Improving the Effectiveness of Corporate Boards

In: Business and Management

Submitted By hansenman360
Words 1109
Pages 5
The primary purpose of for-profit companies is to maximize the return on shareholder’s investment. In instances where ownership of a company and control of said company are separate, shareholders employ directors as the primary monitoring mechanism. In other words, the role of corporate boards is to monitor executive management to make sure that they manage the company in a way that maximizes shareholder value by managing the company with their best interests in mind. The scandals of Enron, Tyco International, WorldCom, and others cost investors billions of dollars and shook investor confidence in the nation’s stock markets. The global economy plunged into a recession in 2008 partly because large banks took unprecedented risks and overleveraged themselves when they invested in collateralized debt obligations (CDOs) and credit default swaps - the repayment of which was only possible if the housing market continued to increase in value.
As a result of the high profile corporate scandals at the beginning of the millennium and the economic recession, experts are beginning to explore new ways to improve the effectiveness of corporate boards. According to Nicola Faith Sharpe, Associate Professor of Law at The University of Illinois College of Law, “history has shown that the scholarly and regulatory focus on board composition and structure is a dangerously incomplete solution to the problems that have caused recent corporate failures.” (Sharpe, 2012) He goes on by saying “organizational behavior offers a more comprehensive approach to improving monitoring than current policymaking initiatives.” (Sharpe, 2012)
The most recent legislation affecting boards is Sarbanes Oxley (SOX) which was enacted in 2002. The bill sought to solve, as well as a multitude of other problems, the prevalence of ineffective boards. During the…...

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