Why Might It Be Good For Members Of A Corporation’s Board Of Directors To Own The Firm's Stock? Essays Example

The board of director’s role in the modern business focuses on monitoring management (Booth et al., 2001). The advantage of monitoring management relates to divergence of incentives among shareholders and managers. Booth et al. (2001) contend that board of directors must be independent for effective monitoring to take place.
There are two measures of independence that serve as the focus for the reforms of the company’s board of directors. These include the number of outside directors having a position on the board and whether chief executive officer likewise serves as the chairman of the board (Booth et al., 2001). Discussion of independence of the board focuses on the function of outside directors in putting constraints to the possibility for agency costs when making decisions and controlling decision. Booth et al. (2001) argue that through monitoring management, external directors can restrict the practice of managerial discretion, thereby reducing contracting costs between the management and the shareholders.
Generally, corporations consist of a lot of owners. Each share of stock signifies an ownership interest in a business. Shareholders have the rights to owns stocks. These rights include a privilege to a part of the profit that the company has and the power to vote during elections for the company’s board of directors. When an individual owns a company stock, that person is invested in that corporation, and obtains benefits each time the company performs well. Company directs are allowed to own a company stock particularly in the company where they hold a position on the board. Issues tend to transpire when the company’s board member owns a stock in the business of the competitors. Stock ownership in the business of the competitors could create a conflict of interest as all as breach of the directors’ loyalty.
According to Booth et al. (2001), in addition to external directors as well as the chief executive officer, as the manager’s company stock ownership continue to increase, the managers’ interest, including the interest of the outsider become a lot more aligned. Simply put, when directors possess significant holdings in the stock of the company, their decisions also tend to affect their personal assets. Apparently, these boards of directors are not likely to conduct actions that would diminish the wealth of shareholder irrespective of the extent of their independence. In opposition to internal mechanisms of monitory, there are a number of industries, including public utilities and depository institutions, in which regulators restrict the amount of discretion that managers have, and hence, its impact on the wealth of shareholders. In these industries, the decisions of the managers are carefully monitored by various regulators.
In summary, it is good for members of a corporation’s board of directors to own the firm's stock because it gives them more control over the company’s policies, regulations, and operations. Furthermore, by having more stocks, the board of directors will also have the power to influence the company’s decision making.

References

Booth, J., Cornett, M., & Tehranian, H. (2002). Boards of directors, ownership, and regulation. Journal Of Banking & Finance, 26(10), 1973-1996. doi:10.1016/s0378-4266(01)00181-9
Spaulding, W. (2015). Common, Preferred, and Treasury Stocks; Legal Rights of Stockholders.Thismatter.com. Retrieved 17 March 2015, from http://thismatter.com/money/stocks/stocks.htm