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The principal role of the board of directors: the duty to say “no”

The principal role of the board of directors: the duty to say “no” Purpose – This paper aims to explain a new idea for the corporate board's main agenda, which should dramatically increase the scale of problems with which the board deals. This agenda also changes the board's interaction with the management providing a new approach to the agency problem. Design/methodology/approach – The paper is based on the normative method. The authors rely on cases (only a few are presented here) to illustrate uses of the real option analysis in the approach to the board activities. The paper shows that, on one hand, it is impossible to avoid managerial fraud and misconduct by means of the board's (and authorities’) traditional monitoring, even under the maximum possible toughening of the criminal and civil law, but, on the other hand, it is possible to change the content of the board‐management interaction to prevent fateful events. Findings – The paper shows how “the duty to say no” approach can prevent corporate failure and, at the same time, facilitate growth and innovation. The underlying basic idea is to use the real options analysis (ROA), which gives an approach to designing strategies under uncertainty. The paper illustrates this technique on different real‐life cases. Research limitations/implications – The paper's strategic approach does not ignore such traditional issues as remuneration and executives and board turnover. It just shifts the priorities of the board. Obviously, further research is needed to articulate the appropriate approach for various circumstances. Originality/value – The paper proposes and justifies a dramatic change in the board's duties. It suggests an approach to finding the most important business problems, which require strategic rather than technical decisions; a substitution of the existing “forensic” approach with a “large‐scale” one, turning the board from a policeman into a leader; a change to the style of the board's interaction with the top management of the company. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Corporate Governance Emerald Publishing

The principal role of the board of directors: the duty to say “no”

Corporate Governance , Volume 11 (5): 12 – Oct 18, 2011

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Publisher
Emerald Publishing
Copyright
Copyright © 2011 Emerald Group Publishing Limited. All rights reserved.
ISSN
1472-0701
DOI
10.1108/14720701111177028
Publisher site
See Article on Publisher Site

Abstract

Purpose – This paper aims to explain a new idea for the corporate board's main agenda, which should dramatically increase the scale of problems with which the board deals. This agenda also changes the board's interaction with the management providing a new approach to the agency problem. Design/methodology/approach – The paper is based on the normative method. The authors rely on cases (only a few are presented here) to illustrate uses of the real option analysis in the approach to the board activities. The paper shows that, on one hand, it is impossible to avoid managerial fraud and misconduct by means of the board's (and authorities’) traditional monitoring, even under the maximum possible toughening of the criminal and civil law, but, on the other hand, it is possible to change the content of the board‐management interaction to prevent fateful events. Findings – The paper shows how “the duty to say no” approach can prevent corporate failure and, at the same time, facilitate growth and innovation. The underlying basic idea is to use the real options analysis (ROA), which gives an approach to designing strategies under uncertainty. The paper illustrates this technique on different real‐life cases. Research limitations/implications – The paper's strategic approach does not ignore such traditional issues as remuneration and executives and board turnover. It just shifts the priorities of the board. Obviously, further research is needed to articulate the appropriate approach for various circumstances. Originality/value – The paper proposes and justifies a dramatic change in the board's duties. It suggests an approach to finding the most important business problems, which require strategic rather than technical decisions; a substitution of the existing “forensic” approach with a “large‐scale” one, turning the board from a policeman into a leader; a change to the style of the board's interaction with the top management of the company.

Journal

Corporate GovernanceEmerald Publishing

Published: Oct 18, 2011

Keywords: Boards of directors; Strategy; Real options; Option to abandon; Corporate strategy

References

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