Home > Estructura del Consejo > Networks, personal agendas and Boards´ effectiveness

Networks, personal agendas and Boards´ effectiveness

Mathilde Ravanel wonders in his 2013 paper “Networks on boards: a survey of the literature” (1) whether directors own interests may affect their effort in favor of the shareholders´interests. Do boards really exert an effective oversight over managers`actions?

 She revises the literature on the matter, and explains her views on the main topics tackled by the main authors. Jensen and Meckling (1976) Fama (1980) Fama and Jensen (1983) (2) deal with the Agency Theory problem, arguing that proper incentive designs could help directors to exert the necessary oversight over managers. And in particular, taking the nomination power out of the hands of the Ceo (introducing independence) appears to be a necessary condition.

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She revises then the empirical literature and acknowledges the lack of consensus on the effectiveness of independence and its effect on performance. And diversity as a proxy for independence doesn`t show better results either.

 Mathilde Ravanel then notices the relevance that part of the Corporate Governance literature assigns to the complexity of board dynamics; friendly rather than strict monitoring boards better succeed in obtaining information from managers, according to Adams and Ferreira (2007), (3). And the alternative function of a board (counseling or advising) is better accomplished this way.

 Given this complexity, peer relations and social ties become relevant as reputation mechanisms (fostering directors`s efficiency and firm performance), thus reducing the independence strength.

 Studies on lobbyists show how they change their interest on topics when their political connections change responsibilities. And connections are outstanding also in the corporate world. No only political ones, but also educational networks, and other. Broadly speaking social connections offer more power and opportunities. And also connections inside and outside the board. The first ones could eventually dampen true independence and monitoring. And studies show that social ties have a big say in directors recruitment. Interlocking is one of the effects, (Ceo A sitting in B`s board and viceversa). Busy directors (serving in many boards) offer similar performance measures to insider dominated boards, which could be seen as a negative effect of social ties on effectiveness.

 The author then analyzes the literature on information aggregation and strategic voting in committtees or boards, starting with Condorcet`s “Essay on the Application of Analysis to the Probability of Majority Decisions”, (1785), which states that a majority always serves better results provided the voters` sincerity. The problem relies in the fact that, sincerity does not constitute a Nash equilibrium, and so “herding” appears, (Austen-Smith and Banks 1996), (4).

 The particularity in boards remains in that voting is not sequential. Levy (2007) (5) introduces the idea that directors vote trying to show they have private information on the topic, thus avoiding herding. But he doesn`t consider the cost of dissent when the Ceo has certain power to control nominations. The cost of dissent generates some features in the board`s dynamics: communication among directors previously to the vote, but also passivity, or conformity.

 The two explanations for a disconnect between formal independence and firm performance, (social ties and the desire to conform) can be linked, as boards which are socially tied tend to conform and build consensus.

  1. Ravanel, Mathilde, Networks on Boards: A Survey of the Literature (December 18, 2013). Available at SSRN: http://ssrn.com/abstract=2690762 or http://dx.doi.org/10.2139/ssrn.2690762
  2.  Jensen, Michael C. and Meckling, William H., Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure (July 1, 1976). Michael C. Jensen, A THEORY OF THE FIRM: GOVERNANCE, RESIDUAL CLAIMS AND ORGANIZATIONAL FORMS, Harvard University Press, December 2000; Journal of Financial Economics (JFE), Vol. 3, No. 4, 1976. Available at SSRN: http://ssrn.com/abstract=94043 or http://dx.doi.org/10.2139/ssrn.94043 , Fama (1980) in http://www.jstor.org/stable/1837292?seq=1#page_scan_tab_contents, and Fama, Eugene F. and Jensen, Michael C., Separation of Ownership and Control. Michael C. Jensen, FOUNDATIONS OF ORGANIZATIONAL STRATEGY, Harvard University Press, 1998, and Journal of Law and Economics, Vol. 26, June 1983. Available at SSRN: http://ssrn.com/abstract=94034 or http://dx.doi.org/10.2139/ssrn.94034
  3.  Adams, Renée B. and Ferreira, Daniel, “Gender Diversity in the Boardroom” (November 2004). ECGI – Finance Working Paper No. 57/2004. http://ssrn.com/abstract=594506
  4.  http://www.jstor.org/stable/2082796?seq=1#page_scan_tab_contents
  5.  https://www.aeaweb.org/annual_mtg_papers/2007/0106_1015_1602.pdf


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