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How to Keep Wimps and Cronies Off Company Boards

How to Keep Wimps and Cronies Off Company Boards
Businessweek.com
By Ira Sager
Published: September 18, 2014
>> How to Keep Wimps and Cronies Off Company Boards

PaperThe Quad Model for Identifying a Corporate Director's Potential for Effective Monitoring: Toward a New Theory of Board Sufficiency

Authors: Donald Hambrick, Vilmos Misangyi, and Chuljin Park, Penn State University

Published: August 2014

Despite numerous reforms over the years, corporations and their managers keep misbehaving in predictable ways, because the directors appointed to guard against such conduct turn out to be ineffective watchdogs.

The ability to predict whether a company's board will effectively monitor and punish ethical lapses could avert legal troubles for individual companies, as well as, perhaps, prevent the next worldwide financial crisis.

In an exploratory paper presented at the Academy of Management's annual meeting in August, Penn State University professors offered their formula for board effectiveness. Good board directors have four qualities: independence, expertise, bandwidth, and motivation. One or two won't cut it.

Board directors neglect or ignore their oversight responsibilities if they don't have all four of these characteristics. The job requires "vigilance on many fronts," including a willingness to invest time, the moxie to ask tough questions, and a working knowledge of the business. "The monitoring role is completely premised on doubt and skepticism, qualities that perhaps few directors possess and that fewer still may wish to display, and qualities which CEOs certainly do not relish in their overseers," the researchers note.

The paper's main revelation: To improve oversight, boards need at least one fully qualified director (what the researchers call "quad-qualified," or having all four qualities). The model doesn't work if these qualities are sprinkled among members of the board.

While having one director with the right attributes is good, the researchers point out that two is better: "If a board has two or more such fully qualified directors, who can bolster and amplify each other, the company's likelihood of governance failure will be especially greatly reduced."

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