Pros and Cons of Inside Directors

250 Words1 Page
PROS Mainly 8% of the companies operating in the US are being driven by the same person i.e. the CEO and the chairman of the board (Lorsch & Maclvery, 1978). The pros of allowing an inside director to serve on the board is to exert enough power over the outcome and practices within the board, potentially involving in disagreement that occur from outside costliars. This combined office structure also gives room for the CEO to successfully manage information to be presented to the remaining board members (Cee Jensen, 1993a). This CEO/Chair combination end up with minimum effective supervision of the CEO. So therefore, with this minimum supervision of the CEO, the probable agency cost of managerial make of decision are exacerbated. Hence, board independence along with various supervising devices result to important mechanism to manage agency problem. CONS Quite a few studies disagree that owing stock by CEO and Board members provide them enticement thereby leading the firm to a maximum level and with due care monitor manager’s effectiveness. (See for example, Brickley et al, 1988). Due to officer and board possessing considerable holdings in the firm’s stock (whether direct holdings of stocks or option on the firm stock), their decision is to impact their individual wealth. More so, the significance of director’s decision regarding their wealth is complex as receipt of stock of options is an element to which compensation packages is being given to them. Meanwhile, they could involve in a minimum action of maximizing shareholder’s
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