Chapter 10: Corporate Governance 321
that the same person does not hold both positions.^72 A situation in which an individual
holds both the CEO and chair of the board title is called CEO duality. As is shown in the
CEO duality at JPMorgan Chase with Jamie Dimon, it is often very difficult to separate
the CEO and chair positions after they have been given to one person.^73 Unfortunately,
having a board that actively monitors top-level managers’ decisions and actions does
not ensure high performance. The value that the directors bring to the company also
influences the outcomes. For example, boards with members having significant relevant
experience and knowledge are the most likely to help the firm formulate and implement
effective strategies.^74
Alternatively, having a large number of outside board members can also create some
problems. For example, because outsiders typically do not have contact with the firm’s
day-to-day operations and do not have ready access to detailed information about man-
agers and their skills, they lack the insights required to fully and effectively evaluate their
decisions and initiatives.^75 Outsiders can, however, obtain valuable information through
frequent interactions with inside board members and during board meetings to enhance
their understanding of managers and their decisions.
Because they work with and lead the firm daily, insiders have access to information
that facilitates forming and implementing appropriate strategies. Accordingly, some evi-
dence suggests that boards with a critical mass of insiders typically are better informed
about intended strategic initiatives, the reasons for the initiatives, and the outcomes
expected from pursuing them.^76 Without this type of information, outsider-dominated
boards may emphasize financial, as opposed to strategic, controls to gather perfor-
mance information to evaluate managers’ and business units’ performances. A virtually
exclusive reliance on financial evaluations shifts risk to top-level managers who, in
turn, may make decisions to maximize their interests and reduce their employment risk.
Reducing investments in R&D, further diversifying the firm, and pursuing higher levels
of compensation are some of the results of managers’ actions to reach the financial goals
set by outsider-dominated boards.^77 Additionally, boards can make mistakes in strategic
decisions because of poor decision processes, and in CEO succession decisions because
of the lack of important information about candidates as well as the firm’s specific
needs. Overall, knowledgeable and balanced boards are likely to be the most effective
over time.^78
10-3a Enhancing the Effectiveness of the Board of Directors
Because of the importance of boards of directors in corporate governance and as a result
of increased scrutiny from shareholders—in particular, large institutional investors—the
performances of individual board members and of entire boards are being evaluated
more formally and with greater intensity.^79 The demand for greater accountability and
improved performance is stimulating many boards to voluntarily make changes. Among
these changes are:
- increases in the diversity of the backgrounds of board members (e.g., a greater num-
ber of directors from public service, academic, and scientific settings; a greater per-
centage of ethnic minorities and women; and members from different countries on
boards of U.S. firms);
- the strengthening of internal management and accounting control systems;
- establishing and consistently using formal processes to evaluate board member’s per-
formance;
- modifying the compensation of directors, especially reducing or eliminating stock
options as a part of their package; and
- creating the “lead director” role^80 that has strong powers with regard to the board
agenda and oversight of non-management board member activities.
