How Does Board Membership Affect Business Operations?
Being on a board of directors is one of the most lucrative career options available. Disregarding the years of education and work experience the typical board member has, a nuanced job description requires board members to deliberate in board rooms for a couple of hours every week to earn lucrative salaries, stock options, and insurance benefits.
Since the financial crisis of 2007, corporate pay structures have come under intense debate. Board members of too-big-to-fail financial institutions made risky business decisions which only enlarged the housing market bubble which led to the demise of the global economy, yet were still offered golden parachutes for running the economy to the ground. This article will look at how corporate governance have affected businesses, and contemporary problems arising from boardroom structures.
Corporate Governance
The way boardrooms are structured vary depending on the size, field of work, and scope of different organizations. For example, a five-person company obviously doesn’t need a ten-person board and a mineral-extraction company would prefer engineers in addition to financial experts on their board. With that said, there are several factors that every company faces when designing the structure of their respective boards.
Shareholder Equity
The role of the board of directors is to ultimately represent the opinions of shareholders in the company. For publicly-traded companies, this might involve weighing the majority versus minority shareholder opinions, while private entities will most likely have a smaller number of interest holders to account for.
A Freakonomics post focuses on how corporate mismanagement affects shareholder equity in corporations. According to its authors, Andrew Lo and Jeremiah Chafkin, corporate risk taking has in recent years has diminished shareholder equity due to the tunnel vision of both board members and shareholders. The authors point out that, “While ‘greedy’ CEO’s are easy scapegoats, the main object of everyone’s attention — the stock price — is often driven by shareholders looking for short-term profits, not long-term capital appreciation.”
In other words, a good board will lead a company to financial success. A great board can rescue a company during financial hardship. Incurring risk may lead to greater grains at the cost of greater losses, and both shareholders and board members must understand this risk. In addition to stock price, other factors such as price volatility and capital accumulation must be taken into account when measuring the value of shareholder equity.
Non-Shareholder Interests
Non-shareholders include employees, consumers, and business partners of a corporation. Although they have no direct equity in the corporation, the board of directors must also consider their interests when making business decisions. For example, under Delaware Law, “a board has no duty to maximize short-term value. So long as there is a rationally related benefit for shareholders, a board may consider the interests of non-shareholder constituencies.” What this means is that the board of directors can build long-term relationships without being hindered by the possibilities of short-term losses.
Board Responsibilities
An up-and-coming trend in boardroom responsibilities is the role of social corporate responsibility (SCR) to augment existing operations within a corporation. An example of SCR is the Danone Communities initiative. Started by health foods producer Danone in partnership with Grameen Bank, the two corporations combined their expertise in yogurt production and financial services to employ locals and produce healthy yogurt options to rural and urban areas around Bangladesh.
Investors in this fund include both traditional investors in Danone and outside investors looking for to invest in a social cause. Regardless, both groups understand that their investments will be paid back without interest or financial returns. Instead, capital is used to strengthen infrastructure, improve nutrition, and increase unemployment throughout neighborhoods.
Current Issues: Gender Roles in Boardrooms
There is no doubt that female board members are just as effective as their male counterparts. For example, Carol Bartz at Yahoo! and Sheryl Sandberg at Facebook at two of the most prominent leaders in corporate America, regardless of gender. As you can see below, females make up for only 15% of executive committees and board members in American companies, a shocking number considering that in the United States, more females graduate with bachelor’s and master’s degrees than males every year.
According to an article in The Economist, the lack of female representation in executive positions is actually a hindrance in terms of overall performance. Borrowing from behavioral psychology, a more diverse boardroom reduces the amount of herding and prevalence of group mechanics, factors which usually lead to riskier and less-informed decision making. Furthermore, by drawing on an underutilized female talent pool, corporations have a better chance of landing a successful executive.
Data supports the idea behind a more diverse boardroom. According to consultancy firm McKinsey, a survey comparing 89 gender-diverse European firms to average firms of the same industries yielded surprising results. The survey found that these corporations enjoyed a “higher return on equity, fatter operating profits and a more buoyant share price.”
Board compositions are an important reflection of the company’s aspirations and goals. Healthy corporations need managers who are capable of running a company at both the peak and troughs of the business cycle. Hiring a diverse and experienced executive team is a great way to start.
