The notion that corporate boards should be independent from management derives largely from agency theory, which posits that management acts as an agent of the company”s owners or shareholders.i However, an inherently self-serving management team can, if left unchecked, pursue priorities that may be at odds with owners” or shareholders” best interests. To preclude this possibility, agency theory also specifies that independent boards of directors, which are not closely associated with management, be established to monitor management”s performance and to use levers such as compensation to guide its behaviors.

Moreover, agency theory addresses the role of information. It recognizes that management at all times knows more about the business than the company”s shareholders (and directors) do, and that this information asymmetry is one of the key factors that allows management, if it is so inclined, to pursue goals that are divergent from shareholders” interests. It follows, therefore, that truly to be effective in protecting the company”s shareholders, directors need to overcome this information asymmetry so that they will have a firm grasp of the business and the risks it faces.

The nature and quality of interactions between two entities, such as a company”s management and board, are always affected by how much they know about each other”s interests, objectives, fears and aspirations. While each side has knowledge of itself and knowledge about the other side, each... To read the complete article, login or sign-up using the form below.