It seems Twitter’s board of directors finally 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 Could 2022, called it the “dysfunction of the company.” Conservative politicians derided the board as “scared” of free speech.
As experts on corporate governance, we imagine this feud raises two necessary company governance questions: What function 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 foul 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Enterprise capitalist Fred Destin wrote that in 2018, citing what he known as an “outdated Silicon Valley proverb.”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, “huge details.”
Broadly talking, a board’s most important roles embody hiring, paying and monitoring the chief government officer.These tweets and the overall dialog that has emerged have necessary implications for understanding boards and their function in shepherding an organization.
Tutorial analysis means that board members at massive firms – who typically receive generous compensation packages – could also be restricted of their potential to carry out these duties successfully. In our work, we discovered that boards often find it impossible to conduct sufficient monitoring and rein in wayward CEOs as a result of there’s simply a lot info for contemporary boards to course of with their limited time. And the social dynamics concerned within the board additionally make it tough for administrators to talk up and oppose different administrators.
In a separate examine involving face-to-face interviews with administrators, we were consistently told that administrators take their board service significantly and function with their firms’ finest pursuits in thoughts. However they accomplish that with a watch 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 deal with this, if the board and the CEO basically disagree concerning the path of firm – which was typically the case between Dorsey and the Twitter board – it could definitely be problematic and will result in lower than optimum selections being made.
In different phrases, a board that isn’t functioning successfully can undoubtedly destroy an organization’s worth. And some reporting suggests that’s what occurred to Twitter, whose shares were trading at less than half their 2021 peak earlier than Musk disclosed he had amassed a 9% ownership stake.
A raider’s lament
That brings us to the subsequent query: Doesn’t proudly owning a big stake in an organization you oversee make it extra probably that you simply’ll run it into the bottom, as Musk appeared to counsel?
A number of days after making his takeover offer on April 14, the billionaire, responding to a tweet exhibiting how few shares Twitter board members personal, posted that its administrators’ “financial pursuits are merely not aligned with shareholders.”
Wow, with Jack departing, the Twitter board collectively owns nearly no shares! Objectively, their financial pursuits are merely not aligned with shareholders.
— Elon Musk (@elonmusk) April 16, 2022
Musk’s arguments harked again to takeover bids from the Eighties by which activist buyers – or “company raiders” – would argue that executives’ pursuits did not align with those of shareholders. As “Wall Avenue’s” Gordon Gekko famously railed against executives of a enterprise he wished to take over, “Immediately, administration has no stake within the firm!”
Musk’s phrases echo Gekko’s “greed is nice” speech, besides in regard to impartial administrators, who comprise the vast majority of company boards. The easy definition of an impartial or exterior director is that they don’t maintain an government function in working the corporate, resembling 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 ownership 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 company Tesla is similarly 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.
Combined analysis
Tutorial researchers on efficient company governance within the Seventies argued that outside directors ought to keep away from proudly owning many shares within the firms they oversee to keep up objectivity. Extra not too long ago, management scholars have suggested that larger stakes may provide a way to motivate administrators to observe administration and make selections extra in keeping with shareholder pursuits.
However different work that examined a number of research exhibits the affect of director inventory possession is mixed at best, with some research suggesting larger stakes doubtlessly result in destructive outcomes, resembling excessive executive and director compensation.Some researchers have discovered that boards with bigger possession stakes can improve a company’s operational performance and better align outside directors with the interests of shareholders.
Because the passage of the Sarbanes–Oxley Act of 2002 after massive accounting scandals at Enron, WorldCom and elsewhere, company governance points resembling board oversight have become increasingly important. This led to a lot of adjustments supposed to align the pursuits of managers and people of shareholders, together with a deal with board independence and adjusting government compensation.
Though our analysis exhibits boards are restricted of their potential to observe administration, they’re still better than nothing.
In his letter to shareholders saying his bid, Musk vowed to “unlock” Twitter’s potential as a private company, with no public board. We might quickly see if he’s proper.
Article by Michael Withers, Affiliate Professor of Enterprise, Texas A&M University and Steven Boivie, Professor of Administration, Texas A&M University
This text is republished from The Conversation beneath a Artistic Commons license. Learn the original article.
