Improve Board Effectiveness: The Need for Incentives

Abstract

Roberts, McNulty and Stiles (2005) focus on the attitudes and behaviours of non-executive directors in their recommendations for improving board effectiveness. This paper addresses the importance of providing incentives for non-executives in order to improve board effectiveness. It first points out that the current norms and practices in corporate governance suggest that, without strong incentives, non-executive directors are unlikely to become engaged in corporate governance, to challenge executive decision, and to remain independent of executive influences. It then proposes that, for non-executive directors to develop the attitudes and behaviors recommended by Roberts, McNulty and Stiles, it is important to require them own a significant amount of company stocks over a long period of time. It also addresses some concerns regarding the use of stock ownership to improve the effectiveness of non-executive directors in corporate governance.