Miriam Schwartz-Ziv and Michael S. Weisbach
What do boards really do? Evidence from minutes of board meetings
Journal of Financial Economics | Volume 108, Issue 2 (May 2013), 349–366

Board of directors are a key part of corporate governance. Both academics and practitioners have had a longstanding interest in understanding how boards work. A major difficulty in conducting research on boards of directors is that their day-to-day work is private. Accordingly, scholars are, generally, able to examine only observable public data which documents only a small portion of a boards' work.

For this reason, empirical finance studies have generally examined how the way in which boards are structured affects observable variables concerning the firm, such as CEO turnover and firm acquisition. Theoretical studies on boards have the advantage of being able to model the actual every-day working of boards. Such studies generally start from a premise about what kinds of decisions boards make (managerial or supervisory), as well as the process by which these decisions are made. However, the uncertainty about the underlying assumptions of the theoretical models characterizing real world boards limits the applicability of this research.

In this paper, we supplement existing research, which is primarily based on publicly available data, with private data on the detailed minutes of board meetings. This paper is the first to analyze the content of board minutes in a systematic fashion. The advantage of the minutes we analyze is that they record everything that happened at the meetings and provide a clear picture of what boards actually do.

We examine minutes for 11 business companies in which the Israeli government has a substantial equity interest (government business companies, or GBCs), each set of minutes covering a year of meetings within the 2007–2009 period. These minutes show the details of board and board-committee meetings, including all the statements made by every participant in each meeting. As such, they are significantly more detailed than minutes of American companies. We transform the minutes into a quantitative database that characterizes the board meetings, allowing us to assess the way in which the boards work and interact with management.

For each issue discussed, we describe what was discussed, whether an update was delivered or a decision was made by the board, whether there were any dissenting votes, whether the decision followed the recommendation of the chief executive officer (CEO), whether the board took an initiative to modify or define more broadly the actions to be taken, whether the board requested to receive further information or an update, and whether the board was presented with at least two proposals to consider. This database consists of the minutes from 155 board meetings and 247 board-committee meetings, in which 2,459 decisions were made or updates were given.

Do boards make managerial decisions or monitor the managers?

A fundamental problem in the theoretical literature on boards of directors is that it has not agreed on the process by which boards govern the firm. Some studies, including Song-Thakor (JF 2006), Adams-Ferreira (JF 2007), and Harris-Raviv (RFS 2008), adopt a “managerial” approach to boards of directors that presumes boards make managerial decisions such as which projects to undertake, and which employees to hire.

Alternatively, the “supervisory” approach, adopted by models such as Hermalin-Weisbach (AER 1998), Almazan-Suarez (JF 2003), and Raheja (JFQA 2005), starts from the assumption that the main function of boards is to monitor and assess the CEO, rather than to intervene in particular issues. The minutes data allow us to do the somewhat unorthodox testing of the underlying assumptions made in each of the two approaches, in addition to testing their predictions. Consistent with the supervisory approach, for the sample of GBCs we consider, boards discuss issues we classified as supervisory approximately two-thirds of the time. In addition, most of the time boards go along with the CEO's wishes: In only 2.5% of the cases did boards partially or completely vote against the CEO. In addition, we find that in only 1% of the time was the board presented with more than one alternative to choose from.

However, we also find evidence suggesting that some of the time boards do play a managerial role. On average, in 8.1% of the issues discussed the board took an initiative on its own, implying that it actively participated in shaping the decision in these cases. In addition, in 8% of the issues the board requested to receive further information or an update. Because a number of issues are discussed at every meeting, boards played an active role on at least one issue in the majority of meetings.

Figure 1 reports, on firm level, the frequency boards (1) requested an update, (2) took an initiative, or (3) did not vote in line with the CEO, out of all 2,459 issues discussed. On meeting level, in 63% of the meetings, boards took at least one of these three actions. The latter findings suggest that boards can be characterized as active monitors. Most commonly, they supervise and monitor management. However, on occasion they actively make managerial decisions themselves.

1: Boards requesting updates, taking initiatives, or voting against CEOs
For the 11 GBCs examined (numbered from 1 to 11 on the x-axis), this figure presents the percentage of cases boards took an initiative (green bars), requested an update (blue bars), or did not vote in line with the CEO (orange bars) at board meetings.

Boards are active monitors

Taken together, our findings suggest that boards can be characterized as active monitors. Boards are active, but their main focus tends to be on supervising management rather than dictating the specifics of how the company should be run. This picture of boards, taken from the minutes of their meetings, complements much previous research. Our findings suggest that incorporating both supervisory and managerial roles simultaneously into future discussions of board behavior is a potentially fruitful research direction. Theoretically, models in which boards can both supervise managers and sometimes take over managerial tasks themselves are likely to be more realistic than those currently in the literature.

A potential concern with this analysis is the extent to which the boards of our sample of Israeli government-controlled companies reflect other companies. While it is impossible to know exactly how different our firms' governance is from that of privately held companies in both Israel and the rest of the world. The directors of GBCs have the same fiduciary responsibilities as directors of private and public Israeli firms, which are very similar to those of American directors. In addition, the GBC directors are explicitly required to maximize their firm's profits, and our reading of the minutes suggests that they take this responsibility seriously. Furthermore, the board dynamics we find are similar to those reported in interview-based studies, which are most often based on publicly traded U.S. companies. For these reasons, the relationship between a CEO of a GBC and his board, and among the directors of GBCs, is likely to be similar to the corresponding relationships in other boardrooms.

To understand the role of boards of directors, we believe it is necessary to observe to the extent possible how they actually function. To do so requires the kind of data for which we have access for our sample but is impossible to obtain for most firms. Our hope is that opening up the black box of the board for these companies will allow improved formal modeling of boards and lead to a better understanding of empirical findings.

Sotatsu Tawaraya (1570–1643): Waves at Matsushima. Edo Period, Japan, 1624.. This is one of the six-panel folding screens capturing the magnificent coast of Matsushima, set on a gold-leaf background. Sotatsu was the most influential court artist of the Edo period, known for its restrictive social class system, monitored customs, and closed borders. Yet it was not all bad for the artists. On the one hand, they suffered a lack of exposure and freedom. On the other hand, the economic stability and boom allowed the merchant class to indulge in the Arts. (This “on the one hand, on the other hand” was written by an economist.) The Edo period ended when Commodore Perry sailed into Tokyo Bay in 1854. In 1868, the city of Edo became the city of Tokyo. This painting is exhibited in the Freer and Sackler Gallery at the Smithsonian.