HomeChapter 9: Comparing Changing Board Attributes9.2 The Transformation of Corporate Boards in the US and the UK

9.2 The Transformation of Corporate Boards in the US and the UK

The previous chapters indicate that the separation of decision management from decision control can be accomplished in several ways in the top decision making structure of corporations. One way to accomplish an independent structure is to compose corporate boards of directors with a majority of non-executive directors. Other design strategies focus on the separation of CEO and chair roles, the appointment of independent senior lead directors to boards and the formation of oversight board committees comprised entirely of non-executive directors.

The analyses in chapters six and seven of this study indicate that initiatives from stock exchanges, regulators and institutional investors have put more pressure on corporations to apply these design strategies. According to reformers, one-tier boards composed of a majority of executive directors are associated with the concentration of executive power that may lead to conflicts of interest between management and shareholders, such as greenmail payments, excessive executive compensation schemes and the adoption of poison pills.

The way corporations have organized the leadership structure in their one-tier boards is another important aspect of board organization that receives much attention from boardroom reformers. These suggest that the decision control task of the board to monitor and to discipline management is weakened when CEO and chairman roles are combined. The analyses of board attributes in the US (chapter six) and the UK (chapter seven) indicate that directors apply design strategies that separate decision management from decision control in their boards in response to external pressures. These changes are summarized in the next sections of this paragraph to find support for the proposition that one-boards have become more independently composed and organized in the US and the UK.

 

Changes in the Size and The Composition of One-Tier Corporate Boards in the US and the UK

According to Spencer Stuart (1996), the average size of boards has decreased from sixteen directors in 1981 to thirteen directors in 1996 in the top one hundred corporations in the US. The decreasing representation of executive directors mainly counted for a net reduction of 195 executive directorships between 1987 and 1996. The study also found that boards are more often composed of a majority of non-executive directors. The latest figures indicate that boards are composed of nearly 3.5 non-executive directors to every executive director in 1996 compared to two non-executive directors to every executive director in 1987 (Spencer Stuart, 1996).

On average, corporate boards are composed of three executive directors and ten non-executive directors in 1996. Although a similar development can be observed in the UK, changes in the size and the composition of boards appear to be less significant in a sample of one hundred corporations listed on the London Stock Exchange in 1996 (Spencer Stuart, 1996g). The average number of non-executive directors increased from 6.1 in 1991 to an average of 6.5 non-executives in 1996. The average number of executive directors decreased from 6.6 in 1991 to 6.1 executive directors in 1996. As such, the average size of boards of directors did not change significantly between 1991 and 1996. This indicates that on average corporations did respond to external pressures with modest changes in the size and the composition of boards in the UK.

 

Changes in the Leadership Structure of One-Tier Corporate Boards in the US and the UK

Another development in the governance structure of listed corporations relates to changes in the leadership structure of one-tier boards. The figures in chapter six suggest that more senior non-executive lead directors are appointed to boards of listed corporations in the US. These lead directors are appointed to provide the CEO advice on the selection of board committee members and the organization of board meetings. Lead directors also monitor the adequacy of management information, set the agenda of the board and set up procedures to formally evaluate the performance of the CEO and other executive directors (Lipton and Lorsch, 1992, The Business Roundtable, 1997).

The appointment of lead directors is a relatively new development in the US. This development is illustrated with the following figures: Spencer Stuart (1996) indicates that a minority of ten corporations out of a total of one hundred listed corporations had assigned lead directors to their boards in 1995. This number totaled to 36 corporations that had assigned lead directors to their boards in the same sample in 1996! Also studies from NACD/Deloitte and Touche LLP (1995) and Korn Ferry International (1997) indicate that corporate boards increasingly favor the appointment of independent lead directors. In comparison to the appointment of lead directors, the separation of CEO and chair roles receives only modest support from corporations in the US. Korn Ferry International (1997) found that two percent of 1,125 directors consider the separation of the CEO and chair roles. The study also indicates that six percent of 878 investigated Fortune industrial and service corporations have separated the CEO position from the chair position of the board. Baliga et al. (1996) found several possible explanations for the persistence of CEO-duality in the US:

  • duality reflects the traditional influence of firm management in board composition and the reluctance of the board to exercise its governance prerogative;
  • the board may be indifferent to the duality issue and is content to let duality prevail as long as it is convinced that the CEO has the ability to occupy both positions effectively;
  • duality may be a superior organizational structure;
  • though a non-duality structure may be superior to a duality structure, ceteris paribus, there are other managerial control mechanisms in place to mitigate the abuse of managerial discretion that may arise from a duality structure.

