ONCE AGAIN: WHY DO WE NEED BOARDS?
Click below to a
fascinating research paper by Ulrike Malmendier of Stanford University
and Geoffrey Tate of the University of Pennsylvania.
The researchers looked at
the personal portfolio decisions of CEOs in Forbes 500 companies. They
identified "overconfident" CEOs as those who under diversify their
personal portfolios at the expense of maximization of their stock
option holdings.
These
"overconfident" CEOs tend to engage in more acquisitions than
average. They are prone to using cash and untapped debt capacity
to create diversification deals.
The empirical results
appear that the average merger since the late 1990's destroys value
shareholders in the the acquiring firm. But that does not seem to
have an impact on the overconfident CEO.
Warren Buffet said it
best:
"Many managements apparently
were overexposed to the story in which the imprisoned handsome price is
released from a toad's body by a kiss from a beautiful princess. They
are certain that their managerial kiss will do wonders for the profitability
of the target company.
We've observed many kisses but
few miracles.
Nevertheless, many
managerial princesses remain serenely confident about the future potency of
their kisses.
THE VALUE OF BOARDS OF DIRECTORS
Put the legal requirements for a Board to one side for a
moment. Put Sarbanes Oxley to one side for a moment.
From a business perspective, why do you need competent
Boards dominated by strong outsiders?
The argument goes like this:
1. Good CEOs are champions.
Champions are bred to have hubris. If they did not
have believe in themselves, they would not be aggressive CEOs.
2. In the absence of a
strong countervailing force, some CEO Champions will rigidly hold on to
a once successful business model that ought to be thrown away. In the
absence of a strong countervailing force, some CEO Champions will foolishly
rush into M&A activities that defy both logic and statistical
probability. In an earlier column, we once wrote about the LBJ Effect:
the tendency of leaders to put MORE resources into a failing course of
action once the data is clear that it is failing.
3. This strong countervailing
force is called the Board of Directors.
What do YOU think?
Respond to lstybel@boardoptions.com
BOARD OPTIONS, INC.
www.boardoptions.com
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