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Aswath damodaran 11 the ceo oven hand picks directors

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Unformatted text preview: up issues that are not to the management’s liking. Aswath Damodaran 9 And insItuIonal investors go along with incumbent managers… 10 Aswath Damodaran 10 Board of Directors as a disciplinary mechanism 11 ¨༊  ¨༊  ¨༊  ¨༊  Directors are paid well: In 2010, the median board member at a Fortune 500 company was paid $212,512, with 54% coming in stock and the remaining 46% in cash. If a board member was a non- execuIve chair, he or she received about $150,000 more in compensaIon. Spend more Ime on it than they used to: A board member worked, on average, about 227.5 hours a year (and that is being generous), or 4.4 hours a week, according to the NaIonal Associate of Corporate Directors. Of this, about 24 hours a year are for board meeIngs. Those numbers are up from what they were a decade ago. Even those hours are not very producIve: While the Ime spent on being a director has gone up, a significant porIon of that Ime was spent on making sure that they are legally protected (regulaIons & lawsuits). And they have many loyalIes: Many directors serve on three or more boards, and some are full Ime chief execuIves of other companies. Aswath Damodaran 11 The CEO oVen hand- picks directors.. 12 ¨༊  ¨༊  ¨༊  CEOs pick directors: A 1992 survey by Korn/Ferry revealed that 74% of companies relied on recommendaIons from the CEO to come up with new directors and only 16% used an outside search firm. While that number has changed in recent years, CEOs sIll determine who sits on their boards. While more companies have outsiders involved in picking directors now, CEOs exercise significant influence over the process. Directors don’t have big equity stakes: Directors oVen hold only token stakes in their companies. Most directors in companies today sIll receive more compensaIon as directors than they gain from their stockholdings. While share ownership is up among directors today, they usually get these shares from the firm (rather than buy them). And some directors are CEOs of other firms: Many directors are themselves CEOs of other firms. Worse sIll, there are cases where CEOs sit on each other’s boards. Aswath Damodaran 12 Directors lack the experIse (and the willingness) to ask the necessary to...
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