A company’s board of directors acts as the official representative of shareholders interests within the company. It is not feasible for management to deal with a shareholders individually, especially in the case of large corporations with a diverse shareholder base and varying opinions. The board is thus charged with the responsibility to determine the best interests of shareholders and then ensure that the firm is operating with the objective of furthering these interests. Directors are often compensated generously for this task, earning fees in the hundreds of thousands of dollars, often for only a handful of meetings each year (though, there is obviously preparatory work required in advance of these meetings). Moreover, it is often difficult to determine whether a board has achieved its objectives, as it is usually not clear whether the problem is a lack of effective oversight or whether competition, regulation, or the economy is at fault.
There are two theoretical models for how boards of directors act. There is the “managerial model” which assumes boards are part of the firm’s management, actively making decisions with respect to things such as strategy. Alternatively, there is the “supervisory model” which assumes that boards act only to monitor the actions of management. Unfortunately, boards meet behind closed doors and their activities are largely opaque.
In a recent study of eleven companies owned in part by the Israeli government, researchers Miriam Schwartz-Ziv and Michael Weisbach were able to obtain board and committee meeting minutes containing all of the statements made by every participant. In total, there were 155 meetings and 247 committee meetings with 2459 decisions or updates. The researchers were able to isolate, on an issue-by-issue basis, what options were presented to the board, what questions were asked, what management recommended, and how frequently the board accepted management’s recommendation.
Though Schwartz-Ziv and Weisbach found that boards exhibit characteristics of both models, the supervisory model was most dominant. Here are some of the major findings:
- 67% of the issues discussed were supervisory
- 99% of the time, only one option was presented for the board to “decide” upon
- Boards disagreed partially or completely with the CEO (at the voting phase) in only 2.5% of cases
- Boards voted unanimously in 96.7% of cases
- The board requested an update on a past decision just 8% of the time
These findings lead to a number of concerns. First, if this sample is reflective of the larger set of public companies (and this is a big if), then it would seem there is little reason for the levels of compensation that directors now command. To be paid so generously for such little debate (as evidenced by the unanimity, support of the CEO’s recommendation and only one choice being appraised) is preposterous. Second, it would seem that presenting only a single option would severely limit the effectiveness of a board. By limiting the decision to ‘Go’ or ‘No Go’ rather than ‘Alternative A,’ ‘Alternative B,’ ‘Mixture of the two,’ etc, etc limits any discussion of the pros and cons of different variables and potential outcomes. Presenting just one option changes the dynamic of the debate entirely, though the unanimity of the decisions suggests that there is little debate to begin with.
This study sample may not be representative of American public companies, but without the kind of transparency and insight that these researchers had, we will never know. I would support a move by the SEC to require public companies to file the minutes of their board and committee meetings. As long as shareholders are kept in the dark about what goes on in these meetings (which are ostensibly to further shareholder interests!), it will be impossible to determine whether best practices are being followed and whether shareholder interests are truly being represented.
The full study can be found here.
Author Disclosure: Long Transparency.