ONLINE CHAPTERSTherefore, shareholders rarely have the time or insight to oversee a company and all its operations, so they
elect representatives whose job is to oversee the decisions made at the company. These representatives
are known as the board of directors of the company. This section briefly reviews corporate governance, and,
in particular, the duties of the board in the context of merger and acquisition transactions.
Other than in extreme circumstances, such as when a company is in extreme financial difficulty
or is a bidder or target in an acquisition, the board members are not involved in the daily activities of
the company. Instead, the company hires professional managers and employees to perform day-to-day
operations. Board members typically have four to eight meetings per year, and at these meetings upper
management updates the board on key issues facing the company, usually making recommendations
of the course of action they believe the company should follow. Ideally, the board is fully engaged, and
does not just rubber-stamp the recommendations of upper management. However, board members are
often identified and approved by the company’s CEO and upper management team, which raises the
possibility that the board is captured by management, in the sense that the board may not fully scrutinise
the company’s recommendations and decisions. The number of captured boards has declined in the US
since the 2002 passage of the Sarbanes–Oxley Act, because public companies are now required to have
a nominating committee comprised entirely of independent directors. Corporate governance involves
the study of these interrelations between the board, management and, in general, the oversight of the
company.
One of the primary functions of the board is to monitor upper management and the decisions of
the company. Another is to offer advice. Therefore, a board is ideally made up of experienced business
veterans, bankers and experts in the operations of the company. A portion of the board should ideally
be independent and not in any way personally tied to the CEO or upper management, to ensure that
objective oversight and advice are provided.
Governance varies widely across countries. In many European countries, there are two boards of
directors, a management board and a supervisory board, with the latter being selected in large part by
employees and labour unions. Not surprisingly, governance in Europe is often employee-friendly. In
many Asian countries, there is a pyramid structure to corporate ownership, in which company A owns
a substantial portion of company B, which in turn owns a substantial portion of company C, and so on.
The actual decision-making process therefore involves numerous companies, and is interlocked with
the decisions of other companies. In Japan, such a network of companies is often organised around a
main bank, and is called a keiretsu. There are many other interesting aspects to corporate governance.
However, because this chapter is about mergers and acquisitions, we focus the rest of this section on
responsibilities of the board and governance in the context of M&A.21-7a DUTIES OF THE BOARD IN THE CONTEXT OF M&A
The board of directors’ primary obligation is to shareholders, in particular to maximise long-run
shareholder value. When a bidder wishes to acquire another company, the bidder can make an offer
directly to shareholders in the form of a tender offer. However, it is usually in the bidder’s best
interest to approach the target board or CEO in a friendly manner and negotiate the terms and
conditions of the offer. Ultimately, the target shareholders must approve the sale of the company, but
the target’s board plays a crucial role in interacting with the bidder and representing the shareholders’
best interests.
Often, when a company is the target of a takeover bid, the outside bidder offers to buy the target’s
shares at a premium over current share price. Should the board immediately agree to the first offer aboveboard of directors
Representatives elected by
shareholders and charged
with the responsibility of
overseeing management