The Relationship between Board Diversity, Accountability, and Company Performances - Literature review Example

Corporate Governance By Author’s Name Foundation Course Tutor’s Name University’s Name Department’s Name Date of Submission Corporate Governance The role of corporate governance framework is guiding a company in its strategies, monitoring management, and maintaining board accountability to its shareholders (Baysinger, and Butler 1985, pg.115; Byrd, and Hickman 1992, pg. 200). The board of directors oversees corporate governance structure (Byrd, and Hickman 1992, pg. 198). Hence, the board carries the responsibility for maintaining aspects of corporate governance such as accountability, judgments, and transparency. According to recent literature, diversifying the board of directors enhance the corporate governance (Goodstein, Gautam and Boeker 1994, pg. 243). Moreover, many kinds of research recognize the tremendous role by shareholders' activism in corporate governance. Hence, the paper studies the roles of board and board diversity in corporate governance. The paper explores the relationship between board diversity, accountability, and company performance. The article also covers the role of shareholder activism in corporate governance. Board The board of directors also called the board is a body of elected individuals to oversee running of a company. They act as an agent of the stockholders by establishing management policies. The board of directors represents the shareholders by checking the health of an organization. The board of directors can fire or hire executives of a company (Baysinger, and Butler 1985, pg.121). They establish dividend strategy, option policies, and managerial compensation. The boards also set broad goals for the corporation, support managers in their work, ensures resource at disposal are enough, and follow up with the management of resources (De Andres and Vallelado 2008, pg. 2572). After the financial crisis, the focus of the board changed to promoting the success of the company in a way it benefits its shareholders. The various powers and structures of an organization’s board rely on the company's bylaws. These include the number of members, terms of duration for the board and rewarding process. Ideally, the board members represent shareholders and management (De Andres and Vallelado 2008, pg. 2578). Thus, the board comprises of members working as managers of the corporation, and others are other people. The manager on the board is called inside directors and those outside the company are called independent directors. When a board constitutes too many executive directors, the decision made favor management at the expense of performance (Baysinger, and Butler 1985, pg.115). When an organization has too many independent directors decisions made leave out managers, which make them move on in dissatisfaction (Byrd, and Hickman 1992, pg. 218). Shareholders always elect the board, but the nomination committee always selects those participating in the election. When most of the participant in the appointment committee come from the executive, the proposed candidates are likely to monitor less aggressively the manager (Byrd, and Hickman 1992, pg. 215). Some instance may make shareholder resolve a board member as follows. The member uses his/her power towards other objectives other than the interest of the shareholders. Making deals with other shareholders of voting thus compromising board members unfettered discretion. Member engaging in a transaction with the company create the conflict of interest (Byrd, and Hickman 1992, pg. 199). Finally, shareholders resolve the member using information in the meeting for personal gain. Board Diversity Although the traditional board of directors guaranteed the shareholders of an intelligent and professional force were working hard for their interest, they only supported the Chief Executive Officer (CEO) strategy (Baysinger, and Butler 1985, pg.118). Instead of considering diversity while building a board, traditionally, factors such as known entities, reliability, and like-mind characterized selection of the board’s members. Moreover, assembling a board depending on personal relationships with the CEO led to insularity. The resultant board had downsides that significantly hampered the growth of the organization (Byrd, and Hickman 1992, pg. 235). For instance, owners became the CEO, which undermined board freedom. Unsurprisingly, the homogeneity of the traditional board of directors significantly hinders company growth in the now dynamic world. With globalization, increasing technological sophistication, higher need to risk analysis, and changing workforce demographics, doing business is more complex and demand more input from the board of directors (De Andres and Vallelado 2008, pg. 2571). Even diversity in education, gender, race, age, and family background cannot save companies from demands and opportunities of the new business environment (De Andres and Vallelado 2008, pg. 2572). Moreover, decreasing non-executive members and increasing board independence only make a company less homogenous, but cannot protect the company from new trading requirements (De Andres and Vallelado 2008, pg. 2573). Consequently, company owners in their attempt to remain in business must realize the needed diversity. Therefore, board diversity is ensuring the board breadth and perspective varies broad enough to benefit an organization. The board selecting committee needs to consider beyond the distinct traits and account for less physical factors such as personal traits and life experiences (De Andres and Vallelado 2008, pg. 2571). Devising a quality board of directors requires checking competence and perception of an individual candidate. Besides, attaining the typical board responsibilities, such as risk