Question

Your firm, which specializes in complex electronic
products, has grown rapidly and you
are now incorporating. Even after incorporation,
a large percentage of the stock will
be held by the founders, including you.
Your colleague recommends a large corporate
board made up exclusively of outsiders.She is very concerned about the sensationalized
corporate scandals in recent years. Do
you agree with her recommendation?
Explain.

Answer 1

No, I do not agree with her recommendation because appointing only outsiders on board is not the solution to the problem. Instead, appointing a greater number of outsider board members than insider ones is the progressive and correct solution. A company that has a corporate board comprising of a greater proportion of independent or outsider board members than insider members is a well - balanced structure. Though, her recommendation is partly correct i.e. of making board of outsiders, though not exclusively as the inclusion of insiders has their own benefits.

Corporate board with outside directors have a different angle of viewing the problem and their knowledge and expertise let them view the company activities from a fresh eye. Moreover, their own advice does not include the biased view of insider board members and the internal politics of the corporate firm. The outsider board members have different skills and expertise in different fields which help the insiders to get a variety and different yet enriching insight in the functioning of the company which ultimately increases the shareholders' value if it is worked upon effectively. Moreover, outside directors also bring along several contacts like that of suppliers, bankers, and also customers and several other connections that can be used by the company which can really prove to be beneficial for the company in the long run. Having only insiders on the board may prove fatal for the company in the long run because the manager or the directors may seek to maximize their personal benefit at the expense of shareholders. On the less harmful side, the insider board members associated with the firm may be more risk-averse, i.e. they may take less risk as compared to what should be ideally taken and this is done to protect their own job and reputation and fear of going wrong during the good days of the company. This may hinder the growth prospects of the company.  

Appointing only outsider members on board may not be sufficient because they may not be well versed in the company policies and actual functioning of the company. They may also not fully aware of the intentions of the insider and management of the company regarding their plans for future growth prospects and scopes they may be looking forward to (which is not yet made official and is in the planning stage). To solve these issues, it is suggested not to have a board exclusively of insider members but to include insider members where the proportion of insider must be less.

Therefore, a healthy mix of insiders and outsiders in the board of Corporate where the outsider is more than the insider will directly help the brand or the company to grow because the skill and expertise of the outsiders and the fresh perspective provided by them along with the inputs provided by the insider members having greater information of the company and the real experience of running it successfully, will ultimately aim towards better and more deserving compensations to CEO and other post-holders and also benefit shareholders by continuing increased growth and also help the company to adapt to new changes and improve the existing policies to increase their horizon and do their 'perfect' things more 'effectively'.