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Directors and Officers: The Difficulty of Board Composition

Directors & Officers The Difficulty of Board CompositionFinding the right mix of Directors and Officers for a board.

Recruiting and retaining a balanced, successful board of Directors and Officers is no easy task.

There are multiple factors to consider when examining a successful board composition. The right mix of industry and financial expertise, objectivity, a diversity of perspectives and experiences, different business backgrounds, and overall diversity is an ideal situation, and a difficult composition to find.

One possibility is choosing an independent chairman. This practice has been implemented widely in the U.K., but minimally in the United States. In an analysis, 281 of the S&P 500 companies’ chairman was the current chief executive officer. Thirty-eight had chairmen who were former executives, or had some sort of connection to the CEO, and seventy-two others were listed as independent outside directors were often still connected.

When the CEO decides who sits on the board, choosing trusted business connections can seem like the natural choice. However, it can also stifle innovation to have a board that is static in their diversity and makeup.

The issue also reveals a fundamental difference between shareholders interest and the CEOs. In a survey by Chief Executive Magazine, 63 percent of CEOs said in a survey they would recommend a combined CEO/chairman role for their replacements- the Council of Institutional Investors on the other hand, calls the dual roles a conflict of interest.

Above all, it presents a greater risk having the CEO also act as the chairman. According to Bloomberg news, companies that combined the top two roles were 86 percent more likely to register as “aggressive” in an assessment of the financial reporting. Companies that adopted the dual role approach were also more likely to default on debts, sell or restructure assets, lay off employees, or taking other steps to deal with a weakened financial condition.

Directors and Officers are under increasing scrutiny, both in the public eye and by their shareholders. PLRisk Advisors, Inc. provides Directors & Officers insurance that is specifically designed for the exposures faced by public companies. Contact us today for more information. (855) 403-5982.

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