Archive for the ‘Estructura del Consejo’ Category

Controlled Companies and Independent Directors

Lucien Bebchuk and Assaf Hamdani have recently published an article, (1) in which they present an alternative to current director elections so that true independence is assured, in particular at controlled companies, where beyond the fact that Nomination Committees are responsible for the selection, controller shareholders usually de facto fully control the procedures so that independence does no actually happen, (as it may be thought to be the case at widely held companies).

Enhanced Independence (as they call it) may emerge if directors are held accountable by public investors; Bebchuk and Hamdani think that not only controller shareholders are to be dispossessed of their complete influence in the nomination process, but that some influence must be granted to public investors, at least regarding some of the independent directors. Their influence can be executed in appointment, reelection and termination decisions.

Bebchuk and Hamdani state that even with director nomination restricted to Nomination Committees populated only with independent directors, controller shareholders have a big say in the process. Independent directors cannot be elected or reelected without their decisive voting rights as shareholders, and also find it difficult to remain when controlling shareholders leave the company. Apart from the social gratitude stemming from having been elected, directors very often suffer the direct or indirect, explicit or not pressure from controller shareholders regarding decisions that affect them and value, particularly related-party transactions. Read more…


The Volkswagen case and its corporate governance roots.

March 6, 2016 1 comment

Charles M. Elson, Craig K. Ferrere and Nicholas J. Goossen recently published a short article (1) in which they analize the corporate governance flaws that might have led to the recent Volkswagen scandal related to fraud in the polluting emissions metrics disclosed for their diesel vehicles.

 Board and even Ceo said they were unaware of the fraud, which used a complex and widespread procedure, which unveils a sever lack of oversight.

 Elson, Ferrere and Goossen wonder why this fraud appeared in a company with a strong controlling shareholder, (the two Piech and Porsche families jointly own 31.5% of shares, but Quatar Holding also owns 15.4%), that has also the government as a shareholder (12.4%) and employees sat at the board table. It was not the kind of firm with dispersed ownership where the Corporate Governance theory would have predicted a lack of oversight over the managers activities and interests.

 The causes.

 The scandal reveals bad management but also a lack of an adequate corporate culture, which allowed a complex fraudulent system to be developed and covered by several management layers. The board didn`t impose a correct oversight and corporate culture, for different reasons: Read more…

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.

Screenshot - 05_03_2016 , 19_12_00 Read more…

Powerful Independent Directors

The European Corporate Governance Institute published in January 2014 a working paper written by Fogel, Kathy and Ma, Liping and Morck, Randall, in which they advocated for “Powerfull independent directors” (PID) to be present in boards. (1)

PIDs are defined as individuals placed in the top quartiles in distributions for at least three out of the following factors:

  • Degree centrality, or number of people with whom the person is connected;
  • Closeness centrality: mean degrees of separation with others in the network;
  • Betweeness centrality: number of pairs of people he serves as connector;
  • Eigenvector centrality: weighted average of his/her connections`s social power.

  Read more…

Board tenure: some thoughts

February 14, 2015 Leave a comment

Is it fruitful to refresh a board only because directors have been at the job for more than a certain number of years? What criteria or rules should govern this approach to structure a board?

The (Canadian) Institute of Corporate Directors tries to shed light on the matter, outlining the two main factors usually brought forward by term limits proponents: (1) Read more…

Independence in the board: benefits but also costs

It has passed a long time since independent directors started to be required in public firms` boards by legislators, regulators, and stock exchanges norms. A certain number of independent directors need to be appointed, and certain committees need to be composed by independents also, (at least the Audit Committee, but sometimes also the Nomination or Compensation Committees, etc).

Some firms try nevertheless to push the model to its own limit, when the only insider is the Ceo, the rest of directors being independents, (let`s call these boards full independent boards, or FIB). Would you say this is a reasonable structure? Although it might seem clear the answer is not, there have been no rigorous studies in the matter until recently.

In July 2014, Olubunmi Faleye from NorthEastern University at Boston, published an article on the matter, (1), and we will try to expose his main conclusions in what follows. As an advance, Faleye recommends boards to include some additional managers, and not only the Ceo. Let`s see why. Read more…

Directors` selection and recruitment: the Matrix of Skills

July 21, 2014 1 comment

Lawrence Trautman discussed, in a paper published in July 2012, (1), about the attributes and characteristics of directors, and the recommendations a company should follow when deciding on the composition and structure of its board.

A first advise the author offers to those building a board, is to consider certain variables: (i) the company life-cycle stage (ii) its international footprint in the future (iii) its technology dependence profile and (iv) its capital needs. More generally, the choice of a board sits on an established and communicated strategy for the firm, he says.

As Trautman says, the first clear mandate directors generally have, (even if legislations differ), regards their duty of care and loyalty to the company and its shareholders. The business judgement rule protects directors when deciding and acting in good faith, in an informed and responsible manner. Somehow this also affects the Nomination Committee members in their responsibility to foresee the directors`s succession.

Secondly, according to the author, every board has the same fundamental needs (a charter for the committee charged with nominations; independence and external advice).

A director nomination process starts with a selection of personal attributes nominated director should have, among which we can spotlight ethical behavior, availability and time flexibility, personal and professional achievements, interpersonal skills, independence and soundness of judgement. Also director need to demonstrate some experience features, (general business and industry knowledge, financial acumen etc).

We will not analyse in depth Trautman`s view on board composition and board committees`s structure, that he explains brilliantly, nor the role of the lead director, nor the actual corporate governance demographics. We will nevertheless focus in a tool for optimizing the directors`s selection process:

The Matrix of directors`s skills. Read more…