Friday, June 12, 2009

The Board of Directors Club

I have been thinking about corporate governance and the role of the board of directors a great deal lately. My thoughts keep coming back to this post at the Harvard Law School Corporate Governance Blog. The post discusses a recent study on the appointment of CEOs as outside directors. Among other things, the study finds that, "The appointment of a CEO outside director helps certify the appointing company and its management, but it does not lead to measurable improvements in operating performance or corporate policies." Still, even though CEO directors add little (or nothing) to the corporate governance environment of the boards that they sit on, they are still highly sought after by firms.

We have recently posted on the need to get rid of moonlighters, and the shortage of truly independent directors. A host of other issues, such as executive compensation, would be reduced or perhaps solved by stronger governance from directors. So what needs to change in order to strengthen the governance of the board?

Perhaps one way we could improve upon our current situation is to increase the consequences of negligence. Ideally, stricter penalties for a failure in oversight would weed out directors who are not adding value to the corporation on behalf of the shareholders. Although firms may need to look outside of the 'club' for independent directors, the resulting increase in independence and oversight would go a long way toward reducing the occurrence of fraud.

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