Source: Baliga et al. (1996).

 

In contrast to the findings in the US, chapter seven of this study found strong support from the business community to split the two roles in the UK. According to Spencer Stuart (1996g), the Cadbury Code has influenced the way corporations divide the power structures at the top of corporations. The study indicates that 25 corporations out of a total of one hundred corporations listed on the London Stock Exchange combined the roles of CEO and chair in 1991. Only seven corporations in the sample continued to have a combined board leadership structure in 1996. The appointment of lead directors to corporate boards is less common compared to the number of lead director appointments in US due to the strong support of the business community to separate the chair role from the CEO role in the UK.

 

Changes in Board Committees of One-Tier Corporate Boards in the US and the UK

Another development relates to the formation and the composition of oversight committees in one-tier boards. This study found that oversight board committees have become common elements of the corporate governance structure of listed corporations in the US. Developments in legislation and listing rules have resulted in the formation of audit committees in corporations listed at the NYSE, NASDAQ and AMEX. Audit committees have become more independently composed in the US between 1978 and 1987. Also compensation and nominating committees have become more common and more independently composed in the US.

Developments in the UK suggest a similar emphasis on the formation of independence board committees. A study by the ICA indicates that directors in 66 percent of 202 corporations worked with audit committees in 1992 compared to 17 percent in 1985 (ICA, 1992). The Cadbury compliance report also indicates that 90 percent of audit committees are composed of three or more non-executive directors in 1995 compared to 59 percent in 1991. Also remuneration and nomination committees have become standard elements of the governance structure of listed corporations in the UK.

 

Signs of Board Model Transformation in the US and the UK

The findings on changes in the composition, the leadership structures and the oversight committees of one-tier boards may reveal a process of board model transformation in the US and the UK. This process is visualized in figure 9.1. This figure presents a classification of board models based on the composition and the leadership structure of one-tier boards in the US and the UK. The figure is based on the assumption that the board becomes more independently composed and structured when the governance structure of a board transforms from a “type 3” one-tier board into one of the three other types of board organization. In its dual form, the classic one-tier board model (type 3) is entirely composed of executive directors who are chaired by the CEO. The analyses in part II of this research indicate that this model used to be the dominant board model in the US. Yet, the findings indicate that directors have applied design strategies that have altered the governance structures of their boards in this country.

Arrow a in figure 9.1 indicates that directors have transformed their boards from a board type with a majority of executives (board type 3) into a structure with a majority of non-executive directors (board type 2) between 1981 and 1996 in the US. Meanwhile, directors have paid more attention to the appointment of lead directors to compensate the persistence of CEO-duality in the US. Interestingly, arrow b in figure 9.1 indicates that directors have followed a different path in response to external pressures from boardroom reformers, investors and regulators in the UK between 1992 and 1997.

 

Figure 9.1

Changing Board Leadership Structures and the Appointment of Non-Executive Directors To One-Tier Boards in Listed Corporations in the US and the UK

 

Changing Board Leadership Structures and the Appointment of Non-Executive Directors To One-Tier Boards in Listed Corporations in the US and the UK

Sources: chapters 7 and 8.

 

A majority of boards of top one hundred listed corporations have changed from a board with a small majority of executive directors and combined CEO and chair roles (between board type 2 and board type 3) to a model with a small majority of non-executive directors and an independent board leadership structure (somewhere between board type 1 and board type 4). As such, the relatively large number of executive directors in boards of listed corporations in the UK - compared to non-executive directors - seems to be compensated with a strong emphasis on the separation of CEO and chair roles in these boards. In addition to these observations, independent oversight board committees have become common elements of the governance structure of listed corporations in the US and the UK.

