College Station, United States:
It seems Twitter’s board of directors finally accepted Elon Musk’s hostile offer and agreed to the sale – but not before it received severe defeats from Tesla and SpaceX millionaires, Twitter founder Jack Dorsey and other prominent users on their own social networks.
Musk, who on April 25, 2022, signed a deal to buy Twitter for $ 44 billion, criticized board members for barely owning shares in the companies they regulate. Dorsey, who will step down from his seat on the Twitter board at the end of his term in May 2022, called it a “company dysfunction.” Conservative politicians mocking the board as “afraid” of freedom of speech.
As experts in corporate governance, we believe this controversy raises two important questions of corporate governance: What is the purpose of the board of directors serving? And does it matter if the member owns shares of the company or not?
‘Bad institutions will kill’
“A good board doesn’t create a good company, but a bad board will kill a company all the time.”
Venture capitalist Fred Destin wrote that in 2018, citing what he called the “old Silicon Valley proverb.” The quote has made the rounds on Twitter recently in light of Musk’s hostile offer. In fact it seems to get praise from Dorsey himself when he replies to a tweet contains the quote, “big facts.”
These tweets and the general conversations that have emerged have important implications for understanding the board and their role in shepherding the company.
In general, the most important board roles include hiring, paying and overseeing the chief executive officer.
Academic research suggests that board members in large companies – who typically receive generous compensation packages – may be limited in their ability to perform this task effectively. In our work, we find that boards often find it impossible to conduct adequate monitoring and curb misguided CEOs because there is so much information for modern boards to process with their limited time. And the social dynamics involved in the board of directors also make it difficult for directors to speak out and oppose other directors.
In a separate study involving face -to -face interviews with directors, we were consistently told that directors take their board services seriously and operate with the best interests of their company in mind. But they do so with the intent of working with the CEO and the entire executive team rather than serving as unbiased observers, as suggested by their “independent” status.
While our work doesn’t focus on this, if the board of directors and CEO fundamentally disagree on the company’s direction – which often happens between Dorsey and the Twitter board – it will certainly be problematic and can lead to less than optimal decisions being made.
In other words, a board that doesn’t function effectively can certainly destroy a company’s value. And some reports suggest that’s what happened to Twitter, whose shares traded at less than half of their 2021 peak before Musk revealed he had amassed a 9% ownership stake.
The lament of a robber
That brings us to the next question: Does not having a substantial stake in the company you regulate make it more likely that you will run it into the ground, as Musk suggests?
A few days after making a takeover bid on April 14, the millionaire, reply to a tweet showed how few shares Twitter’s board members owned, posting that “the economic interests of its directors are not in line with those of shareholders.”
Musk’s argument recalls a takeover offer from the 1980s in which activist investors – or “corporate raiders” – would argue that the interests of executives were not in line with the interests of shareholders. When Gordon Gekko of “Wall Street” famously scolded the business executive he wanted to take over, “Today, management has no interest in the company!”
Musk’s words echo Gekko’s “greed is good” speech, except with respect to independent directors, who make up the bulk of the corporate board. The brief definition of an independent or external director is that they do not hold an executive role in running the company, such as the chief executive officer or chief financial officer.
In fact, Twitter’s board stock ownership is very similar to other companies.
Excluding Dorsey, the independent director of Twitter holds a median ownership stake of 0.003%. In comparison, we look at the equity ownership of independent directors of companies listed in the S&P 500 stock index in 2021. We find a median holding of less than 0.01%, and all but a handful of directors hold less than 1% of the company’s stock. . The median ownership in the company Musk Tesla is also very small, at 0.23%.
Whether this brings change to a company’s success is difficult to assess because research on the topic is relatively rare, largely because board members have very little equity.
Academic researchers on effective corporate governance in the 1970s argued that outside directors should avoid owning many shares in the companies they regulate in order to maintain objectivity. Recently, management scholars have suggested that higher interests can provide a way to motivate directors to monitor management and make decisions more in line with shareholder interests.
Some researchers have found that boards of directors with greater ownership interests can improve a company’s operating performance and better align external directors with shareholder interests.
But other work examining various studies shows the effects of mixed directors ’share ownership at best, with some studies suggesting higher stakes potentially lead to negative outcomes, such as excessive executive and directors’ compensation.
Since the passage of the Sarbanes – Oxley Act 2002 after massive accounting scandals at Enron, WorldCom and elsewhere, corporate governance issues such as board oversight have become increasingly important. This led to a number of changes aimed at streamlining the interests of managers and shareholders, including a focus on board independence and adjusting executive compensation.
Although our research shows boards are limited in their ability to monitor management, they are still better than none.
In his letter to shareholders announcing his bid, Musk vowed to “open up” Twitter’s potential as a private company, without a public board. We’ll probably see if he’s right.
(Author:Michael Withers, Associate Professor of Business, Texas A&M University and Steven Boivie, Professor of Management, Texas A&M University)
This article is republished from The Conversation under a Creative Commons license. Read the original article.
Disclosure Statement: The authors do not work for, consult, own shares in or receive funding from any company or organization that would benefit from this article, and do not disclose related affiliations other than their academic appointments.
(Except for the headline, this story has not been edited by AGRASMARTCITY staff and is published from a syndicated feed.)