The Trouble with Too Much Board Oversight

Sloan Management Review, Vol. 54, No. 3, pp. 52-56, Spring 2013

Northeastern U. D’Amore-McKim School of Business Research Paper No. 2013-15

Posted: 21 Mar 2013

See all articles by Olubunmi Faleye

Olubunmi Faleye

Northeastern University - Finance Group

Rani Hoitash

Bentley University - Department of Accountancy

Udi Hoitash

Northeastern University - Accounting Group

Abstract

The high-profile scandals of the late 1990s have transformed the corporate governance landscape and increased the oversight duties of independent directors. New mandates, such as the Sarbanes-Oxley Act of 2002, have had substantial effects on corporate boards. For one thing, they dramatically increased the workload of directors serving on audit, compensation and nominating committees. In addition, the number of independent directors serving on multiple committees has expanded greatly, from 48% in 2000 to 61% in 2011.

The shift toward increased monitoring raises two important questions. First, has the increased focus on board oversight helped to improve the quality of board monitoring? Second, can board oversight become excessive and ultimately detrimental to desirable objectives?

This article focuses on three distinct aspects of oversight responsibility: design and implementation of suitable executive compensation packages; removal of underperforming CEOs; and disclosure of earnings that reflect the company’s true financial conditions. In a study of S&P 1500 companies, boards were able to perform these functions most effectively when they devoted significant resources to managerial oversight. Board oversight improved when independent directors devoted the time and resources envisaged by the new regulatory regime.

However, the most favorable conditions for innovation occurred when the board did not monitor the CEO intensely but focused on strategic advising, thereby encouraging the CEO to pursue valuable but high-risk innovation projects. Conversely, corporate innovation suffered when the board monitored intensely. Companies with such boards invested less in R&D, received fewer patents overall and received fewer influential patents as measured by the frequency of citations of the patents they received. In addition, company value was lower when the board devoted greater time to oversight.

Keywords: Board Oversight, Firm Innovation, Firm Value, Board Advising

JEL Classification: G34

Suggested Citation

Faleye, Olubunmi and Hoitash, Rani and Hoitash, Udi, The Trouble with Too Much Board Oversight. Sloan Management Review, Vol. 54, No. 3, pp. 52-56, Spring 2013; Northeastern U. D’Amore-McKim School of Business Research Paper No. 2013-15. Available at SSRN: https://ssrn.com/abstract=2236318

Olubunmi Faleye

Northeastern University - Finance Group ( email )

Boston, MA 02115
United States

Rani Hoitash (Contact Author)

Bentley University - Department of Accountancy ( email )

175 Forest Street
Waltham, MA 02452-4705
United States

Udi Hoitash

Northeastern University - Accounting Group ( email )

360 Huntington Ave.
Boston, MA 02115
United States
671-373-5839 (Phone)

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