By: Larry MacDonald
Two recent studies find boards of directors may meet statutory definitions for independence by having the requisite number of members with no financial or familial ties to the chief executive, yet de facto lack independence thanks to the absence of criteria covering the appointment of friends and “cheerleaders.”
In “It pays to have friends,” a study to be published by Hwang and Kim in the Journal of Financial Economics, “mutual alma mater, military service, region origin, academic discipline, and industry” are used as markers of social ties in the boardrooms of a “unique data set” of U.S. corporations. They found 87% of the boards met the regulatory definition of independence but only 62% were independent on both regulatory and social grounds.
Hwang and Kim cite the example of one corporation that officially had 10 independent directors on a 13-member board in 2000. However digging into social connections they found one independent director was from the home town of the CEO, attended the same university, and had given the CEO’s son a job in his firm. Another independent director graduated from the same university within the same academic discipline as the CEO … and so on, ultimately leaving only 5 of the 13 directors with no social, financial, or filial ties to the CEO.
In “Hiring Cheerleaders: Board Appointments of Independent Directors,” authors Cohen, Frazzini, and Malloy examine a group of independent directors who previously were sell-side analysts providing public views and investment ratings on corporations. They found “striking evidence that boards appoint overly optimistic analysts who exhibit little skill in evaluating the firm itself, other firms within the firm’s industry, or even other firms in general.”
One Response to “ Boardroom friends & cheerleaders ”
Having ties may not be a bad thing. Sometimes the devil you know… the real issue is how to to devise an ‘objective’ strategy for selection and evaluation of directors that will satisfy share-holders and investors. And then, you need an objective set of criteria for assessment of directors, and, most important of all, and most lacking in industry and in public service: a policy for removing directors that don’t fulfill their obligations. For example, 30% of the directors at a well-known public college in Alberta have regularly failed to attend bi-monthly board meetings over the past five years. The college policy regarding its board is that they’re expected to attend those meetings. So what has been the board’s reaction to the lousy attendance figures? You guessed it, all of the offending governors were re-appointed. Board appointments appear to be just ornaments on a resume, in many cases. Joe Public is a chump to think that because an institution has a board of well-known names, that there must be at least some accountability at that institution.
Marnie Tunay
http://fakirscanada.googlepages.com/
By Marnie Tunay on Aug 23, 2008