Both Type of the Board of Directors Have Their Own Advantages and Disadvantages
a) What are the possible advantages and disadvantages facing a board of directors composed of insiders? (b) What are the possible advantages and disadvantages facing a board of directors composed of outsiders? The board of directors plays a vital part in the domination of any company whether it is a family business or otherwise. For every company or organization the board of directors is different in terms of its composition, roles and responsibilities of the directors and its structure.
The composition is normally determined by the nature of the business and its complexity. There are mostly two types of board of directors namely composed of insiders and that composed of outsiders. Both type of the board of directors have their own advantages and disadvantages. 1. Advantages and disadvantages of the board of directors composed of insiders: Advantages: I. The board of directors when formed with the insiders, the members usually has no legal responsibilities. This type of board of directors is formed in order to make the company cost minimal.
II. It becomes easier for the company to recruit members because the membership is not as much difficult as to form the board of directors. III. The company can avail with the technical support, expertise, skills and knowledge of the members which might not be available at the required level. IV. The insiders usually provide with unbiased advice and have irrational attitude. V. Insiders can offer with new links/contacts which can generate extra sales or source of income. Disadvantages: I.
The board of directors composed of insiders works like a group of experts but their advice is usually not considered seriously and might not be followed methodically leading into loss. II. None of the members of such board of directors in this scenario have authority to collect any sort of information from management, resultantly their recommendations could only be based on what management had informed them and they might not be aware of the issue that management was not willing to share with them. III. The embers of boards of directors composed of insiders usually have no say or very little influence on the company’s strategy and performance oversight of management. IV. Since they lack legal responsibilities therefore it becomes hard to hold the members of the board of directors in any scenario accountable or responsible of any advice they gave. V. The board of directors might not consider their roles seriously and they might not contribute effectively in accordance to the duties of the real board members. 2.
Advantages and disadvantages of the board of directors composed of outsiders: Advantages: I. A board of directors composed of outsiders have a variety of expertise collected together for making the business flourish more and more II. The outsiders bring a outside vision and broad perspective on the control of business and the strategy. III. It adds to the knowledge, enhances the skills that might be missing within the company previously. IV. Since different experienced people get together so more brain becomes available for the discussion to flourish the business.
V. The hiring/firing process and the promotion method become independent of the insiders view and hence the chances of favoritism decrease. VI. An outside member can become an objective judge of disagreement for the insider managers and can provide balance to the difference among the members. VII. The outside members can increase the business through their contacts and connections. Disadvantages: I. The outside member of the board of director is usually a burden on the business finance as they require high salaries and other fringe benefits.
II. The outside members of the board are usually covered under the insurance therefore they are again a burden over the budget. III. The outside members usually have no personal affiliation with the business therefore they only opt for the professional decisions and suggestions. IV. The outside members of the board only provide assistance in the department they are hired for even and do not look into other matters which are not relevant to their departments.