Reference no: EM131110912
ETHICAL DILEMMA Directing the Directors
One critical structural element of most corporations is the board of directors. In principle, chief executives report to the directors. In practice, however, boards do not always function as you might expect. Boards were implicated in many corporate scandals of the past decade-either because they actively condoned unethical behavior or because they turned a blind eye to it. Many also blamed lax board oversight for the financial meltdown and ensuing recession. Business media have called boards "absolutely useless" and "a sham."
One of the keys to reforming board behavior is ensuring that boards function independently of the CEO. The Securities and Exchange Commission (SEC) and the New York Stock Exchange (NYSE) have set guidelines for the independence of directors-who should not be otherwise affiliated with, employed by, or connected to the organization they direct. The more independent the structure and composition of the board, the better the corporation will be governed, and the more effective it will be.
One example of nonindependence came to light in 2010. In addition to $225,000 in cash and deferred stock he was paid to function as a member of Citibank's board, Robert Joss earned $350,000 in consulting fees for advising the bank on projects "from time to time." When asked to comment, Joss replied, "I'm comfortable that I can handle that."
Such examples seem egregious violations of independence in board structures. Yet, evidence on the link between board independence and firm performance is surprisingly weak. One recent review concluded, "There is no evidence of systematic relationships between board composition and corporate financial performance." Another structural issue is how the roles of the CEO and chairperson are filled-for instance, whether these positions are held by different people. Most argue that for the board to function independently, the roles must be separate, and Bloomberg Businessweek estimates that 37 percent of the 500 largest U.S. corporations do split them. Yet here, too, the evidence is weak: it doesn't appear that corporations with separate CEOs and chairs perform any better than those where the CEO and chairperson are one and the same.
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