320 Part 3: Strategic Actions: Strategy Implementation
in monitoring and controlling top-level managers’ decisions and subsequent actions.^64
Because of their relatively ineffective performance and in light of the recent financial
crisis, boards are experiencing increasing pressure from shareholders, lawmakers, and
regulators to become more forceful in their oversight role to prevent top-level managers
from acting in their own best interests. Moreover, in addition to their monitoring role,
board members increasingly are expected to provide resources to the firms they serve.
These resources include their personal knowledge and expertise and their relationships
with a wide variety of organizations.^65
Generally, board members (often called directors) are classified into one of three
groups (see Table 10.1). Insiders are active top-level managers in the company who are
elected to the board because they are a source of information about the firm’s day-to-
day operations.^66 Related outsiders have some relationship with the firm, contractual
or otherwise, that may create questions about their independence, but these individ-
uals are not involved with the corporation’s day-to-day activities. Outsiders provide
independent counsel to the firm and may hold top-level managerial positions in other
companies or may have been elected to the board prior to the beginning of the current
CEO’s tenure.^67
Historically, inside managers dominated a firm’s board of directors. A widely accepted
view is that a board with a significant percentage of its membership from the firm’s top-
level managers provides relatively weak monitoring and control of managerial decisions.^68
With weak board monitoring, managers sometimes use their power to select and com-
pensate directors and exploit their personal ties with them. In response to the SEC’s pro-
posal to require audit committees to be composed of outside directors, in 1984 the New
York Stock Exchange (NYSE) implemented a rule requiring outside directors to head the
audit committee. Subsequently, other rules required that independent outsider directors
lead important committees such as the audit, compensation, and nomination commit-
tees.^69 These other requirements were instituted after SOX was passed, and policies of
the NYSE now require companies to maintain boards of directors that are composed
of a majority of outside independent directors and to maintain full independent audit
committees. Thus, additional scrutiny of corporate governance practices is resulting in a
significant amount of attention being devoted to finding ways to recruit quality indepen-
dent directors and to encourage boards to take actions that fully represent shareholders’
best interests.^70
Critics advocate reforms to ensure that independent outside directors are a significant
majority of a board’s total membership; research suggests this has been accomplished.^71
However, others argue that having outside directors is not enough to resolve the problems
in that CEO power can strongly influence a board’s decision. One proposal to reduce
the power of the CEO is to separate the chair’s role and the CEO’s role on the board soTable 10.1 Classification of Board of Directors’ Members
Insiders- The firm’s CEO and other top-level managers
Related outsiders - Individuals not involved with the firm’s day-to-day operations, but who have a relationship with the
company
Outsiders - Individuals who are independent of the firm in terms of day-to-day operations and other
relationships