Effects Of Board Structures In Corporate Governance

Effects Of Board Structures In Corporate Governance

The performance of an organization relates directly with the structure of its board structure. Board structures usually surface themselves in different types but the success of any structure largely depends on its application and hence no type is superior the other. The distinct types of board structures include, two tired, outsider controlled, single, and insider controlled types of structures (Altenburg, 2011). A research by an author Gillette, which experimental in nature, ideally brings out the effects of board designs on the governance and performance of firms. The research clearly outlines that the governance of a firm depends on the board design since; the design affects the policies a corporation adapts. It is apparent that according to the results of the study, institutional policies and personal interested are adapted differently according to the structure of the board. This research paper outlines and analyses different structures of a board and the effects of each structure on firm governance.

Nash equilibrium of the four designs of board is known by their potential to adapt institutional based policies and their nature to synchronize activities (Hopt, 2011). It is according to this characterization that equilibrium divides into two, efficient and coalition-proof Nash equilibrium. Equilibrium is efficient if it is, the dominant equilibrium and no other equilibrium exist while a coalition-proof equilibrium is equilibrium that no other equilibrium if present can upend it. According to the research, a coalition- proof Nash equilibrium cannot execute institute-based policies, which especially maximizes value of a corporate. It is however important to note that, single tired boards are similar to two tired boards in the outcomes of equilibrium they maintain. This is especially because; these two types of board designs employ institutional based policies, which are only achievable in an efficient Nash equilibrium. Coalition-proof equilibrium can still be adapted in a corporation with a single tier board but is inside controlled.

A single-tired board that is composed of majority insiders, every member will have a preference to undertake a project rather than rejecting it regardless of his or her information hint (Brain, 2011). This is because in a situation where the insiders are the better part, they command strongly rendering the overseers almost immobile to overrule the insiders’ preference. The research still proves that defaulting by a subgroup of the insiders that can render a project vulnerable to rejection is not maintainable. This is because the defaulters have the power to payoff and vote back for the project approval. Although this gives the insiders to have a sense of control in their corporation, the corporation is prone to experience overinvestment since quality of projects lack consideration. It is thus evident that in coalition-proof equilibrium with insiders being the majority in the board, there is guarantee of project acceptance regardless of the overseers’ votes although their votes are unrestricted.

A switch in the ratio where the overseers become the majority the voting powers consequently modify so is the equilibrium, which becomes an effective Nash equilibrium. In such, even positive response from one hundred percent of the insiders cannot guarantee acceptance of a project but only the overseers vote can. However, if the change in voting powers accompanies a reduction of the insiders’ representation in the board to one, then the effectiveness of the board is also prone to change (Brain, 2011). A representation of one in the board makes coordination on the inside more efficient, which purges the likelihood of efficient equilibrium leading to an institutionally based policy. The policy can only be active if the insiders send their honest preferences regarding the quality of a project.

In a two- tiered board, governance seems relatively different in some aspects compared to a single-tiered board. Overseer’s can only control only solitary board tier and have the power to obstruct the insiders’ proposals even if the insiders’ votes outnumber theirs (Gillette, Noe, & Robello, 2008). Consequently, the overseer can maneuver dependable outcomes. Recent research shows that since even in a two- tiered board the insiders are as many as in the case of a single-tiered board, a single insider cannot affect the outcome. This design of a board only allows Nash equilibrium that maintains institutional based policies. It is therefore a common feature in both single and two tiered boards to expect identical outcomes if the overseers are the majority with insiders being more than one.

In a two-tied board where the insiders are more than one then if the equilibrium is a coalition-proof, a hundred percent of the insiders vote to decline a project even with the two information indicators (Gillette, Noe, & Robello, 2008). This theory finalizes that with the insiders being majority in a board, overinvestment is a common produce of their coordination. When their number in the board declines or their votes subjected to a sanction by a second board in case of a two- tiered board then they lose control. Thus, inclusion of many insiders in the board results into an equilibrium that is desirable to both the overseers and the insiders. It is also evident from the theory that when outsiders have total control in any board structure results to a coalition-proof equilibrium with decisions being biased against the insiders (Gillette, Noe, & Robello, 2008).

Inclusion of outsiders in a board noticeably affects the equilibrium of whether they are the minority or the majority. This is especially because presence of outsiders in the board calls for adoption of institutional based policies more frequently (Gillette, Noe, & Robello, 2008). This leads to a coalition-proof equilibrium in boards where the outsiders are the majority. This is in total contrast of a board having insiders as the majority as it is possible to have self-interested policies since the insiders always wants the policies designed according to their preferences (Gillette, Noe, & Robello, 2008). Yet, outsider controlled boards prove more success as they are able to barricade appalling projects but not able to ensure implementation of the good quality projects, this is especially common in two-tiered boards. Thus sovereign outside directors have the potential to perform as overseers even with without the direct personal information about the operations of an organization (Hopt, 2011).

In conclusion, the structure of a board can be single-tiered or two- tiered board. In a single- tiered board, the votes of the insiders come prior to those of the overseers although the overseers’ votes are not restricted (Brain, 2011). In a two-tiered board however the insiders, proposals are passed to another board and a project have no guarantee of acceptance as in the case of a single- tiered board a project proposed by the insiders stands is guaranteed of acceptance. A board is as outsider controlled if the outsiders are the majority in the board and control all decisions or insider-controlled if the insiders are the majority in the board and control all decisions.

References

Gillette, A.B., Noe, T.H. & Rebello, M.J. (2008). Board structures around the world: an experimental investigation. Review of Finance, 12 (1) pp.93-140. DOI: 10.1093/rof/rfm027.

Altenburg, R. (2011). The determinants of roles and responsibilities of boards of directors. London: GRIN Verlag.

Hopt, J. (2011). The European Company Law Action Plan Revisited: Reassessment of the 2003 Priorities of the European Commission. Leuven: Leuven University Press.

Brain, T. (2011). The duties and Liabilities of the board of directors. New York: Pearson Technology Group.