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Board Committees

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Board members who chair key board committees can also add to firm value through their approach to strategic governance.32 In fact, the importance of board committees has grown over time due to increased legal requirements and the growing complexity of the business environment.33 Research tells us about the overall board structure or board member demographics, such as functional backgrounds and ages, but not so much about the detailed work of directors that mostly occurs in committees. In particular, all boards, especially in Western cultures, have committees that identify new board members and facilitate CEO search processes (nominating and governance committees), set executive compensation (compensation committee), and oversee financial reporting (audit committee). These three dominant committees are today required by public stock exchanges and the SOX Act. The SOX Act additionally requires that they be headed by independent outside directors—those that are not inside managers and have no stakeholder affiliation (such as legal representation or customer or supplier relationship). The three committees, part of the audit culture, function to protect shareholders and other stakeholders from managerial malfeasance. Managers should not have the power to nominate board members that supervise their decisions, set their own compensation, or make aggressive or fraudulent accounting decisions.

In theory, shareholders appoint directors. In practice, however, shareholders simply ratify director candidates selected by the board's nominating committee, although the proxy voting process has become increasingly complex due to activist discontent.34 As described in more detail in the Strategic Governance Highlight (Box 1.3), activist board members are elected to targeted boards and often represent wolf pack hedge funds who have teamed together. These board members push for share price increases and other activist agenda items, which may come at the expense of other stakeholders. The nomination process is hence critical in making appropriate director appointments, as the effectiveness of the board with regard to its monitoring role depends on the quality of the board members selected.35

Understanding and Managing Strategic Governance

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