assessment, counseling for tactical decisions, and monitoring CEO's performances, it requires the following two elements (Baysinger, and Butler 1985, pg.120). Firstly, the board members must have relevant experience, take responsibility, and work collaboratively (Goodstein, Gautam and Boeker 1994, pg. 244). Secondly, the board calls for an operating environment of undying trust and allowing confronting challenging issues and seeking opposing opinions. Finally, the board allows successful implementation of corporate governance and its strategic oversight to create dynamic chemistry. With the above factors, the resultant board is more heterogeneous. Other than checking on gender alone and non-participating officers, the good features of board diversity establish corporate governance and accountability (Goodstein, Gautam and Boeker 1994, pg. 247). As different personalities and characters serve on the same board, the characteristics in each director bring alternative options. The combination of the diverse traits offers a collection of shared capital that improves company performance and increasing its accountability. Role of Board and Board Diversity in Corporate Governance By bringing different perspectives to board diversity, there are different reactions to accountability, company performance, and corporate governance. Firstly, an extremely diverse board is decisively effective in matters of corporate governance (Coffey, and Wang, 1998 pg. 1568). A diverse board is good at anticipating and considering concerns and directions of a company. Although the role of the board of director is checking the welfare of the shareholders, in the absence of the consumers and employees, the interest of shareholder suffers more (Coffey, and Wang, 1998 pg. 1555). Hence, to improve the performance of the company, the board accounts for the risk they face, consider alternative actions regarding their consequences and choose the best fitting (Baysinger, and Butler 1985, pg.117). However, projecting as many risks as possible is the only way to minimize the unexpected. Having directors experienced in dealing with threats from different angles is the only solution. Meeting such an experienced leader is quite hard, and the only option is combining leaders with diverse backgrounds such as different personalities and experiences. Secondly, special knowledge addresses complexes a company meets. The range of experience is directly proportional to opportunities in a firm and to understand its opportunities, the corporation needs a range of experience (Goodstein, Gautam and Boeker 1994, pg. 247). Rarely does the board projects a right answer to issues facing a company with certainty. As the pillar of businesses crumbles from the effect of technology, globalization, and increased risk, predicting production blurs (Goodstein, Gautam and Boeker 1994, pg. 248). By bringing diversity to board members, a board benefit from multiple views and the company only implement highly thought decisions. Hence, board diversity is a way of maintaining pace with dynamics a corporation faces. Thirdly, the variety of board determines the portion of the members attending a meeting and frequency of scheduled meetings. Board with independent members and diversity attract members participation unlike a board with demographically same members who have less to debate. Demographically different board members cannot rush to replace the CEO not unless there are compelling reasons. To replace the CEO, board members with diversity look at weaknesses and strengths of the CEO in comparison to the position of the company from several angles (Baysinger, and Butler 1985, pg.113). However, for the homogeneous board, these angles are limited, and they end up rushing to replace the CEO. Moreover, the diverse board knows the different experience was lacking in them, and when they want to choose a new director, they search for it. However, the CEO usually manipulates the uniform board to accept his/her choice. Fourthly, the various roles of the board of directors are more efficient in the diverse board. Dissimilar personal experiences, capabilities, and different personality lead to diverse leadership, behaviors, preferences, emotional styles, and thinking ((De Andres and Vallelado 2008, pg. 2572). Thus provides creativity in a solution to problems and a detailed oversight of sensitive areas in company operations. The board also has a greater supervision (Baysinger, and Butler 1985, pg.114). For example, to monitor managers, it requires directors with managerial experiences (Byrd, and Hickman 1992, pg. 201). Advising on strategic issues needs board of directors experienced in business analytics while providing access to the external sources of information requires board members experienced in marketing and supply chains. Fifthly, Diversified board minimizes group-thinking tendencies, which result to corruption. High remuneration among members of the council in homogenous boards than in diverse illustrates the corruption. In diversified boards, bribery between the CEO and board member is minimized unlike in monogamous boards (Byrd, and Hickman 1992, pg. 278). Before making a decision, the diverse board critically examines alternatives without minding about emerging conflicts. Eventually, they efficiently attain a sweeping conclusion. Finally, the performance of a company improves in all aspects as the board can effectively oversee its roles without depending on employees' interpretation of data ((De Andres and Vallelado 2008, pg. 2580). The heterogeneous board is a proof of a company that offer equal opportunity to all and indicate its varied culture to the stakeholders. Besides, the diversity shows management as eager to position the firm into socially responsible. The difference between board members is a reflection of community