Question

What is the role of a board of directors of a corporation and why is there often criticism of boards of directors? What is at least one recommendation made by the critics to improve the situation?

Answer 1

The board of directors, including the general manager or CEO (chief executive officer), has very defined roles and responsibilities within the business organization.
Role of directors
1. Decision-Maker/Evaluator: Played passively, this role involves mostly "monitoring" what others are doing and ratifying the recommendations of others. Played actively, it involves the board in coming up with
its own suggestions and voting on them. Both passive and active versions of this role involve making some judgements about the degree of success achieved by previous decisions. This is the evaluation function of boards.
2. Advisor: In this role, board members provide information and expert advice to others such as the CEO or other management staff.
3. Implementer: Board members may actually carry out the activities required by the policy decisions they (or others) make, e.g., approaching prospective donors for funds or interviewing candidates for the CEO position.

Criticism

number of major criticisms have been leveled at corporate boards of directors in recent years. The most common criticism is that they are largely ceremonial, and simply rubber stamp the decisions of management. As a result of management's control of the proxy voting system, it is more likely for management to select directors than vice versa. Accordingly, the role of directors is largely advisory and does not involve significant decision making. Furthermore, it is argued that the "old boy" network that dominates some boards makes it undesirable for directors to question the performance of their peers.

A related criticism is that the board's discussions are dominated by the CEO, who typically also serves as chairman of the board. When the same person controls the agenda of boardroom proceedings as well as the day-to-day performance of the company, the power of the individual director may be diminished

Many directors act as partners of senior management, rather than as monitors able and willing to reward and penalize management's performance.

Corporate directors also are criticized for conflicts of interest and for showing greater concern for the welfare of other companies. Many outside directors of corporations do business with the companies on whose board they serve.

The board's compensation committee is typically a group dominated by outside directors. Frequently, those outside directors are senior executives of other firms, who are supportive of proposals for increased compensation of their counterparts. Other independent outside directors may represent another set of special interests—those of the local community. Another concern is the relationship of the inside directors to the chairman/CEO since he or she is their day-to-day supervisor and possesses the effective authority to change the directors' role in the company.

The board of directors’ most important function is to approve or send back for amendment management’s recommendations about the future direction of the corporation. This function usually receives minimal attention. Two reasons explain this irony. First, management is often not organized or required to deal with strategic choices within its own ranks—and even less under the questioning of a board of directors. Second, the board of directors is not usually organized or able to shoulder its responsibility.