What are corporate boards for?

Eve Troeh Dec 14, 2012
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What are corporate boards for?

Eve Troeh Dec 14, 2012
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Yahoo’s new CEO, Marissa Mayer, has aimed to change company culture, adding free lunch, for one thing. And today, Yahoo announced a new member of its corporate board: PayPal co-founder Max Levchin. That prompted some explanation of what, exactly, a corporate board does.

First, corporations have branches, kind of like the federal government, so you can think of the board of directors and the management as two branches that keep each other in check.

“The board is there to monitor the management for the benefit of the investors,” says Charles Elson, a professor of corporate governance at the University of Delaware, “to ensure that management is running the company effectively.”

He says board members clock about six weeks’ worth of working hours per year, so any serious candidate should not already sit on lots of other boards. Investors also should not be impressed by celebrity board members, as they have in the past.

“The old idea was you filled a board with as many ex-politicians as you can because people know their names,” Elson says.

Might a young jeans-and-T-shirt startup superstar be today’s equivalent?

Well, Max Levchin, a founder of PayPal, can certainly lay claim to internet business expertise. In a blog post, he laid out personal reasons for taking the board position. That included a sentimental feeling toward Yahoo, which showed him “computer geeks can start companies that create that future.”

But Levchin also cited admiration for Yahoo’s CEO. That can sometimes be a red flag, says Jeffrey McFadden at corporate law firm Steptoe & Johnson.

“You have very powerful chief executive officers who want people on the board that are going to go along with what the CEO wants to do,” he says.

He says federal watchdogs and major investors are scrutinizing the true independence of corporate boards more than ever. They want corporate boards to focus on the long-term health of companies, instead of going after quick profits.

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