New Study by Bentley and Northeastern University Professors Finds Extensive Monitoring by External Board Members May Detract from Firm Value
October 29, 2010
A study co-authored by Bentley University assistant professor of Accountancy Rani Hoitash and Northeastern University faculty members Olubunmi Faleye and Udi Hoitash examines whether various roles of the Board of Directors of public companies overshadow each other. The study titled “The Costs of Intense Board Monitoring” is forthcoming in the Journal of Financial Economics. Results showed that when directors place too much emphasis on monitoring managerial decision-making, they are inclined to neglect their strategic role to advise top management in creating value for shareholders.
“Surveys of independent directors suggest that, while independent directors believe their strategic role to be extremely important, increased monitoring requirements leave them less time to devote to this role,” notes Rani Hoitash.
Typically the members of a board of directors serve on committees where they have an advisory role, as well as on committees where they have an oversight role. But, says Olubunmi Faleye, “if directors are asked to serve on multiple board oversight committees they may be stretched too thin and these directors won’t be able to focus adequately on strategic advising.”
The research team found that devoting greater board resources to oversight duties on the audit, compensation and nominating committees is associated with improved oversight. Specifically, if the majority of independent directors serve on two or more of the primary oversight committees, there is less excess CEO compensation, higher reported earnings quality, and a more likely replacement of under-performing CEOs.
“While these improvements are aligned with the interests of shareholders, they come at a significant cost --namely weaker strategic advising, greater managerial myopia, and lower firm value,” cautions Udi Hoitash. “Corporate acquisition performance, research and development investments, the quality of patents and overall firm value, all suffer as a result of too much board emphasis over management oversight.”
“It has been approximately ten years since the stock exchanges and regulation within the Sarbanes-Oxley act restricted membership on the key audit, nominating, and compensation committees to independent directors,” adds Faleye. “While this effort was meant to protect shareholders and emphasize the role of independent directors in overseeing management, boards should be cognizant that an exclusive focus on board monitoring and management oversight can have unintended consequences which can lead to a deterioration, rather than an increase in shareholders’ value.”
The complete study can be found at
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