CEOs often favor the use of board insiders who often have intimate knowledge of the firm’s business affairs

CEOs often favor the use of board insiders who often have intimate knowledge of the firm’s business affairs. In contrast, many institutional investors such as mutual funds and pension funds that hold large blocks of stock in the firm often prefer significant representation by board outsiders that provide a fresh, nonbiased perspective concerning a firm’s actions.

One particularly controversial issue in regard to board composition is the potential for CEO duality, a situation in which the CEO is also the chairman of the board of directors. This has also been known to create a bitter divide within a corporation.

For example, during the 1990s, The Walt Disney Company was often listed in BusinessWeek’s rankings for having one of the worst boards of directors (Lavelle, 2002). In 2005, Disney’s board forced the separation of then CEO (and chairman of the board) Michael Eisner’s dual roles. Eisner retained the role of CEO but later stepped down from Disney entirely. Disney’s story reflects a changing reality that boards are acting with considerably more influence than in previous decades when they were viewed largely as rubber stamps that generally folded to the whims of the CEO.

Table 10.1 Board Roles William Shakespeare once wrote, “All the world’s a stage, and the men and women merely players.” This

analogy applies well to boards of directors. When the performance of board members is impressive, the company is able to put on a dynamic show. But if a board member phones in their role, failure may soon follow. We discuss the different roles board members may play below.

Accountant Board members may, at times, approve financial objectives.

Lawyer Ensuring the firm complies with applicable laws is a key role.

Advisor Providing advice on strategic issues is a critical role that is overlooked by less effective boards.

Activist Boards must ensure the rights and interests of stakeholders (especially stockholders) are represented

 

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