Public Company Boards Research Articles

Sex stereotyping in the boardroom

Purpose – This paper aims to review the latest management developments across the globe and pinpoint practical implications from cutting-edge research and case studies. Design/methodology/approach – This briefing is prepared by an independent writer who adds their own impartial comments and places the articles in context. Findings – The study’s findings reveal that the characteristics that impact the appointment of women as outside directors to public company boards differ from those of men. Relative to men, certain professions such as government relations and education improve the odds of appointment of women to corporate boards, while age lowers women’s odds. The number of network ties and the degree of network cohesion was also significant in predicting the likelihood of female board appointment to public corporations relative to men’s odds. The final model was able to predict female board membership correctly only in 28 per cent of the cases, while male board membership was predicted in 89 per cent of the cases, suggesting that factors other than human capital and professional networks (e.g. their gender) impact women’s appointment to corporate boards. Practical implications – The paper provides strategic insights and practical thinking that have influenced some of the world’s leading organizations. Originality/value – The briefing saves busy executives and researchers hours of reading time by selecting only the very best, most pertinent information and presenting it in a condensed and easy-to-digest format.

Ekonomiczne następstwa wprowadzenia parytetów płci w radach nadzorczych spółek publicznych

Economic implications of gender parity implementation in supervisory boards of public companies The purpose of the article is to present the economic aspects of the implementation of gender parity in public companies. The test method used involves the analysis of Polish and foreign source literature. The starting point for considerations are two European Commission documents: ’Strategy for equality between women and men 2010–2015’ and ’Green Paper – EU corporate governance framework,’ which commit public companies to implementing gender parity in the countries of the European Community. The article also quoted examples from outside the European Union. Furthermore, it presents a brief outline of the stages of the implementation of gender parity in the supervisory boards of European companies and attempts to show the wider context of the problem of equality between women and men in the labour market. The analysis of the issues of gender parity and the availability of supervisory board member positions in public companies also became a contribution to the consideration of the position and role of women in the modern economy.

Human capital and professional network effects on women’s odds of corporate board directorships

Purpose– The purpose of this study is to examine the importance of human capital and professional networks for women’s and men’s appointment to the boards of directors of public companies. The study provides an in-depth analysis of how human capital and professional networks contribute to women’s as compared with men’s odds of corporate board membership.Design/methodology/approach– The study analyzes the human capital and professional networks of 494 male and female corporate outside (non-executive) directors appointed between 2005 and 2010 to the boards of US public companies listed in the Standard & Poor’s 500 index. Human capital was measured as director age, education and professional experience (function and role). Professional network variables measured included composition of professional network, network centrality, constraint and cohesion.Findings– The study’s findings reveal that the characteristics that impact the appointment of women as outside directors to public company boards differ from those of men. Relative to men, certain professions such as government relations and education improve the odds of appointment of women to corporate boards, while age lowers women’s odds. The number of network ties and the degree of network cohesion were also significant in predicting the likelihood of female board appointment to public corporations relative to men’s odds. The final model was able to predict female board membership correctly only in 28 per cent of the cases, while male board membership was predicted in 89 per cent of the cases, suggesting that factors other than human capital and professional networks (e.g. their gender) impact women’s appointment to corporate boards.Originality/value– To the authors ' knowledge, this study is the first to comprehensively examine the professional network components of female and male directors along with their human capital in the analysis of their prospects for board appointment. The conceptualization of professional networks as well the depth of quantitative analysis of the network components of the study advance the extant literature on the composition of corporate boards.

