A key issue behind the scandals of the past decade, resulting in the increasingly widespread attention given to corporate governance, recently, is the tension between professional management and owners (or their representatives). Their interests do not naturally coincide, and much of corporate governance is directed at that problem.
It is important to bring management’s interests in line with owners through compensation schemes, and to affirm accountability through supervisory devices such as reporting and auditing requirements.
But the most important and fundamental objective should be to ensure the board’s interests are aligned with owners. Accordingly, the issue isn’t strictly to add outside directors – it is to remove inside directors. The board should consist of directors unequivocally representing owners. When businesses are family owned or controlled, this interest is served by family domination of the board. Lacking this, the heart of the board should be composed of directors who are skilled strategic-level decision-makers focused on creation of shareholder value. The board should be rounded out with additional outside directors who can bring in supervisory expertise in areas such as compensation, auditing, and other areas of particular interest to the industry in which the firm operates and which complement the skills of the other directors.
The relationship between management and ownership is inherently in tension. While ownership can legitmately (maybe not adequately, but certainly justifiably) take on the role of management, management can never properly do the reverse. Accordingly, the board must be purged of inside non-owner directors. A board that is owner-oriented and properly trained need not meet more frequently, really, than boards have traditionally done, as long as it has placed management in its subordinate role and established adequate supervisory mechanisms.
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