Corporate Governance

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Specifically, how can company management be a part of its Board of Directors? Wouldn’t that make a Board’s integrity questionable?

In: Economics

3 Answers

Anonymous 0 Comments

Let’s use JP Morgan as an example, since Jamie Dimon is the CEO and Chairman of the company. The company is considered (among the industry at least) to be among the best-run banks of any size, and Jamie among the best bankers.

The JPM Board also has Lee Raymond, the Former CEO of Exxon, as its lead independent director, which is exactly what it sounds like: the leader of the board members who are not directly employed by JPM. He is basically Jamie’s primary sounding board, but also has specific governance controls in place like the ability to call a board meeting (full or independent only), set the agenda, etc.

Where Jamie is primarily charged with running the company day-to-day and setting the strategic vision, Lee is essentially in charge of running the independent Board oversight and being a sounding board.

It’s also worth noting that Jamie is a member of any of the Board committees, including Audit, Compensation, Governance, or Risk.

So the short answer is: Boards have management on them because they want management (who are in many cases substantial if not majority shareholders) to be in on major decision making and have a vote. Good corporate governance is having policies in place that provide oversight to those Board members.

If you’re truly interested in this, a company’s proxy statement usually provides details the oversight structure the independent Board members creates over the management Board members.

Anonymous 0 Comments

The Board represents the shareholders. So, two things usually happen:

1. In a company, management wants the company to succeed, and the shareholders typically want the company to succeed, so that profits are high. Everybody’s desires and goals basically align.

2. Management can be the biggest shareholders. Depends on how much stock everyone has. Sometimes management is paid in stock options in addition to actual money, so they end up being the biggest shareholders.

In addition, Management is typically specialized (CFO knows a lot about finance, CIO knows a lot about information technology, etc.), and the Board can decide to generally supervise but otherwise trust these individuals to make their specialized decisions for day-to-day operations, to the point where they’re actually members of the Board. It’s more efficient that way.

Anonymous 0 Comments

Their goals are the same as shareholders and they have expertise in how the company runs, etc. so their input would be valuable to outside board members. And typically they only hold one or two seats, meaning company management has nowhere near a majority of seats.