Question

Linck, Netter, and Yang (2008) documented an increase over the 1990– 2004 period in the proportion of outside directors on the Boards of U. S. corporations, where they defined outside directors of a firm as those who are not executives of that firm. For example, for large firms in their sample, the average proportion of outsiders on the Board had risen to about 76% by 2004, with only slightly lower averages for medium-and small- size firms. While changes in Board structure may be due in part to the 2002 Sarbanes- Oxley Act (Section 1.2), the authors documented that this trend was under-way well before Sarbanes- Oxley.
Outside directors, however, since they are more independent of management than inside directors, are particularly likely to be at an information disadvantage. Managers may exploit this information disadvantage through, for example, bias and lack of timeliness of inside information given to the Board. In particular, while management is likely to convey good news, it may be less likely to convey bad news. Yet, directors need high quality information to carry out their monitoring and advisory duties.

Required
a. Outline policies and procedures under which managers can credibly supply high quality inside information to the Board.
b. Outside directors can also receive relevant firm information from public sources, such as published financial statements. Outline reasons why public financial statements may be more credible to such directors than information supplied by management.
c. Improvements over time in the quality of inside and public information available to Board members are a possible explanation for the increase in outside directors. Explain this argument.



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  • CreatedSeptember 09, 2014
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