The Importance of Board Independence - a Multidisciplinary Approach
Einde inhoudsopgave
The Importance of Board Independence (IVOR nr. 90) 2012/3.3.0:3.3.0 Introduction
The Importance of Board Independence (IVOR nr. 90) 2012/3.3.0
3.3.0 Introduction
Documentgegevens:
N.J.M. van Zijl, datum 05-10-2012
- Datum
05-10-2012
- Auteur
N.J.M. van Zijl
- JCDI
JCDI:ADS599490:1
- Vakgebied(en)
Ondernemingsrecht / Algemeen
Ondernemingsrecht / Corporate governance
Deze functie is alleen te gebruiken als je bent ingelogd.
The theory that has strongly influenced organisation theory and business policy is the agency theory (Davis et al. 1997: 20). Proponents of this theory have an outspoken view on the composition of the board with respect to independence. The view of agency theorists is described in subsection 3.3.1; the ideal board composition that stems from this theory is given in subsection 3.3.2. Table 3-1 first gives a short summary of the agency theory, which is worked out further in the remainder of this section.
Table 3-1: Summary of the main characteristics of the agency theory.
Description of theory
Agency theory regards the company as a nexus of contracts, in which principals (i.e. owners of the company) delegate executive tasks to agents (i.e. managers or members of board of directors). The relationship between principals and agents is called the agency relationship.
Problem
Both principals and agents are – according to the agency theory – utility maximising people. Since the utility curves of agents and principals diverge, the decisions of the agent are not always in the best interests of the principal. This problem is called the agency problem. The difference between the welfare of the principal in this case in comparison to the decision which would be in the best interest of the principal is the residual loss.
Solution
Independent monitoring and alignment are solutions to reduce the residual loss. However, monitoring and alignment are not costless. These costs and the residual loss are agency costs, which should be minimised in an agency theory framework.
Focus on independence
One of the solutions in an agency framework is independent monitoring, which should be executed by independent directors. More independent monitoring has a positive influence on company performance, according to agency theorists. Independence can therefore be regarded as an essential factor in the agency theory.