What Do Compensation Committees on the Boards of Public Companies Do? Comparisons of Indian and U.S. Process Differences Juxtaposing Complementary Theoretical Lenses

This study examined the processes undertaken by compensation committees (CCs) on Indian public company boards building on the CC process study of U.S. public company boards reported in Hermanson et al. (2012). The Indian data reported here were gathered through scripted, in-depth, semi-structured interviews of 21 Indian directors (17 CC members, two Management Committee members and two directors, all of whom dealt with compensation matters on their boards). In keeping with agency theory predicates, Indian CC processes were designed to safeguard the independence, knowledge and expertise of CC members, while ensuring they had access to the resources needed to make sound and informed decisions. Compensation principles emphasized paying for performance, ensuring a proper mix of compensation, benchmarking to market practices and retaining good talent. There were some process differences among Indian organizational archetypes like family businesses, public sector firms, multinational subsidiaries (MNCs) and promoter-controlled firms, suggestive of neo-institutional theory influences. Notable differences from U.S. CC practices were that Indian CC practices were less formal, and directors were seen to be more partners of management playing broader roles extending beyond traditional agency-theory-driven fiduciary responsibilities. Some of these differences could portend the existence of secondary (principal-principal) agency problems. There were other process differences from U.S. practices, arising from institutional and cultural variations. In particular, institutional frameworks and statutory limits appeared to circumscribe the Indian CCs' role, enabling greater managerial oversight of CC processes and engendering a more collectivist ethos among CCs in India. CC practices in the Indian context also lead us to discern some elements of an underlying tension between agency theory and institutional theory. These underlying tensions are further compounded by firm ownership differences (family, business group, MNC subsidiary, government owners, majority control, etc.). This is where we argue that neo-institutional influences based on ownership structure differences manifest themselves. To the best of our knowledge, our study represents a pioneering attempt at depicting these latent tensions between agency and institutional theory, and in teasing out how neo-institutional influences impact CC practices, thereby furthering our understanding of these phenomena. Cumulatively, these findings provide important directions for advancing theory, and enabling a more grounded and holistic understanding of CC processes. Since CCs were not mandatory for Indian public companies at the time this study was conducted, requiring CCs on all Indian company boards (as the revised 2013 Indian Companies Act has mandated ) would provide an added fillip to legitimizing and formalizing the role of this committee. However, because of the existing differences in the institutional and socio-cultural contexts, it is unlikely that CC processes across the Indian and U.S. company boards will converge and become completely uniform or homogeneous.

Of Babies and Bathwater: Deterring Frivolous Stockholder Suits Without Closing the Courthouse Doors to Legitimate Claims

The Delaware Supreme Court’s May 8, 2014 Opinion in ATP Tour marked a sudden and potentially transformative moment in the relationship among corporate boards, their stockholders, and the Delaware legal system. This article observes that failure to legislatively override the ATP precedent is likely to eliminate all but the most unusual types of stockholder litigation. The authors juxtapose the evolution of the pertinent jurisprudence with the backdrop of an increase in the volume of deal-related stockholder litigation. Notably, on March 6, 2015, the Delaware Corporation Law Council proposed a recommended amendment to the DGCL to legislatively overrule ATP, to the extent it would apply to public companies. The Council’s proposal is generally consistent with the core conclusion of this article, which consolidates the legal and policy reasons for Delaware legislators and pertinent commentators to support the proposal.The article asserts that the “nuclear option” of allowing boards of public companies to employ fee-shifting bylaws against stockholders whose interests they are supposed to represent is poor policy and departs from well-established legal principles. Moreover, such a draconian use of corporate power is not needed to curtail the problem of frivolous lawsuits that achieve no material benefit for stockholders while providing corporate defendants with broad releases. In opposing fee-shifting bylaws, the authors provide legal and policy reasons not to permit bylaws or charter provisions to be used to impede fundamental stockholder rights, including the right to enforce fiduciary duties through litigation. Furthermore, the authors propose an alternative to fee shifting to reduce the number of cases that provide no material benefit to stockholders and put a strain on corporations and the judiciary.

AUDIT COMMITTEES IN STRUCTURES SUPERVISORY BOARD - SEVERAL YEARS EXPERIENCE

The article examines the current state of functioning of audit committees within the framework of the supervisory boards of public companies, so companies that are statutorily obliged to create such committees. According to research presented in the article, only about 40% public companies formed audit committees. The remaining 60% of the entities have benefited from their capabilities to set when the board of directors consists of not more than five members - they are called small boards. In such a situation, the entire board of directors takes over the duties and responsibilities of the audit committee. According to the author of this paper, audit committees in Poland are unnecessary. The very fact that they have no decision-making powers, but only advisory and consultative causes are seen as unnecessary, and their activity does not bring any added value.It should also be emphasized that a legal duty has been the establishment of audit committees in Poland imposed by EU legislation, which causes further their duration is inevitable.

