The boards of directors often have a vital role in any company whether it is a corporation or family owned. However, the board of directors in each company is usually different in terms of their responsibilities, composition, and roles. The board of director can compose of people who are from inside the organization or people who are from outside the business. Both types have their advantages and disadvantages.
Advantages and Disadvantages of Board of Directors that is Composed of Insiders
The board of directors that comprises of insiders is one that consists of officers, direct stakeholders, and employees in the company. They have the fiduciary duty towards the organizations where they operate it and are expected to act in a manner that ensures that interests of the company are a top priority. Having a board that consists of insiders has various advantages.
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Advantages
A board that is comprised of people who are internal to the organization has the advantage of making sure that efficient and effective decisions have been made ( Steger, 2008). These individuals often run the business on a daily basis and have a better understanding of the company which means that the decisions which they make are often towards meeting the strategy and objective of the company. In addition, the decision-making process is usually fast because they have specific knowledge of the competitive position and capabilities of the company ( Rezaee, 2008). They do not have to go through the records to get the information as they are well aware of the position of the business.
The other advantage of this form of the board in an organization is the fact that there are no legal responsibilities that the company has towards the members. Therefore, it reduces the costs to the company in terms of decreasing the fees that would have been paid to members who come from outside the company. In addition, considering the fact that the members from inside the company and also the fact that there are no legal requirements, it is often easier to form the board.
The insiders often provide advice that is considered to be unbiased and often have the attitude of making sure that the company is successful. These individuals usually have an interest in the company and thus ensure that the decisions which they make are not only for their own interest but also for the benefit of the organization.
Disadvantages
One disadvantage of this form of a board of directors is the fact that it reduces the credibility of the board to outside stakeholders. In this case, it reduces the feeling among the stakeholders that the business is being run in an effective, ethical, and professional manner. It also means that there is the risk that investors are often afraid of investing in such businesses because of the lack of assurance that their interests will be considered first ( Feld, 2014).
Companies that have a board that consists of people from inside the companies often face the risk of having a conflict of interest. In many cases, the board members are usually interested in making sure that their personal interests such as increased bonus and salaries are looked after as opposed to making sure that the interests of the shareholders are considered. It means that there is a low chance for the members of the board to be independent because of the need to look after their interests.
The other disadvantage of having a board that comprises of people from inside the company is the lack of creativity when dealing with issues. People from outside the business often bring in new perspectives to the business based on their knowledge, expertise, and from their experiences while working with other companies. The disadvantage can make it hard for an organization to progress because the same issues will continue to re-occur because of not being solved.
The other disadvantage of this form of the board is the fact that it denies the company the benefits that come with networks ( Mallin, 2013). Having a board that comprises of people from outside the organization often links it to networks of skilled and influential people. Being able to gain access to such networks often opens doors to new opportunities for the business. Building networks often take time which is something that most top managers do not have. Therefore, this form of board hinders businesses from gaining the opportunity to get access to resources and other opportunities that can ensure that it improves the competitive advantage. In turn, the companies lose the chance to grow quickly.
The other disadvantage is the fact that the lack of legal responsibility in this form of the board often makes it hard for the members of the board to be held accountable and responsible for their decisions. Therefore, the members of the board are likely to ignore the seriousness of their roles and can act in an ineffective manner as expected from board members.
Advantages and Disadvantages of Board of Directors that is Composed of Outsiders
Having a board of directors that is composed of outside directors is also a big consideration for most companies around the world ( Tricker, 2015). In this case, it involves engaging people from outside the organization to be on the board. These are usually people who are not stakeholders or employees of the company. The standards of corporate governance often require public organizations to have a specified percentage or number of outside directors because of the benefits that they bring to the company.
Advantages
Outside directors have the advantage of being impartial because of the fact that they are not closely linked to the business when compared to the board of directors who are from inside the company ( Monks, 2011). Their independence often allows them to be objective when making decisions so that the company can move in a positive direction. More specifically, they aim at securing the well-being of the organization and ensure that the interests of the shareholders come first.
Outside directors also have the advantage of bringing in expertise that helps in growing the business. With a board that is composed of people from outside the company, the business has a chance of having experts from specific areas that the business wants to grow or an area which has become urgent because of the changes in the market, adverse situations, or new opportunities. Therefore, specific expertise in the board has the advantage of making sure that there are growth opportunities in addition to helping in avoiding mistakes that prove to be costly. A board that comprises of outside directors is especially advantageous for start-up companies because they bring in a lot of operational experience that helps the business.
The next advantage is that a board that includes outsiders is often the key to making sure that there is no conflict in interest. Considering the fact that they are from outside the company means that they have no personal interests in the activities of the business. Their main concern is usually to make sure that the interests of the shareholders are met.
Disadvantages
A board of director that is composed of outsiders has its a limitation in terms of the quality of the managerial oversight that they can offer as they often depend on the information that they receive from top managers of the company. The quality of managerial oversight often depends on the completeness and quality of information provided. There is always the risk of deliberate bias from the management team that is likely to decrease the value of information that is provided to the board. In turn, this can make the board members become less effective because of the poor quality of information that is provided.
The second disadvantage is seen in the process of replacing a CEO where there is a high chance that they may evaluate internal candidates in a less accurate manner. The risk is highly possible because they do not often interact, evaluate, or observe the internal candidates because of the fact that they are board members who have been sourced from outside the organization. In other words, the board can conduct and inaccurate evaluation because of being less familiar with internal candidates. In addition, there is the risk that the board can appoint an external candidate in cases where the internal candidate is the better option.
Conclusion
It is evident that the boards of directors play a vital role in the operation and success of organizations. There are two main types of the board of directors including those which are formed by members of the company and those which are formed by people who are outside the company. These forms of the board have their advantages and disadvantages meaning that their effects in a company depend on the various needs of the companies. For example, the board that is formed by people from inside the company can ensure that they make informed knowledge. On the other hand, a board that is formed by people from outside the company often increases the credibility of decisions made.
Bibliography
Feld, B., & Ramsinghani, M. (2014). Startup Boards: Getting the most out of your board of directors . Hoboken, N.J. : John Wiley & Sons.
Mallin, C. A. (2013). Corporate governance . Oxford: Oxford University Press.
Monks, R. A. G., & Minow, N. (2011). Corporate Governance . West Sussex, England: John Wiley & Sons.
Rezaee, Z. (2008). Corporate governance and ethics . Hoboken, N.J: Wiley.
Steger, U., & Amann, W. (2008). Corporate governance: How to add value . Chichester, England: John Wiley & Sons.
Tricker, R. I. (2015). Corporate Governance: Principles, policies, and practices . Oxford: Oxford University Press.
