Question

Financial Planning and Agency Conflicts:

Recommend two desired characteristics of a board of directors. Provide support for your response, citing the ways in which these characteristics usually lead to effective corporate governance.

Answer 1

Board of directors of a company play a critical role. They are the gatekeepers between the company's management and the company's shareholders.

Board of directors need to have the requisite skills and experience to make sure that the management is acting in the best interest of the share holders. Here are a couple of characteristics a director needs to have :

1) The board of directors need to be impartial and make sure the management acts in the long-term interest of the shareholders.

For example, if the current compensation structure is such that top management get's rewarded even if there has been no value creation from a shareholder's perspective. An unbiased board of directors will spot that and make changes to the compensation structure so that it is aligned with the long-term interest of the shareholders

2) Ability to make informed decisions about the company's future

The board of directors need to have the ability to parse the industry trends. If the board thinks the management is erring in decision-making, the board can present its own views.

For example, Apple Inc.'s hardware business has been struggling for the past year. The company was able to envision declining iPhone shipments, and started focusing on fast-growing segments like Services and wearables, which are now yielding results and nullifying the negative growth in iPhones.