The Control Role of the Board
Several control mechanisms have been proposed to ensure that managerial discretion is aligned with shareholder interests. The major external mechanism is the market for corporate control, in which the threat of takeover induces incumbent management to greater efficiency. However, this mode of control has limited effectiveness due to imperfections in the market and the wider effects of takeover bids. A great deal of attention has focused on the chief internal mechanism for control: the board of directors. This chapter examines the role of boards of directors in corporate control and argues that, contrary to the managerialist tradition, the boards can exert control over the running of the organisation by using management control systems, assessing top management, and determining their incentives and sanctions. In addition to monitoring past and present organisational performance, directors also actively diagnose opportunities for the firm through data from control systems, thereby facilitating organisational change.
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