Seven Myths of Boards of Directors

Abstract

Corporate governance experts pay considerable attention to issues involving the board of directors. Because of the scope of the board’s role and the vast responsibilities that come with directorship, companies are expected to adhere to common best practices in board structure, composition, and procedures. While some of these practices contribute to board effectiveness, others have been shown to have no or a negative bearing on governance quality.

We review seven commonly accepted beliefs about boards of directors:

1. The chairman should be independent 2. Staggered boards are bad for shareholders 3. Directors that meet NYSE independence standards are independent 4. Interlocked directorships reduce governance quality 5. CEOs make the best directors 6. Directors have significant liability risk 7. The failure of a company is the board’s fault

We ask:

• Why isn’t more attention paid to board processes rather than structure? • Why aren’t more governance practices voluntary rather than required? • Would flexible standards lead to better solutions or more failures? • When do directors deserve the blame for a company’s failure and when is it the fault of management, the marketplace, or luck? • How can shareholders more effectively monitor board performance?

The Stanford Closer Look series is a collection of short case studies through which we explore topics, issues, and controversies in corporate governance and executive leadership. In each study, we take a targeted look at a specific issue that is relevant to the current debate on governance and explain why it is so important. Larcker and Tayan are co-authors of the books Corporate Governance Matters and A Real Look at Real World Corporate Governance.

Keywords: Board of directors, staggered board, classified board, independent director, independence standards, director interlocks, governance quality, director liability, indemnification, corporate governance research

JEL Classification: G30, G32, G34