Diversity on Boards

Examinations of public company board composition have focused on the absence of women but rarely on the absence of visible minorities. Given an increasingly diverse domestic population and increased participation of second-generation immigrants in the professional cadre, we think that board diversity, and in particular visible minority directors (VMDs), warrants academic attention. Accordingly, in this study, we examine both women and VMDs on boards of firms listed on the Toronto Stock Exchange as well as in graduating classes of director education programs in Canada. Our preliminary analysis indicates that visible minorities represent less than 5 percent of the population in both cohorts while the percentage of women is much higher. By contrast, white women comprise 25 percent of DEP graduates and 14 percent of public company boards. We note the much lower representation of visible minorities relative to both white women and white men on corporate boards. We also examine the types of firms that are more likely to place visible minorities and women on their boards, noting that firms in certain industries such as mining and oil and gas have been historically less likely to have diverse boards.

The Growing Executive Compensation Advantage of Private Versus Public Companies

Private companies have a natural governance advantage over public companies—one that stems mainly from the presence on their boards of their largest owners. This governance advantage is reflected in the greater effectiveness of private company executive pay plans in balancing the goals of management retention and incentive alignment against cost. Private company investor‐directors are more likely to make these tradeoffs efficiently because they have both a much stronger interest in outcomes than public company directors and more company‐specific knowledge than public company investors.Furthermore, private company boards do not have to contend with the external scrutiny of CEO pay and the growing number of constraints on compensation that are now faced by the directors of public companies. Such constraints focus almost entirely on one dimension of compensation governance—cost—in the belief that such constraints are required to limit the ability of directors to overpay their CEOs.In practice, any element of compensation can serve to improve retention or alignment, as well as being potentially costly to shareholders. Furthermore, any proscribed compensation element can be “worked around” by plan designers, provided the company is willing to deal with the complexity. For this reason, rules intended to deter excessive CEO pay are now effectively forcing even well‐intentioned public company boards to adopt suboptimal or overly complex compensation plans, while doing little to prevent “captured” boards from overpaying CEOs. As a result, it is increasingly difficult for public companies to put in place the kinds of simple, powerful, and efficient incentive plans that are typically seen at private companies—plans that often feature bonuses funded by an uncapped share of profit growth, or upfront “mega‐grants” of stock options with service‐based vesting.

Forty proposals to strengthen: The public company Board of Director’s role in value creation; management accountability to the Board; and Board accountability to shareholders

The following provides recommendations for public company Board reform to focus on value creation; to increase independence from company management; and to increase Board effectiveness and accountability to shareholders, for discussion and feedback purposes. The author is grateful to Henry D. Wolfe for his review of this article, to James E. Nevels for his discussion on the concept of ‘Office of the Chairman’ and for feedback provided by the author’s LinkedIn group ‘Boards and Advisors’.

Positive and negative synergies between the CEO's and the corporate board's human and social capital: A study of biotechnology firms

This paper contributes to the corporate governance literature by developing and testing theory regarding positive and negative synergies between the CEO's and the board's human and social capital. Using a sample of 360 biotechnology firms that went public between 1995 and 2010, we demonstrate that accumulated public company board experiences of the CEO and the board have positive synergistic effects on IPO performance whereas the current board appointments have negative effects. While scientific educational backgrounds have positive synergies, industry-specific experiences produce either positive or counterproductive effects depending on the age and profitability of the firm. Thus, our paper contributes to the corporate governance and human and social capital literatures by describing the costs and benefits of specific types and combinations of CEO and board capital. Copyright © 2013 John Wiley & Sons, Ltd.

Convergence of corporate governance and corporate social responsibility

There is growing convergence of corporate governance and corporate social responsibility due to increasing business performance pressures and escalating stakeholder expectations of the firm and board of directors. This union encourages director influence on the firm’s CSR agenda through stakeholder engagement, active participation in strategy, board-management relationships, and integrated financial, operational, and sustainability performance reporting. This study considers the experience of seven US public company boards to determine factors that may advance board involvement and impact in corporate social responsibility.

