No board to watch over Musk when he takes Twitter private. Does it matter?

Musk, who on April 25, 2022, sealed a deal to buy Twitter for $44 billion, criticised board members for owning almost no shares of the company they oversee.

It appears Twitter’s board of directors finally warmed to Elon Musk’ hostile bid and agreed to a sale – but not before it took a severe beating from the Tesla and SpaceX billionaire, Twitter founder Jack Dorsey and other prominent users on their own social network.

Musk, who on April 25, 2022, sealed a deal to buy Twitter for $44 billion, criticized board members for owning almost no shares of the company they oversee. Dorsey, who will step down from his seat on Twitter’s board at the end of his term in May 2022, called it the “dysfunction of the company.” Conservative politicians derided the board as “scared” of free speech.

As experts on corporate governance, we believe this feud raises two important corporate governance questions: What purpose does a board of directors serve? And does it matter if a member owns company stock or not?

‘A bad board will kill’

“Good boards don’t create good companies, but a bad board will kill a company every time.”

Venture capitalist Fred Destin wrote that in 2018, citing what he called an “old Silicon Valley proverb.” The quote has been making the rounds on Twitter recently in light of Musk’s hostile bid. It even appeared to get a gesture from Dorsey himself when he answered to a tweet containing the statement, "large realities."

These tweets and the overall discussion that has arisen have significant ramifications for understanding sheets and their part in shepherding an organization.

As a general rule, board's most significant jobs incorporate employing, paying and checking the CEO.

Scholarly exploration recommends that board individuals overall organizations - who regularly get liberal pay bundles - might be restricted in their capacity to really play out these undertakings. In our work, we observed that loads up frequently track down it difficult to lead sufficient checking and get control over rebellious CEOs since there's simply such a lot of data for present day loads up to process with their restricted time. Furthermore, the social elements associated with the board additionally make it hard for chiefs to shout out and go against different chiefs.

                             Also read - What's next now that Twitter agreed to Elon Musk's bid?

In a different report including eye to eye interviews with chiefs, we were reliably informed that chiefs view their board administration in a serious way and work considering their organizations' wellbeing. However, they do as such with an eye toward working together with the CEO and the remainder of the chief group as opposed to filling in as fair spectators, as their "free" status proposes they ought to.

While our work didn't zero in on this, assuming the board and the CEO essentially differ about the course of organization – which was often the case between Dorsey and the Twitter board – it would certainly be problematic and could lead to less than optimal decisions being made.

In other words, a board that isn’t functioning effectively can definitely destroy a company’s value. And some reporting suggests that’s what happened to Twitter, whose shares were trading at less than half their 2021 peak before Musk disclosed he had amassed a 9% ownership stake.

A raider’s lament

That carries us to the following inquiry: Does not possessing a critical stake in an organization you direct make it more probable that you'll destroy it, as Musk appeared to propose?

A couple of days in the wake of making his takeover offer on April 14, the very rich person, answering a tweet showing what a small number of offers Twitter board individuals own, posted that its chiefs' "financial interests are just not lined up with investors."

Musk's contentions beheld back to takeover offers from the 1980s in which extremist financial backers - or "corporate looters" - would contend that chiefs' advantages didn't line up with those of investors. As "Money Street's" Gordon Gekko broadly jumped on chiefs of a business he needed to assume control over, "Today, the board has no stake in the organization!"

Musk’s words echo Gekko’s “greed is good” speech, except in regard to independent directors, who comprise the vast majority of corporate boards. The simple definition of an independent or outside director is that they don’t hold an executive role in running the company, such as chief executive officer or chief financial officer.

In reality, Twitter’s board share ownership is very similar to other companies.

Excluding Dorsey, independent Twitter directors held a median ownership stake of 0.003%. For comparison, we looked at equity ownership of independent directors of companies listed in the S&P 500 stock index in 2021. We found the median stake was less than 0.01%, and all but a handful of directors held less than 1% of the company’s stock. Median ownership at Musk’s company Tesla is similarly minuscule, at 0.23%.

Whether this makes a difference to a company’s success is hard to assess because research on the topic is rather sparse, in large part because board members have so little equity.

Mixed research

Academic researchers on effective corporate governance in the 1970s argued that outside directors should avoid owning many shares in the companies they oversee to maintain objectivity. More recently, management scholars have suggested that higher stakes could provide a way to motivate directors to monitor management and make decisions more in line with shareholder interests.

A few scientists have observed that sheets with bigger proprietorship stakes can work on an organization's functional execution and better adjust outside chiefs with the interests of investors.

However, other work that inspected numerous investigations shows the effect of chief stock possession is blended, best case scenario, for certain examinations recommending higher stakes possibly lead to adverse results, like unreasonable leader and chief pay.

Since the entry of the Sarbanes-Oxley Act of 2002 after huge bookkeeping embarrassments at Enron, WorldCom and somewhere else, corporate administration issues, for example, board oversight have become progressively significant. This prompted various changes planned to adjust the interests of directors and those of investors, remembering a concentration for board freedom and changing chief pay.

In spite of the fact that our exploration shows sheets are restricted in their capacity to screen the executives, they're actually better than a kick in the pants than nothing.

In his letter to shareholders announcing his bid, Musk vowed to “unlock” Twitter’s potential as a private company, without a public board. We may soon see if he’s right.The Conversation

Michael Withers, Associate Professor of Business, Texas A&M University and Steven Boivie, Professor of Management, Texas A&M University

This article is republished from The Conversation under a Creative Commons license. Read the original article.