Board Structure & Effectiveness
What is the main role of outside (non-management) directors on a board?
Monitoring management and advising the CEO.
Which U.S. law requires that audit committees consist entirely of outside directors?
The Sarbanes-Oxley Act of 2002.
What is one major argument in favor of having insiders on the board?
Insiders have firm-specific knowledge, which is useful for making informed strategic decisions.
How did regulatory pressure affect board size over time?
Board sizes have decreased, and insider representation has declined due to institutional pressures.
Why do some companies ignore the trend toward smaller, independent boards?
Some firms, especially complex or R&D-intensive firms, benefit from larger boards or more insiders because they require specialized advice.
What type of firms tend to have more outside directors due to their financial structure?
Highly leveraged firms.
How does firm complexity affect the optimal board structure?
More complex firms (e.g., large, diversified, or high-debt firms) benefit from larger boards with more outside directors for advice.
Why is it difficult to prove a direct link between board independence and firm performance? (Looking for a word starting with "e")
Board structure is endogenously determined—firms choose what they believe works best.