and societies the company serves. Hence, the social contract between the company and stakeholder increases, which ensure organization fits its environment. The Relationship between Board Diversity, Accountability, and Company Performances The board diversity and independence drives accountability and performance of an organization. With true board diversity, mechanisms, processes, and structures of a company are in such a way they direct and manage it to better for the long-term shareholders value, which then improve company performance (Coffey, and Wang, 1998 pg. 1574). Independent and Non-executive members play a significant role in upholding accountability and firm growth, as they do not directly benefit from managerial benefits (Baysinger, and Butler 1985, pg.123). However, a board comprised of many non-executive directors has little advisors as dependent directors always relay information from management to the board (Coffey, and Wang, 1998 pg. 1588). A board primarily comprised of executive directors commits financial frauds. What is more, the board size needs to be right. Small sized boards avoid free riders, and directors account their individual actions. With small size, the shareholders muster behavior and conduct of all board members- a real factor to consider when re-electing them (Coffey, and Wang, 1998 pg. 1593). Having separated board leadership from CEO position minimizes chances of members depending on one person. Consequently, board diversity means a well-governed company that accesses better, and cheaper capital outperforms poorly governed peers over a long time and faces a lower risk of financial crisis (Coffey, and Wang, 1998 pg. 1602). A poorly diverse board commits management crimes such as insider trading, fraud, and agency conflicting capable of killing the company (Coffey, and Wang, 1998 pg. 1603). Hence, supporting efficient operations of a company require proper governance and regulatory framework. Board diversity, accountability, and performance of the company are all qualities of good governance. Board effectiveness and accountability, transparency, and integrity are keys to the performance of the company (Coffey, and Wang, 1998 pg. 1567). However, the board is not valid in guarding investors against expropriation by the insider such as; Managers stealing profit, selling shares of the company to a direct rival, trading company securities at prices below the market mark, diverting company future opportunities, selecting unqualified people to managerial posts, and overpaying managers (Coffey, and Wang, 1998 pg. 1572). Attaining the board effectiveness is a right culture and environment enable competent and well-intentioned directors to have a way of placing transparency and accountability in every boardroom activities including reporting through financial statements (Baysinger, and Butler 1985, pg.122). The management of ‘difference’ harnesses the challenge to develop a successful business by managing key risks and fostering innovations. Good governance is about delivering the boards agendas while generating sustainable worth only attainable from systematic ways of thinking (Coffey, and Wang, 1998 pg. 1581). As a result, good corporate governance embodies shareholders' activism for performance and conformance. Shareholder Activism in Corporate Governance Containing shareholder activists is a daunting role to the board of directors. Shareholders’ activism is a way of shareholders influencing the company actions without taking over its control by exercising shareholders’ right as an owner (Schwab, and Thomas 1993, pg.1018). Shareholders do not manage a business, but bylaws of the company allow them to reach the management and the board (Smith 1996, pg. 229). Two tactics used by the shareholder activists to raise their concerns include engaging the management to a dialogue or they write a proposal for all shareholders to vote in during the annual general meeting (Schwab, and Thomas 1993, pg.1018). Implementing the change requested by shareholder activists does not eliminate another attack from them (Smith 1996, pg. 233). Though the shareholders activists’ future attack on the company depends on the significance of changes the activists bring. Future attacks on the board highly rely on board independence and openness. With board diversity, it is easier to keep on analyzing the company processes for risk and engage the shareholders in an engagement program, which improve company’s resiliency, and strengthen the long-term connection with the investors. According to Smith (1996, pg. 229), unlike the board’s "market for corporal control", shareholder activists do "market for corporal influence". Despite shareholder activists’ vice, they are always the first fighting against managerial capitalism and shareholder-centric capitalism (Schwab, and Thomas 1993, pg.1018). Managerial capitalism occurs when corporate governance demand the company should only benefit all the stakeholders while the shareholder-centric capitalism happens in companies whose corporate governance prioritize only on benefiting the shareholders. Shareholders activism is the legitimate tool of good governance in a company as compared to the use of the board. Establishing corporal governance through the board is traditional and ineffective as modern companies are shifting from managerial capitalism to shareholder-centric capitalism (Schwab, and Thomas 1993, pg.1018). The shareholder activists mostly play key roles in transmission of information to the board, which influences decisions made by the board. Targets located by shareholders activists such as takeover usually earn company high returns (Smith 1996, pg. 240). Nonetheless, the board mostly disregards activist suggestions. Thus, companies reserved to the board as the only corporal governance gain averagely. Usually, the