Home > Estructura del Consejo > Who Should have a chair in the Boardroom: Advisory Directors (III)

Who Should have a chair in the Boardroom: Advisory Directors (III)

On June 2011, Olubunmi Faleye, Rani Hoitash, and Udi Hoitash published an article in which they tried to assess whether the presence of advisory directors had an impact on the decision-making process, innovation, M&A decisions, and firm performance in general, (1) y (2).

The origin of their study is the fact that Corporate Governance, although connected to both “Monitoring and Advise”, is more often referred to as having to do with monitoring and oversight of managers. Regulation has also this focus, and careers are less affected by bad advise than by oversight failures.

Some CG writers have nonetheless noticed that such an excessive focus on monitoring damages the quality of advise, through a reduced trust on the Ceo, Holstrom (3), through the dislike of the Ceo, (Almeida, Adams and Ferreira, (4), or through worse acquisition and innovation practices, Faleye, Hoitash, and Hoitash, (5).

The authors try to understand if a board structure that allowed for some independent directors being deprived of monitoring functions and furnished with advising capabilities would enhance the firm performance. Apart from the reasons above, time availability could also add to this effect, the authors argue.

We will not lose time with the details of the empirical work but limit ourselves to the main conclusions. The first important thing is the way they define an Advisory Director. They are those involved in counseling the Ceo in new and risky initiatives. So they (authors say) should have expertise in strategic decision-making, (valuable to the Ceo), should be thought by the Ceo less like judges and more like objective evaluator of projects. They should have Ceo and entrepreneurial experience. They should also serve in a small number of boards, as they are expected to dedicate time and efforts to the task.

The first finding is this type of director exists in firms where the need for advise is higher: those in highly competitive industries, dependent of external resources, and perhaps with a large size.

The following finding refers to how the presence of advisory directors affects acquisitions, (as an example of operations in high need of good advise). Both acquisition returns and the time to complete the deal are better off when advisory directors have been hired.

Innovation needs managerial effort, firm-specific human capital and sometimes disruption in relations with other stakeholders. Authors show that the presence of advisory directors helps increase R&D investment and patent registrations.

After these preliminary results, the authors test their hypothesis that their proposed board increases firm value. They find a positive correlation, and also a correlation of firm value with the number and proportion of advisory directors.

Complexity of firms, – size, scope of operations, number of business and geographies and R&D intensity-, (as a proxy for its need for advise), strengthens the relationship between firm value and this type of board structure. In fact, only in complex firms the relationship is remarkable.

Finally, a powerful Ceo, (as a proxy for a reluctance to accept advise), strongly reduces the firm value enhancing effect of advisory directors.

As a final test, the authors find that the presence of advisory directors (as they have been defined) does not limit the effectiveness of oversight and monitoring by boards.

A clear recommendation for structuring boards with some advisory directors in complex firms, and for lowering the Ceo power, clearly stems from this research by Faleye, Hoitash and Hoitash.


(1)   Faleye, Olubunmi and Hoitash, Rani and Hoitash, Udi, Advisory Directors (February 14, 2013). Available at SSRN: http://ssrn.com/abstract=1866166 or http://dx.doi.org/10.2139/ssrn.1866166

(2)   The Harvard Law School Forum on Corporate Governance and Financial Regulation also included their post here, http://blogs.law.harvard.edu/corpgov/2011/07/22/advisory-directors/

(3)   Holmström, Bengt R., Pay Without Performance and the Managerial Power Hypothesis: A Comment. Available at SSRN: http://ssrn.com/abstract=899096 or http://dx.doi.org/10.2139/ssrn.899096

(4)   Adams, Renee B. and Ferreira, Daniel, A Theory of Friendly Boards. Journal of Finance, Forthcoming; ECGI – Finance Working Paper No. 100/2005. Available at SSRN: http://ssrn.com/abstract=866625 or http://dx.doi.org/10.2139/ssrn.453960

(5)   Faleye, Olubunmi and Hoitash, Rani and Hoitash, Udi, The Costs of Intense Board Monitoring (September 23, 2010). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: http://ssrn.com/abstract=1343364

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