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Independence`s third dimension: innovation and value creation

November 23, 2013 Leave a comment

In the last decade, scholars have focused on agency relationship between board and managers, so that recommendations mostly addressed the composition or structure of the board, differently said, its independence, in order to enhance the oversight and monitoring role.

 

More recently, scholars or practitioners also argue that independence is key for a board to defend minority shareholder`s rights when there is a controlling shareholder; a board is also deemed to preserve a view on the shareholders`s long-term interests, so independence is necessary in order to fence-off short-termism`s attacks.

 

McCahery and Vermeulen tough focus on a third aspect of independence: its connection with innovation and value creation. In other words, formalities derived from both previously cited concerns, (agency costs and short-termism), somehow limit the understanding of boards. Thus, the third aspect: what characteristics of independence are more connected to skills and capacities that will take the firm to lead its market?

 

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What do boards need to do to effectively monitor managers?

November 7, 2013 Leave a comment

Nicola F. Sharpe recently published an article (1) in which he leads readers towards a more behavioral approach to the boards`decision-making processes and their monitoring activities.

According to him, law gives boards the power to manage the corporation, they then delegate the vast majority of functions to managers, and legislation reinforces from time to time the board`s control function. Nevertheless, the number of once solid firms filing for bankruptcy as a result of managers-only decisions is still large. But there is a widespread theoretical and legislative model where boards command the corporation, as previously said.

Both shareholder and board-centric theories advocate for authority being allocated to the Board, so that it performs a monitoring function. Still, managers control decision-making processes and relevant information. A reason may lie in the fact that authority has been granted in the form of board structure rules, not in the form of effective control of those processes.

 

 The author argues:

 

–         The managerial theory is a realistic description, and the dominance of independent directors leads boards to a much less effective monitoring function.

–         The access to information is the main channel boards may use to exercise their control function.

–         Without an effective decision-making process, (from now on D-M P) and an adequate organizational structure, boards lack the authority for the control and oversight function they are legally granted.

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