Why Outsiders on Boards Can�t Solve the Corporate Governance Problem

May 2003
Organizational Dynamics;May2003, Vol. 32 Issue 2, p180
Academic Journal
The article reveals why increasing the number of outsiders on boards of directors cannot solve the corporate governance problem. The authors show how chief executive officers (CEOs) can weave an intricate web of conditions that allow them to exert substantial influence over boards of directors. For example, CEOs can negotiate very favorable compensation contracts, control the compensation process and evaluation processes, provide financial and other benefits to board members and implement corporate strategies that favor high CEO pay. The authors believe that these are the reasons that simply increasing the number of outsiders on boards is not enough. The authors advocate more attention to the compensation of the CEO and board members, as well as clarifying the reporting to the public. The only way to restore investor confidence and prevent the illicit actions of management in the future is through clear and honest financial reporting at all levels of the organization. It is the responsibility of the board to demand conservative accounting treatment for all transactions in which the company is involved.


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