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            Focus Corporate Boards of Directors
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The board of directors is the group of people who are elected by
shareholders to look out for shareholders’ interests. How well they do
that is always a matter of debate, but at no time more so than now
coming after the corporate governance crisis where shareholder’s
interests were seemingly forgotten at many firms.

How closely do the boards actually monitor management? This has been a
difficult question to answer. Some authors have found there to be
little relation between firm performance and CEO turnover. However,
Goldman, Hazarika, and Shivdasani now give us an explanation to this
troubling finding: the sensitivity is not the same at all times. In
particular the relationship is significantly stronger in years the stock
is down. Thus, even when the firm lags its peers, if the stock price is
up, there is less risk of a manager being forced out. Why? One reason
that the authors suggest is that a stock price decline triggers further
investigation of performance, whereas if the stock price is up, the
board feels things are OK. The importance? In the words of the
authors, the results suggest that “even though the overall sensitivity
of turnover to performance may be low in a broad sample of firms, this
sensitivity can be high for firms that don’t meet a performance
threshold. In this regard, the prospect of CEO turnover can be a
powerful incentive device for certain firms.”
http://207.36.165.114/Denver/Papers/CEOturnover.pdf

In an interesting paper that may surprise some who have grown accustomed
to hearing that Boards of Directors fail to look out for shareholders,
Scholten finds that boards of directors are the main party that forces
out CEOs following a poor acquisition. More importantly, Scholten
reports that Boards do this regardless of whether there is an active
takeover market or not. (This is important because earlier papers, for
example Mikkelson and Partch (1997) and Hadlock and Lumer (1997), had
found that Boards need to be pressured into action by an active takeover
market).
http://207.36.165.114/Denver/Papers/InvestmentDecisionsandManagerialTurnover.pdf


In a forthcoming Journal of Finance article, Yermack investigates how
board members are compensated for their actions. Specifically he asks
how sensitive their wealth is to changes in firm value (much like the
famous Jensen and Murphy 1990 paper that looked at CEO pay). He finds
that for a change of $1000 in firm value, there is a corresponding
change of 11 cents to board members. Thus, for a one standard deviation
change in firm value, the average board member would see his/her wealth
increase by $285,000. This is from not only options and stock
ownership, but also a greater likelihood of being selected to serve on
other boards.
http://www.afajof.org/Pdf/forthcoming/JF%202343%20Final%20Revision.pdf

Any bankers on Board? Xie finds that if you have a banker on your board
of directors, CEO pay sensitivity is likely to be lower. This makes
sense if you consider bankers (who may be looking out for their bank and
not just shareholders of the firm) tend to be more risk averse then
diversified shareholders. Additionally, and not surprisingly, the
banker has a greater impact on smaller boards.
http://207.36.165.114/Denver/Papers/Banker%20Director%20and%20CEO%20Compensation.pdf