Directors and company performance

James Surowiecki writes on financial matters for The New Yorker. recently he wrote a piece on the performance of company boards of directors.

He began:-

When Citigroup and Bank of America held their annual meetings last month, shareholders were in an understandably surly mood. Even as the companies’ C.E.O.s apologized for past failures and vowed to do better, shareholders blasted the executives for their incompetence, and talked about the need for dramatic change. Yet, after all the venting and repenting was done, something weird happened: every member of each bank’s board of directors was reëlected to office.

Surowiecki then proceeded to discuss the issue further. He noted the move to appoint more independent directors in recent years, but commented:-

The academics Sanjai Bhagat and Bernard Black, for instance, have found no evidence that simply appointing more independent directors improves corporate performance. And, while increasing diversity was, in theory, going to break up the old boys’ club and make boards less deferential, the benefits have proved more elusive in reality. James Westphal, a business professor at the University of Michigan, has found that professionally diverse boards are actually less likely to challenge the C.E.O. One reason is that even “independent” directors are typically nominated not by shareholders but by the C.E.O. or by other board members, who, not surprisingly, tend to prefer directors who will be cheerleaders for the firm and won’t rock the boat. It also doesn’t help that independent directors are sometimes inexperienced, which makes it harder for them to take on management, or that they’re often chosen for name recognition.

This may be the case, but it may well be that despite calls for them to be more pro-active major shareholders have not pushed for change.