A-Digit/DigitalVision Vectors by way of Getty Photos
It seems Twitter’s board of administrators lastly warmed to Elon Musk’ hostile bid and agreed to a sale – however not earlier than it took a extreme beating from the Tesla and SpaceX billionaire, Twitter founder Jack Dorsey and different distinguished customers on their very own social community.
Musk, who on April 25, 2022, sealed a deal to purchase Twitter for US$44 billion, criticized board members for proudly owning nearly no shares of the corporate they oversee. Dorsey, who will step down from his seat on Twitter’s board on the finish of his time period in Might 2022, known as it the “dysfunction of the corporate.” Conservative politicians derided the board as “scared” of free speech.
As consultants on company governance, we consider this feud raises two essential company governance questions: What objective does a board of administrators serve? And does it matter if a member owns firm inventory or not?
‘A foul board will kill’
“Good boards don’t create good firms, however a nasty board will kill an organization each time.”
Enterprise capitalist Fred Destin wrote that in 2018, citing what he known as an “outdated Silicon Valley proverb.” The quote has been making the rounds on Twitter not too long ago in mild of Musk’s hostile bid. It even appeared to get a nod from Dorsey himself when he replied to a tweet containing the quote, “massive information.”
Michael Reynolds/Pool Photograph by way of AP
These tweets and the overall dialog that has emerged have essential implications for understanding boards and their position in shepherding an organization.
Broadly talking, a board’s most essential roles embody hiring, paying and monitoring the chief government officer.
Tutorial analysis means that board members at giant firms – who sometimes obtain beneficiant compensation packages – could also be restricted of their capability to carry out these duties successfully. In our work, we discovered that boards usually discover it inconceivable to conduct enough monitoring and rein in wayward CEOs as a result of there’s simply a lot info for contemporary boards to course of with their restricted time. And the social dynamics concerned within the board additionally make it troublesome for administrators to talk up and oppose different administrators.
In a separate research involving face-to-face interviews with administrators, we have been constantly instructed that administrators take their board service severely and function with their firms’ finest pursuits in thoughts. However they achieve this with an eye fixed towards collaborating with the CEO and the remainder of the chief crew reasonably than serving as neutral observers, as their “impartial” standing suggests they need to.
Whereas our work didn’t give attention to this, if the board and the CEO essentially disagree in regards to the route of firm – which was usually the case between Dorsey and the Twitter board – it might definitely be problematic and will result in lower than optimum choices being made.
In different phrases, a board that isn’t functioning successfully can positively destroy an organization’s worth. And a few reporting means that’s what occurred to Twitter, whose shares have been buying and selling at lower than half their 2021 peak earlier than Musk disclosed he had amassed a 9% possession stake.
A raider’s lament
That brings us to the following query: Doesn’t proudly owning a major stake in an organization you oversee make it extra probably that you simply’ll run it into the bottom, as Musk appeared to counsel?
Just a few days after making his takeover supply on April 14, the billionaire, responding to a tweet displaying how few shares Twitter board members personal, posted that its administrators’ “financial pursuits are merely not aligned with shareholders.”
Musk’s arguments harked again to takeover bids from the Eighties by which activist buyers – or “company raiders” – would argue that executives’ pursuits didn’t align with these of shareholders. As “Wall Avenue’s” Gordon Gekko famously railed in opposition to executives of a enterprise he needed to take over, “As we speak, administration has no stake within the firm!”
Musk’s phrases echo Gekko’s “greed is sweet” speech, besides in regard to impartial administrators, who comprise the overwhelming majority of company boards. The straightforward definition of an impartial or outdoors director is that they don’t maintain an government position in working the corporate, corresponding to chief government officer or chief monetary officer.
In actuality, Twitter’s board share possession is similar to different firms.
Excluding Dorsey, impartial Twitter administrators held a median possession stake of 0.003%. For comparability, we checked out fairness possession of impartial administrators of firms listed within the S&P 500 inventory index in 2021. We discovered the median stake was lower than 0.01%, and all however a handful of administrators held lower than 1% of the corporate’s inventory. Median possession at Musk’s firm Tesla is equally minuscule, at 0.23%.
Whether or not this makes a distinction to an organization’s success is tough to evaluate as a result of analysis on the subject is reasonably sparse, largely as a result of board members have so little fairness.
Tutorial researchers on efficient company governance within the Nineteen Seventies argued that outdoors administrators ought to keep away from proudly owning many shares within the firms they oversee to take care of objectivity. Extra not too long ago, administration students have instructed that larger stakes might present a approach to inspire administrators to observe administration and make choices extra in step with shareholder pursuits.
AP Photograph/Eric Risberg
Some researchers have discovered that boards with bigger possession stakes can enhance an organization’s operational efficiency and higher align outdoors administrators with the pursuits of shareholders.
However different work that examined a number of research exhibits the affect of director inventory possession is blended at finest, with some research suggesting larger stakes probably result in detrimental outcomes, corresponding to extreme government and director compensation.
Because the passage of the Sarbanes–Oxley Act of 2002 after large accounting scandals at Enron, WorldCom and elsewhere, company governance points corresponding to board oversight have change into more and more essential. This led to a variety of modifications meant to align the pursuits of managers and people of shareholders, together with a give attention to board independence and adjusting government compensation.
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Though our analysis exhibits boards are restricted of their capability to observe administration, they’re nonetheless higher than nothing.
In his letter to shareholders saying his bid, Musk vowed to “unlock” Twitter’s potential as a non-public firm, with no public board. We might quickly see if he’s proper.
The authors don’t work for, seek the advice of, personal shares in or obtain funding from any firm or group that may profit from this text, and have disclosed no related affiliations past their educational appointment.