The scandals at Enron, WorldCom, Tyco and elsewhere over the past few years have focused a spotlight on corporate boards. Why did directors at so many companies fail to ask probing questions, uncover accounting malfeasance, or raise objections to the siphoning off of funds? Numerous explanations have been offered for these and other failures of board oversight, but critics have argued that they add up to one result: Too many boards do little more than rubber-stamp management analyses without providing independent protection for shareholders.
In response, various suggestions for reforming boards and redefining the role of directors have been put forward. Most are targeted at resolving “agency problems” — that is, making sure that the agents (the board members) are acting in the best interests of the principals that employ them (shareholders). For instance, the New York Stock Exchange Corporate Accountability and Listing Standards Committee has recommended these changes to the exchange’s listing standards: that a majority of the directors on boards be independent, that boards convene regular sessions without management in attendance, and that audit committees have sole responsibility for hiring and firing independent auditors and for approving their nonaudit work.
Such recommendations, while useful, do not deal with the fact that directors, no matter how dedicated and diligent, cannot serve as adequate monitors of management without sufficient information and the means to analyze it. And given the size, complexity and global scope of many corporations, the task is daunting. Directors meet on average four to six times a year, rarely have a staff to help them, and because of their demanding “day jobs” have limited time available to devote to collecting and processing the independent information they need to reasonably fulfill their duty to shareholders.
Some critics have suggested that boards need to have a completely separate staff, but that approach would be extraordinarily expensive and might paralyze companies.1 A more limited approach is to focus on what type of information directors must have to discharge their duties effectively. It is here that finance theory comes into play.
From a finance perspective, the fundamental duty of directors is to help management maximize shareholder value.