Monday, 21 August 2006
Professor Renee Adams
Research by UQ Business School's Professor Renée Adams suggests that increasing the independence of boards may not be as good for shareholders as everyone thought.
Adams and co-author Daniel Ferreira found that boards emphasizing their monitoring role were less likely to have access to all relevant information.
She said, "We found that friendly boards may be optimal."
Adams said the emphasis on independence supported the monitoring role of the board but limited its ability to advise effectively.
She said, "The dual role of boards in countries like the US and Australia complicates the relationship between management and the board."
"CEOs face a trade-off in disclosing information to the board - if they share information freely they can expect better advice from the board."
"However, information sharing also allows the board to monitor the CEO's role more closely."
The paper (forthcoming in the Journal of Finance) analyses the differences between a sole board system, such as in the US and Australia, and the dual board system favoured by various European countries.
Adams and Ferreira of Universidade Nova de Lisboa used sophisticated mathematical modelling to explore four key ideas.
Adams said the first idea was that the CEO may dislike some monitoring activities of the board because they impair his or her autonomy.
She said, "But the advisory role of the board increases firm value without interfering with the CEO's choices so the CEO likes that aspect of the board's activities."
"And we know that both monitoring and advising are more effective when the board is well informed - and that the board depends on the CEO for information."
Adams said the research showed that emphasising director independence may have adverse consequences in the sole board system but would 'unambiguously' enhance shareholder value in a dual board system.
She said, "By delegating monitoring roles to audit and remuneration committees, a sole board takes on the nature of a dual board. Thus, our results imply that emphasising independence of committee members is likely to result in good outcomes for shareholders."
"But, when a management-friendly board is optimal, one should expect other governance mechanisms to pick up the slack."
Adams will present her work on friendly boards at the next UQ Business School Boardroom Briefing to be held on Thursday 14 September at UQBS Downtown. For details please phone (07) 3365 8561.
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