The Impact of the Enactment of the Sarbanes Oxley Act in the United States, 2002 on the Improvement of Corporate Finance and Good Governance Behavior

The massive corporate failure in the United States of America (U.S.) in the 1990s and early 2000s as epitomized by the fall of Enron, Worldcom among others resulted in myriad lawsuits and erosion of shareholders wealth. The governance of public companies was brought to question. The politicians were under pressure to provide leadership to the mess that is corporate failure. The house and U.S. senate passed into law new legislation that set the pace for new corporate governance in the U.S. The Sarbanes–Oxley Act of 2002 (Pub.L. 107-204, 116 Stat. 745, enacted July 30, 2002), also known as the 'Public Company Accounting Reform and Investor Protection Act' (in the Senate) and 'Corporate and Auditing Accountability and Responsibility Act' (in the House), or by ‘SOX’ generally, established new requirements for public company corporate boards, officers, and auditors. This Act included criminal penalties and directed the Securities and Exchange Commission (SEC) to oversee its implementation. John Nugent (n.d) observes: 'Subsequent to the enactment of SOX, we have witnessed the financial implosion of the 2007 to 2010 period where firms such as Lehman Brothers, Bear Sterns, AIG and others have been involved in one way or another in the collapse of the mortgage markets through acts deemed improper and/or imprudent. So the mere passage of a statute does not appear to serve as a remedy for bad human behavior.' This observation brings to fore an important question: Did the enactment of the Sarbanes Oxley Act in the Unites States in 2002 improve corporate finance or good governance behavior? In an attempt to answer this question, the paper reviews literature and empirical evidence on this subject matter. A section of the literature faults the enactment of SOX for not improving good governance behavior. We have witnessed in the post SOX era, the collapse of financial institutions such as Lehman Brothers and others through acts that are considered improper. Romano (2004) criticizes the process of enacting SOX. She believes it was done in haste without backing of empirical research. She also questions the requirement by SOX calling for a completely independent audit committee; she reckons that this should optional since it is sub-optimal. Cohen et al. believe that because of the liability requirements associated with Section 304 of SOX, executives now bear risk formerly born by investors. This may impact negatively on the value of the company since the executives will act risk averse and as such unable to invest. On the other hand, there was some evidence supporting SOX in its quest to improve governance behavior. Agrawal and Chadha (2005) findings support one of the principal requirements of SOX, which is the inclusion of an independent financial expert on public company audit committees. Increasingly, companies are taking congnisance of the governance rating and are striving to achieve high scores. Uzen et al. (2004) find that enhanced corporate governance, increased board independence, and independent financial expertise on the board increases the effectiveness of board monitoring as reflected by fewer shocks; accounting restatements and instances of fraud. The evidence from literature is inconclusive and therefore further research should be done in order to gain sufficient evidence to answer the question whether SOX has led to improved corporate governance.

'Financial Expert': A Subtle Blow to the Pool and Current Pipeline of Women on Corporate Boards

Governmental laws and regulations play critical roles and have impacting influences and consequences on corporations and their management and stakeholders as well as the public at large. Sometimes legislative initiatives and administrative actions have detrimental effects on groups of persons, which impacts may or may not be the intended consequences of the governmental protectionism. In the wake of the corporate scandals of the early 2000s, including Enron, WorldCom and Tyco International (the “Enron-type Scandals”), the President of the United States of America signed into law a bi-partisan initiative called the Sarbanes-Oxley Act of 2002 (“SOX”) in an attempt to restore investor confidence in the U.S. securities market following devastating corporate scandals that rocked the investment community and depleted worker savings. Section 407 is part of SOX (the “Expert Law”), which, in short, required the Securities and Exchange Commission (the “SEC”) to promulgate rules obligating certain security issuers to disclose if the applicable organization’s audit committee has at least one person who is a financial expert (as the term would be defined specifically by the SEC) and if no such person, the reason of such absence. The SEC met its regulatory obligation with Section 229.407(d)(5) of the Code of Federal Regulations (Item 407) (the “Expert Regulation”). However, the title and definition for the audit committee expert contain a gender bias and have negative inadvertent consequences against women on public company boards of directors. In this Article, “Financial Expert”: A Subtle Blow to the Pool and Current Pipeline of Women on Corporate Boards (this “Article”), the author addresses this bias and its negative inadvertent consequences and provides proposals that may curtail such bias and consequences, while achieving the goal of investor and public protection.

