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the research focuses on the board of directors as being a a Cornerstone a focal point of of good corporate
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governance and when I say that I mean that that the shareholders of a of a corporation are going to appoint a board
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of directors that then gets involved in the Strategic decision making and the monitoring of management to make sure
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managers are doing uh what shareholders would like them to do um and many of these uh these individuals on the board
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of directors are independent directors meaning they're independent of management so they can act as sort of a
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a watchdog or a monitor of managers but the tricky part there is to make sure those Outsiders um those independent
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directors are well informed about what's going on at the firm these are busy
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individuals with typically high-profile jobs they're only spending four five or
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six days a year involved with the company and so it's a critical issue as to how you make sure they have the
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inform information uh that they need to to Monitor and advise managers and so in
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this paper we focus on um how do firms how does management how does the board of directors uh take actions uh to
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ensure and have a degree of comfort that they're getting good information that
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they can use to to to make good decisions uh the key takeaways from our this particular research project are to
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realize the interconnection between information and uh monitors and decision makers that those two really need to go
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together and that to have a certain type of director in place uh that requires a
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certain type of information uh environment or certain uh level of transparency uh so the big tension or
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tradeoff when looking at a board of directors is between independent and inside directors inside directors are
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affiliated with the firm they're more involved on a day-to-day basis they have
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a lot more background information uh so they're not going to be as uh reliant on
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external information sources uh as an independent director uh is is only going to be there uh five six days a year
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typically uh so they need to information source that can get them informed up to
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speed quickly to facilitate uh their decision- making making sure they're asking the right questions uh things
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like that so the independent director is Al also needs to think about uh their own
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personal reputation and the risks that they face so one of the the biggest costs of being an independent director
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is yes you have to put in some time but you're concerned that if something goes
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bad you're going to be blamed for it and you could be litigated against you could
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be sued uh and it could severely damage your reputation so those independent directors are only going to want to sit
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on a board where they feel that they're going to be getting good information so
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they're appointed from the outside if you if you thought about picking up a set of financial statements and just
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using the public information that's available about a firm I don't think any
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of us would feel like we could make strategic decisions for that company just by looking at their their SEC
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filings you need a much deeper richer set of information so those outside directors come in and they have to get
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themselves up to speed so they are typically interviewed by management they're interviewed by the existing
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board of directors uh and then once they sit on the board they have regular meetings with managers managers present
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budgets managers present ideas managers present lots of things um and that certainly is a very important sort of
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Channel by which information would get conveyed to the directors but again in in Most states of
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the world in most situations that might be perfectly reasonable place for directors to get information but where
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they're concerned is and we've seen lots of cases where managers get up to some
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Financial Shenanigans or some Earnings management or doing things that they shouldn't be doing in those in those
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very important settings in the the very settings where you'd like to get the
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best information managers are not going to give you that information so your channel for getting information about
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things that the managers don't want you to know pretty much get get shut down
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and so the Board needs to then figure out well how do I ensure that the the the tires have been kicked properly if
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you will and so there's lots of people that are looking at the firm analysts
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are looking at the firm Auditors are looking at the firm Regulators are looking at the firm creditors are
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looking at the firm Supply ERS uh employees there's lots of different part institutional shareholders it might be
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some hedge funds or private Equity that has a a large share of block holders that have investment so all of those
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individuals and institutions are kicking the tires if you will and so the board wants to make sure that you have enough
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of those other people out there kicking the tires that they can potentially Fair
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it out things or figure out things um that the board members just either don't
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have the time or the information or simply can't can't do themselves and so
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it's a very complicated information environment but uh the key issu is to remember that the the most the you know
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the things you care most most about as a director if you're trying to do some
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monitoring is making sure you get information when managers are least likely to want to give it to
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you I think what surprised the maybe I know sort of surprised us but but you know one of the the interesting facts
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that that we observe in the paper is that uh the relation between information and the structure of boards goes goes in
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both directions and specifically what I mean by that is that uh trying to force Upon A firm more independent outside
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directors when that firm uh is is po informationally opaque or if that firm has difficulty communicating information
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to outside directors trying to force outside directors into that firm may not work those directors simply may not be
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able to get the information they need to do a good job at the same time we also find that there is some element of when
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you do Force independent directors onto a board they do try to take actions to get better information and so it's this
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very complex and dynamic information structure where uh the directors have some ability to to force the firm to
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become more transparent but at the same time going too far and trying to have too many of the directors independent uh
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can sometimes uh cause informational problems where those directors simply aren't able to get all the information
