Thursday, November 24, 2011

The Missing Logic of Boards

Dr. Seuss Wooden NickelImage via Wikipedia
From The Conference Board's  Roger Martin via MBA Depot

"A board of directors is asked to span a wide (and widening) gulf, resolving the tension between two very different markets with very different actors. On the one hand, boards are intended to act on behalf of outside shareholders... On the other hand, the board must deal closely with executives...motivated to maximize their own returns, even at the expense of shareholders."

and one more:

"It raises the question: Why would we imagine that the directorial agents would act any differently than the executive agents? After all, directors and executives are drawn largely from the same pool: Current and former senior executives are highly sought as directors. Yet we choose to apply agency theory to executives and not to directors. We assume that executives will maximize their self-interest but that directors will not. This is a failure of logic."

BTW the logic is the same as that of Dr. Seuss!  Here it is from "The Economics of Dr. Seuss"---and it was in an older Brealey and Myers(?) text when I was a grad student.
"... Out west, near Hawtch-Hawtch, there’s a Hawtch-Hawtcher Bee-Watcher. His job is to watch… is to keep both his eyes on the lazy town bee. A bee that is watched will work harder, you see.
Well…he watched and he watched. But, in spite of his watch, that bee didn’t work any harder. Not mawtch.
So then somebody said, “Our old bee-watching man just isn’t bee-watching as hard as he can. He ought to be watched by another Hawtch-Hawtcher. The thing that we need is a Bee-Watcher-Watcher.”
WELL… The Bee-Watcher Watcher watched the Bee-Watcher. He didn’t watch well. So another Hawtch-Hawtcher had to come in as a Watch-Watcher-Watcher.
And today all the Hawtchers who live in Hawtch-Hawtch are watching on Watch-Watcher-Watchering-Watch, Watch-Watching the Watcher who’s watching that bee. You’re not a Hawtch-Hawtcher. You’re lucky you see."

perfect for my class' Nexus of Contracts and Governance discussion.

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