Political Intervention, Corporate Governance and Firm Performance: An Empirical Investigation in Japan and Taiwan

This paper investigates the interaction of government and financial institutions in the operation of a company through the relationship of the main bank system and the system of amakudari (appointing retired bureaucrats to the boards of public companies). Consistent with resource dependency theory, the empirical results suggest that governments and financial institutions tend to appoint representatives to the board in order to help troubled companies. However, a negative relationship is established between the presence of such amakudari and subsequent firm performance. Thus, while the system of amakudari may use its influence in an attempt to save troubled companies, it is possible that, as suggested by agency theory, the monitoring ability of the board may consequently be jeopardized to the detriment of overall firm performance.

Strategic Performance Information and Canadian Board Involvement in Strategy Related Issues: A Field Study

This study contributes to the growing body of research examining the governance processes undertaken by Boards of public companies. Specifically, we investigate the Board’s role in developing, executing and monitoring strategy and the nature and extent of strategic performance information provided to Boards. We also examine directors’ perceptions of indicators of effective Board involvement in strategy-related issues. Despite calls for greater Board involvement in strategy, few studies have examined this issue in a Canadian setting. To address this gap in the literature, we conducted 18 field interviews with directors (n = 14) of Canadian public companies and other governance experts (e.g., former directors, consultants). Our findings indicate Boards are commonly involved in monitoring strategy but there is more variation regarding the extent to which they also play an advisory role in developing and executing strategy. We also find that while Boards typically receive key performance indicators (financial and non-financial) there is limited provision of more strategy-based performance information such as balanced scorecards. Finally, our interviewees indicated that indicators of effective Board involvement in strategy should focus on process measures (e.g., nature and extent of strategy discussions) rather than objective outcomes such as financial performance. Our descriptive, field-based evidence provides a better understanding of Canadian Board involvement in strategy-related issues and suggests important areas for future empirical research.

All on Board! Strategies for Constructing Diverse Boards of Directors

A global business convergence exists, making international business easier and more mainstream. Over the last decade, social activists, academics, government agencies, shareholder groups, and other investors have argued for greater in U.S. businesses, including making public company boards of directors more heterogeneous. Such heterogeneity may be based on education, experience, background, class, gender, race, or ethnicity, each of which can be categorized as either a Modifiable Attribute or a Non-Modifiable Attribute. This Article argues that diversity is necessary for U.S. public companies to remain competitive in the borderless global marketplace and that the U.S. should be the leader in and model for implementing true board diversity. Lastly, this Article presents practical solutions for creating diverse boards of directors.

Essay: Neutralizing the Board of Directors and the Impact on Diversity

Boards of public companies are not diverse. As this piece explains, the lack of diversity can be traced to a rational strategy by management of neutralizing the board in order to reduce the risk of intervention in corporate affairs. Neutralization in part involves the designation of directors who will “reliably” support the policies of management. At one time, reliability was assured through the appointment of officers and other persons with significant economic ties to the company. With the rush toward board independence, however, these types of “reliable” directors have largely been eliminated. Instead, they have been replaced by other categories that meet both the porous definition of director independence and the criteria for reliability. These categories include friends of management and current or former executive officers, particularly other CEOs. The need for “reliable” directors explains the lack of board diversity. Directors are not chosen for their unique perspectives or diverse backgrounds but for their predictability in supporting management. The absence of diversity, in turn, largely prevents boards from assuming any meaningful advisory role. Providing managers with effective advice requires directors who are informed and who possess diverse viewpoints. Both are inconsistent with the goal of neutralization. Boards have the authority to impose an advisory function on management. An advisory function will only be effective, however, if accompanied by structural reforms to the board. In particular, this requires changes in the selection criteria for directors. To ensure the effectiveness of any advice provided, directors must be informed and diverse. Diversity encompasses gender and race, two categories heavily represented among consumers but not among directors. It also includes persons with views and backgrounds at variance with management. Diversity, therefore, must replace reliability as the most important criteria for board membership. The impact of neutralization on diversity likely explains a conundrum with respect to board membership. Data has not consistently shown that racial or gender diversity on the board improves performance. These studies, however, examine diversity in the context of monitoring boards that do not exercise a meaningful advisory function. Diversity will be the most valuable for boards performing a meaningful advisory function. Until the function becomes mandatory, therefore, diversity is likely to have reduced impact on performance.