 

Implications for the Independence of One-Tier Boards in the US and the UK

What do these developments mean for the independence of one-tier boards in the US and the UK? Changes in the organization of one-tier boards may indicate that corporations, directors, legislators, institutional investors and other reformers have observed that board design strategies which do not facilitate the separation of decision management from decision control can potentially threaten the independence of boards of directors in listed corporations. As such, changes in the composition of boards in the US and the UK suggest support for assumptions A.1a and A.3a that state that one-tier boards composed of a majority of executive directors are negatively associated with the separation of decision management from decision control and positively associated with the integration of these roles. Changes in the board leadership structure and the nomination of lead directors to one-tier boards also suggest support for the assumption that one-tier boards with a combined board leadership structure are negatively associated with the separation of decision management from decision control (assumption A.1b) and positively associated with the integration of these roles (assumption A.3b).

These changes indicate that dual board leadership structures are increasingly replaced with independent leadership structures or that these are counter balanced by the appointment of independent non-executive lead directors to one-tier boards. The empirical analyses in part II of this research also indicate that independent oversight committees have become more popular in the US and the UK. To support the independence of corporate boards in these countries, board committees have become more independently composed and chaired. These observations suggest support for two additional assumptions on the association between the formation of independent oversight board committees and the separation of decision management from decision control (assumption A.1c) and the integration of these roles (assumption A.3c) in one-tier boards. Changes have not taken place in the unitary structure of one-tier boards in the US and the UK (assumptions A.1d and A.3d).

These developments in the formal organization and the composition of one-tier boards may also generate support for the first proposition of this study on the transformation of one-tier board models. This proposition (P.1) states that directors apply design strategies that facilitate the separation of decision management from decision control in their boards. Seen from an empirical point of view, directors are adopting board attributes that show some similarities with those of two-tier boards, e.g., the independent leadership structure of two-tier boards. These developments may suggest a movement of one-tier board types into the direction of the two-tier model. As such, differences between the formal organization of one-tier and two-tier boards may diminish in the US, the UK and the Netherlands. A summary of research findings on the independence of one-tier boards and relevant assumptions are presented in table 9.1.

 

Table 9.1

Assumptions on One-Tier Board Attributes and Research Findings

Assumptions:

Relates to:

Findings are based on an analysis in the US between 1981 and 1997 and in the UK between 1992 and 1997.

 

A.1a, A.3a.

Board composition:

  • board composition receives more attention from reformers and directors who recognize a potential threat of insider-dominated boards to the formal independence of one-tier boards.

A.1b, A.3b.

Board leadership structure:

  • board leadership receives more attention from reformers and directors who recognize a potential threat of combined leadership structures to the formal independence of one-tier boards.

A.1c, A.3c.

A.1d, A.3d.

Oversight board committees and board organization:

  • oversight board committees receive more attention from reformers and directors who recognize a potential threat of insider-dominated boards and combined leadership structures to the formal independence of one-tier boards. Changes in the formal unitary structure have not taken place.
 

Proposition P.1

Proposition P.1: to facilitate the separation of the executive directors’ decision management role from the non-executive directors’ decision control role, appropriate attributes of two-tier boards are incorporated into one-tier boards.

 

  • more non-executive directors are appointed to one-tier boards and the number of executive directors decreases while overall board size is stable in the UK or while board size decreases in the US.
  • directors have put in place more independent leadership structures, such as lead directors and separate chair and CEO positions.
  • more oversight committees are formed composed of a majority of independent non-executives directors, chaired by a senior non-executive director.
 

 

 

 


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Maassen, G.F. (2002). An International Comparison of Corporate Governance Models. A Study on the Formal Independence and Convergence of One-Tier and Two-Tier Corporate Boards of Directors in the United States of America, the United Kingdom and the Netherlands.

Maassen, G.F. (2002). An International Comparison of Corporate Governance Models. A Study on the Formal Independence and Convergence of One-Tier and Two-Tier Corporate Boards of Directors in the United States of America, the United Kingdom and the Netherlands. Amsterdam: Spencer Stuart Executive Search.