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they need to give you a little bit of background uh about the the study um without getting too technical
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we we use a uh certain regulation that the uh stock exchanges the listing exchanges uh put in place it required
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companies to have a certain uh proportion of independent directors um um so before getting into the analysis
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the question we asked ourselves is why did the companies have uh the board structure that they did to begin with so
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where where are they moving from and uh I think that helps uh helps understand our our Point thinking about it from
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that perspective so the the basic idea behind the paper the methodology was to um
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observe a there a regulation that was passed in the early 2000s um some of was related to the the exchanges the major
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stock exchanges and they required uh a majority of the board of directors to be comprised of independent directors um
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before that there were lots of boards that were dominated by inside directors and and this new regulation forced uh a
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majority to be Outsider independent directors and so when that happened uh firms had to shift their board
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structures dramatically so it's this exogenous shock this regulation that forced these firms to add more
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independent directors and then we observe well how do firms react to that um do they struggle to get the
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information in the hands of those new independent directors so if if prior to the regulation you had say eight inside
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directors and two independent directors and after that you had seven outside directors or independent directors and
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only three or four inside directors somehow you have to get those outside directors up to speed uh on information
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so we look at um do firms change the financial reporting quality do firms uh use the auditing process in a different
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way do firms uh uh disclose more public information in the form of management forecasts or analyst forecasts so you
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know does does the firm take actions uh that would potentially get better information in the hands of directors
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Beyond just the internal information that the directors will get from managers so simply asking managers to
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give us good information is often not good enough or not a credible information Source right so the
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regulation provided the immediate consequence was these companies that didn't have a majority of independent
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directors had to get a majority and our papers focus on well what's the what's
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the second level of consequences once those independent directors are there perhaps even before uh while they're
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trying to uh attract and and get these independent directors how do they make changes to the information environment
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to accommodate uh this new board structure that's going to uh be in place after the
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regulations so the regulation is sort of like the first Domino that fell and then
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we're looking at uh subsequent consequences one of the common misperceptions in general with corporate
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governance is that there there are certain best practices that firms can use and I think the whole the notion of
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a a single best practice in corporate governance is is a is is a misnomer I don't think it really describes the way
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corporate governance works so what might be a good practice for one firm could be
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a disaster for another firm or very costly for another firm so uh and so we focus on Boards of directors and we make
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the point that that simply forcing a firm to have lots of outside directors is not necessarily a good thing if those
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outside directors are going to be making decisions in the dark so unless those outside directors are informed they're
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not going to be able to do a good job and you can to take that same idea and you can impose that on on virtually
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every other simple governance structure so another one that people often talk about are uh the CEO should not Al also
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be the chairman of the board that there should be a an independent chairman of the board the CEO and those two roles
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should be separate uh and there's extensive literature that shows that sometimes having the CEO be the chairman
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of the board is good and sometimes having the CEO be the chairman of the board is bad and you can go right down
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the list with you know staggered boards with executive compensation with with stock options and stock ownership and
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just about every component of governance and it's important to keep in mind that
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there simply is not one single best practice but it needs to be conditional on the firm's setting and that's the way
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people should think about it even beyond that just stopping to ask well why did why why are there differences in the
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first place before we start trying to push everyone to the the same direction and thinking about what gave rise to why
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do some companies already have a majority independent directors While others don't well it could be the ones
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that don't are engaged in a lot of research and development a lot of uh proprietary information that would be
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difficult to credibly communicate to Independent directors or maybe they don't want to for proprietary reasons
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and it makes sense for that company to have a majority of uh of uh non-independent
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directors uh well one practical implication is where do the uh independent directors get the
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information inform that they're using and uh we use a variety of different measures that are relatively common in
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the corporate finance uh literature uh we look at analyst forecast we look at management forecast and management is
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often uh an information Source in terms of the uh frequency with which they issue forecast or the Precision uh we
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look at uh evidence from from uh stock market trades we also look at uh some accounting measures uh there in terms of
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audited Financial reports so those are all uh different pieces that go into the information mix that uh directors and
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especially uh independent directors draw on for uh when they're making their
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decisions and what that means from from the corporation's perspective is that if
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the corporation is trying to put in some changes with respect to governance so if
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they're thinking about changing their board structure they're thinking about
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adding new directors to the board they need to be cognizant of these informational issues so they need to
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give some thought as to how are we going to make sure that those busy people that
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are only that have have a limited amount of time to spend with us are making good
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decisions and it's in the firm's best it's in Management's best interest to
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make sure that the board is informed because otherwise they're imposing their
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voting and imposing their power over management uh without the information to sort of move the firm in the right
