The Advantages of CEO Board Separation

Save
A CEO is answerable to the board.
A CEO is answerable to the board. (Image: Comstock Images/Comstock/Getty Images)

Separating the board from management helps to build clear and well-defined roles and responsibilities. The duty of the board is to create a vision, direction and policies for the company. Management's role is to implement those policies according to the board's directives. There are many advantages to this model of corporate governance.

Accountability

The board's major role is to represent the interests of the shareholders. To that end, directors in a company with an independent board ensure any management officials they hire are performance-oriented. The board has a responsibility to evaluate the company's performance and pin it on the management. Performance is monitored regularly by looking at the company's data on a regular basis. This encourages transparency and reduces chances of fraudulent accounting. Corporate governance structures were previously an issue concerning shareholders and managers with some state law restrictions. But the Sarbanes-Oxley Act (SOA) has made corporate governance a matter of federal law.

Balance of Power

The SOA came into effect after a number of corporate scandals involving fraudulent accounting in which investors lost billions of dollars. Experts attributed corporate malfeasance involving Enron, WorldCom and Tyco International, which were at the center of corporate scandals in the early 2000s, to the imbalance of power in favor of top managers. Enron's founder, Kenneth L. Lay, for instance, who was at the center of the scandal that led to the collapse of the organization, was in charge of both management and the board. An independent board would have detected malfeasance before investors lost substantial amounts of money. Instead of rubber stamping management decision, an independent board provides oversight.

Division of Labor

When the board is separate from management, it focuses its energy on the effective management of a company. Rather than being overburdened with both governance and management responsibilities, company management dedicates its energies to making the company more profitable. Management officials are then answerable to the board, and judged on performance. When the board is independent from management, it can easily fire incompetent managers and retain competent ones.

Open Discussions

A board without management staff has more candor during meetings, when the subject is a management official. If a board member wants to express concern about a management official, for instance, individual directors can discuss without being singled out for blame when there is a dismissal. Such a board can effectively represent shareholders.

Related Searches

References

Promoted By Zergnet

Comments

Related Searches

Check It Out

Are You Really Getting A Deal From Discount Stores?

M
Is DIY in your DNA? Become part of our maker community.
Submit Your Work!