IS THERE A CORRELATION BETWEEN CORPORATE PERFORMANCE
AND THE USE OF OUTSIDE BOARD MEMBERS?
This 1997 research from the University of Leeds in the UK is one of the better attempts to empirically validate the assumption that corporate performance is enhanced by having outside directors.
Results are mixed.
In smaller companies, the use of outside directors is associated with higher economic performance. The beneficial effects shrink as public company size increases.
The author speculates that in small companies, outside directors usually are put on the Board because they have something of value to contribute to the company and are prepared to roll up their sleeves to actually open doors for the company. Larger public companies often hire "Trophy" outside directors whose great value is name recognition. They may lack the competence to "dig in" and really help.
We speculate that the governance structure of larger companies may focus outside Board members to be Committee Oriented instead of Corporate oriented. The necessary work of the Committee not only drains their time but narrows their perspective.
The Enron Board consisted of such well known "Trophy" outside directors, Enron had received an award from a governance magazine one year before it went bankrupt.
The lesson to be learned: get people who are prepared to work and are competent and unafraid to ask tough questions. Retaining a search firm to find "Trophy" directors may not be a wise way to spend shareholder money.
What do you think?
Send your reactions to firstname.lastname@example.org
Board Options, Inc.
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For a full copy of the University of Leeds report click here: