THE CHICAGO MERCANTILE EXCHANGE: REDEFINING CORPORATE GOVERNANCE

• Main Author: Alexander, Christopher S
• Format: Conference Proceeding
• Language: English
• Subjects: Boards of directors; Case studies; Chief executive officers; Corporate governance; Decision making; Futures; Management decisions; Management reviews; Stakeholders; Stock exchanges; Stockholders
• ISSN: 1948-3198; 1948-3198

Corporate governance represents the relationship among stakeholders that is used to determine and control the strategic direction and performance of organizations. (Lynall, et al, 2003; Hillman, et al, 2001). The board of directors is a group of elected individuals whose primary responsibility is to act in the owners' interests by formally monitoring and controlling the corporation's top-level executives (Fama & Tensen. 1983). As a result, if the board of directors is appropriately structured and operates in an effective manner, it can protect owners from managerial opportunism-the tendency to put a manager's interests above the interests of the firm (Baysinger & Hoskisson, 1990). The composition of boards differs; however, most experts agree that a board should consist of the following members; insiders, related outsiders and outsiders (Zajac & Westphal, 1996). Insiders are represented by the firm's CEO and other top-level managers. Related outsiders are individuals who are not involved in the firm's day-to-day operations, but may have a relationship with the company. Examples might include the firm's legal counsel, a large customer or supplier, or a close relative of one of the firm's top-level managers. Outsiders are individuals who are independent of the firm. They are neither involved in the firm's day-to-day operations, nor do they have other relationships with the firm. Because the primary role of the board of directors is to monitor and ratify major managerial actions to protect the interests of owners, there is a call by advocates of board reform that outsiders should represent a significant majority of a board's membership. The drawbacks of outside boards: because outside directors do not have day-to-day contact with the ongoing operations of the firm, they must obtain detailed, in-depth information about the quality of management decisions. Generally this information is obtained through frequent interactions, often developed over time, with inside directors (generally, at board meetings). In the absence of rich information, boards may be forced to emphasize financial rather than strategic controls. Potentially, This means that outsider-dominated boards - because they lack sufficient information - will evaluate managers, not on the basis of the appropriateness of their actions (which the board ratified) but based on the financial outcomes of those actions (Tosi, et al, 2003).