Audit committee effectiveness: Perceptions of public company audit committee members post-SOX

Effective audit committees provide numerous public benefits including better financial reporting and reduced corporate fraud. Prior to the passage of the Sarbanes–Oxley Act (SOX), research identified specific features of audit committee effectiveness, many of which were subsequently included in SOX Sections 301 and 407 regulations on audit committees. Using survey methodology, this study examines the extent to which public company audit committee members believe these effectiveness features are operating within their committees today. Eighty public company audit committee members from a variety of industries completed a survey and indicated that overall, features of effective audit committees are present. A number of areas for potential improvement were noted. By soliciting post-SOX information about audit committee effectiveness from a difficult to access subject pool, our study provides researchers, educators, public company management, and public company boards of directors with an updated understanding of the current state of public audit committee effectiveness. Results from this study can inform policy makers as they consider the adequacy of current regulations for audit committees.

Who Sits on Texas Corporate Boards? Texas Corporate Directors: Who They are & What They Do

Corporate directors play an important role in governing American business, in the capital formation process, and are key to the stewardship of economic growth. Texas businesses play a disproportionately important role among the states in aggregate U.S. job creation, responsible for 37% of all net new American jobs since the post 2008-2009 recovery began. It is the job of the board of directors to govern the corporation. The duties and responsibilities of a corporate director include: the duty of care; duty of loyalty; and duty of good faith. This paper results from the author’s previously assembled biographical data for most of the approximately 20,000 for-profit corporate directors serving on the boards of Texas companies. Corporate directors are among the most influential and affluent individuals in our society. Many present or former chief executive officers are sought to serve on corporate boards due to their expertise and experience overseeing corporations. The average age of Texas directors of for-profit entities is fifty-seven years old; and only about six percent of corporate directors in Texas are women. Texas corporate directors are highly educated: over ninety-nine percent are college graduates: eighty percent hold advanced college degrees; twenty-eight percent have law degrees; and twenty percent of Texas corporate directors hold an MBA degree. Most Texas corporate directors serve the banking and finance sector (thirty-nine percent), next largest is the energy sector (at eighteen percent), and technology companies account for nine percent. Most boards look to recruit someone who understands their business and former CEOs are preferable. Every public company board of directors must now have an audit committee comprised of entirely independent directors, and each publicly-traded company is required to have at least one qualified “financial expert” on its audit committee. Therefore, public company auditing experience, along with a growing recognition that every board needs expertise to govern the enterprises’ information technology - have become “must have” skills represented on every board.

Audit Committee Effectiveness: Perceptions of Public Company Audit Committee Members Post-SOX

Effective audit committees provide numerous public benefits including better financial reporting and reduced corporate fraud. Prior to the passage of the Sarbanes-Oxley Act (SOX), research identified specific features of audit committee effectiveness, many of which were subsequently included in SOX Sections 301 and 407 regulations on audit committees. Using survey methodology, this study examines the extent to which public company audit committee members believe these effectiveness features are operating within their committees today. Eighty public company audit committee members from a variety of industries completed a survey and indicated that overall, features of effective audit committees are present. A number of areas for potential improvement were noted. By soliciting post-SOX information about audit committee effectiveness from a difficult to access subject pool, our study provides researchers, educators, public company management and public company boards of directors with an updated understanding of the current state of public audit committee effectiveness. Results from this study can inform policy makers as they consider the adequacy of current regulations for audit committees.