board is under pressure to reach annual goals and the short-term focus retard thinking of the board members (Schwab, and Thomas 1993, pg.1018). Nevertheless, having shareholder activists against the board ensures the manager can mix both long and short terms projects. The board and managers abuse power, increase remuneration, influence employment in the firm, inside trading, and report financial doctored statement, which spurs the shareholders to find methods that influence running of the company such as majority voting, access to proxies and board declassifications (Schwab, and Thomas 1993, pg.1018). Termination of board membership may result in high compensation, and the chair of the board may cling to power despite the poor performance of the company (Smith 1996, pg. 245). The best solution is shareholder activists who oust the chairperson by withholding their vote in large numbers. The only way shareholders keep the board accountable is through shareholders activism. The shareholders sometimes use the proposals to discipline the board (Schwab, and Thomas 1993, pg.1018). Other times, the shareholders want to advance agendas that board would not listen. Finally, the proposals address the corporate governance concerns (Core, Holthausen and Larcker, 1999, pg. 372). Hence, the board in fear of suffering reputational charges will always implement proposals with a majority vote. Shareholder Activism's Role in Corporate Governance Some of the roles of shareholders activism in corporate governance are as follows. The board of directors cannot solve issues related to the corporate governance. Most of them are the policies governing the board of directors such as board declassification, resetting the rules for majority voting, and avoiding the super majority-voting scheme (Core, Holthausen and Larcker, 1999, pg. 375). However, through shareholders' activism, the shareholders separate the roles of the CEO from those of the director of the board. Shareholder activism also gives the shareholders the power of acting by calling special meetings or writing consent for the benefit of the company without necessarily waiting for the annual general assembly (Core, Holthausen and Larcker, 1999, pg. 378). Shareholders activism has the power to nominate some board of directors they think represent their interest when some conditions present. Recommendation and Conclusion Corporal board diversity is a dynamic part of the good governance. However, the ways through which board diversity contribute to good governance, accountability, and improved performance remain unclear. Some cost of the diversity to the company includes weak cohesion among members causing distrust, uncooperativeness, and poor communication. The decision-making process is made longer and costly. Executive managers are not sufficient to offer business expertise. Finally, increased conflict of personal interest only promotes individualized ideas. However, diversity contributes several benefits. It improves reach to information, increase creativity, and improve the ability to solve problems. There is higher understanding of outsider such as suppliers. Employee's relations improve and offer mentorship and chance to develop knowledge of the employees. finally, conforming to society improve the public image. With the board diversity, directors take on responsibilities of all stakeholders to promote the success of the company and total worth of the enterprise. The board diversity assist even non-executive member accomplishes their oversight duties. The shareholders, therefore, cannot scrutinize company performance, financial reports, and risk. Consequently, share activism is encouraged but restricted to the growth of the company. Shareholders activism usually targets the companies that underperform and have a common structure of governance. The firm targeted has an ineffective board, poorly remunerated managers and does not operate towards the benefits of the shareholder or stockholder. Consequently, to avoid shareholder activism a company needs to have an independent and diverse board. Moreover, the bylaws of the company need to govern the board of directors in fulfilling shareholder’s interest. Finally, the board needs to incorporate shareholders relations into the running of the corporation to minimize shareholders’ activism. Though the shareholders’ activism appear threatening the board of director’s directives, their ideas are now improving the value of the shareholders and enhancing the performance of the business. The board should, therefore, listen to activists ideas and sift the good ones out. In any case, the shareholders' activists make the board understands investment requirements, horizons, and expectations of the company better. In some instances, the shareholders’ activism corrects management on its missed steps. References List Baysinger, B.D. and Butler, H.N., 1985. Corporate governance and the board of directors: Performance effects of changes in board composition. Journal of Law, Economics, & Organization, 1(1), pp.101-124. Byrd, J.W. and Hickman, K.A., 1992. Do outside directors monitor managers?: Evidence from tender offer bids. Journal of financial economics,32(2), pp.195-221. Coffey, B.S. and Wang, J., 1998. Board diversity and managerial control as predictors of corporate social performance. Journal of Business Ethics,17(14), pp.1595-1603. De Andres, P. and Vallelado, E., 2008. Corporate governance in banking: The role of the board of directors. Journal of banking & finance, 32(12), pp.2570-2580. Schwab, S.J. and Thomas, R.S., 1993. Realigning corporate governance: Shareholder activism by labor unions. Vanderbilt Law and Economics Research Paper, p.1018. Smith, M.P., 1996. Shareholder activism by institutional investors: Evidence from CalPERS. The journal of finance, 51(1), pp.227-252. Read More