compensation

• Many companies require that directors maintain personal ownership

positions in the company’s common stock during their tenure on the
board (ownership guidelines). Such a requirement is intended to align
the interests of directors with those of the common shareholders they
represent, thereby giving directors an incentive to monitor
management. For somewhat obvious reasons, shareholders (and
governance experts) look favorably upon companies whose directors
own stock.
 Direction Compensation

• A board evaluation is the process by which the entire board, its

committees, or individual directors are evaluated for their effectiveness
in carrying out their stated responsibilities. The concept of a board
evaluation was among the key recommendations of the Higgs Report,
which stated that “every board should continually examine ways to
improve its effectiveness” and remains a recommendation of the U.K.
 Direction Compensation

• Evaluations can address a variety of topics, including these:

– Composition
– Accountability
– Information
– Meetings
– Relations
 Removal of Directors

• For a variety of reasons, a director might want to leave a corporate

board. These reasons can be benign or more. Similarly, the company
might have either benign or troublesome reasons for wanting to replace
a director. The company could decide that, after many years of service,
it is time to find a new director who can look at strategy and operations
from a different perspective. Or the company might feel that a
particular director is negligent in his or her services and is therefore
unfit to oversee the organization.
 References

Larcker, D., & Tayan, B. (2016). Corporate Governance

Matters: A Closer Look at Organizational Choices
and Their Consequences. 2nd Edition. Pearson FT
Press.