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direction so it's sort of uh the research I think says something about what what firms should be thinking about
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when they're making these changes to corporate governance and I think it also
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could potentially guide Regulators so to the extent that Regulators are going to
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make changes and they've been making a lot of changes to corporate governance
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over the last 10 or 15 years in the last 10 or 15 years The Regulators have decided that uh the majority of every
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Board of Public board of directors will be comprised of a majority of independent directors the audit
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committee needs to be 100% independent directors the compensation committee needs to be 100% independent directors
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the nominating committee for nominating board members needs to be made uh comprised of 100% independent directors
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so The Regulators have been over the last 10 or 15 years imposing more and more cost risk time uh on these
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independent directors and so more and more of the decision making in public corporations is is in the hands of
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independent directors and that's only going to work uh if those independent directors have the information that they
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need so The Regulators need to be cognizant of that as well uh when they're when they're imposing govern
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governance standards another regulatory uh aspect that we uh I would say take as
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a given in our paper is there there have also been uh regulatory changes over the
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last 15 years uh with respect to uh what's disclosed about governance and what I have in mind is in particular is
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the compensation disclosures have gotten a lot uh a lot more uh a lot better and a lot
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more transparent over the last 15 years so now we can uh we as researchers and presumably shareholders analysts
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Regulators have a lot more information about what the compensation package of the CEO and the top Executives looks
00:15:02
like for example uh so there um to the extent that these other uh these other uh economic actors are also doing some
00:15:11
of the monitoring that information uh is potentially facilitating uh their decision making and their their
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monitoring one thing we were talking about uh ahead of time uh in terms of a topic that's in the news is uh
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shareholder voting has uh gotten a lot of attention in the business press lately uh one uh specific examples SE un
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pay voting uh so where the companies have to put the CEOs uh compensation package to a shareholder vote once every
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three years um in the US it's a non-binding vote uh but it is a way for shareholders to to express their
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sentiment about the compensation package um but that's symptomatic of what what
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seems to be a push towards more uh more shareholder empowerment uh in terms of governance giving shareholders
00:16:06
more voting and in light of our research that raises a question well uh just like
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independent directors we need to think about where are they getting their information when you're talking about
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dispersed shareholders who have uh potentially smaller Stakes uh less of an incentive to monitor uh where are they
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getting their information how are they going to be processing it so that's something that needs to be kept in mind
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if you're going to if Regulators for example are going to push for uh uh more
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shareholder empowerment the reason the paper made a contribution to the academic literature
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in this area um was it built on prior literature that essentially argued that um that the information environment that
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the firm was was wrapped up in was was essentially fixed or exogenous to the firm and and the prior literature argued
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that there was really very little that the firm or the board could do to alter the the amount of
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transparency uh that that might be uh there with with the firm between the board and the firm um and so what that
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literature argued is that uh in firms that aren't very transparent they simply
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can't have a lot of independent directors and in firms that are fairly transparent they can now that literature
00:17:27
is primarily in in an um now coming at it from an accounting perspective there's a lot of accounting literature
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that focuses uh very closely on how firms can make financial reporting decisions and and alter the auditing
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process to make the firm more transparent when it when it's not and so our research took the perspective of
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well we think that uh it is possible for the board of directors to step in and actually make some changes for
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management to make some changes that could actually facilitate more indep dependent directors and so I think I
00:18:00
made the point earlier that kind of goes in both directions the the information environment dictates the the the proper
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governance structure that be put in place in terms of board Independence but board Independence likewise can
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influence the information environment and so the two things uh tend to work together move
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together we're working on a a survey paper talking about governance uh in particular in the context of
00:18:28
uh financial institutions and Banks and we're trying to apply some of what we
00:18:32
learned from this paper and and other papers in the literature uh in the context of of Banks and financial
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institutions in particular um that raises some interesting issues such as financial institutions uh have an
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inherent level of of complication complexity uh that that most other organizations don't have so uh from an
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accounting perspective their financial statements tend to be longer a lot more is disclosed in the footnotes so there's
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a lot more information uh the information processing demands are uh uh presumably much higher in that setting
00:19:05
so uh that raises the question well how do independent directors uh acquire process this information in inherently
00:19:13
complex uh potentially opaque institution uh in the financial institutions uh setting there's also the
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Regulators uh who play a very important role and to some extent can substitute for uh some of these other governance
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mechanisms so it's another another set of eyes on management and uh they have
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informational demands as well and thinking about how those are going to get resolved becomes very important and
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just putting in a little bit more context and in the wake of the financial crisis certainly one of the the issues
00:19:45
of the concerns were that managers were up to certain things taking certain risks that shareholders and the board
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was not was not aware of and so there was a concern that that the information of transparency wasn't n there between
00:19:59
what managers were up to and what the board and what shareholders knew and so the the bank Regulators have sort of
00:20:05
tried to to move forward on that and see what they can do about it so this work Chris was talking about uh We've brought
00:20:11
in a co-author that's uh that that works with the Federal Reserve Bank of New
00:20:15
York um and so this paper will be published with with him as a co-author and there we do focus on specific issues
00:20:23
that Banks face uh that are unique to Banks and and trying to move forward on on increasing transparency between the
00:20:30
board of directors and shareholders and potentially even regulators and and [Music]
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managers