Question

In 2003, Sony Corporation announced reform in its management structure. The reform included an increase in the number of outside directors on the Board of Directors, a requirement to separate the Chairman of the Board from the CEO, and greater inclusion of outside directors on the Nomination Committee. Analyze these changes from the perspective of separation of decision control from decision management.

Answer 1

Outside directors are only involved in decision control, unlike inside directors who are likely to exercise decision control as well as perform management functions. The inclusion of outside directors should improve decision control since there will be less “capture” by top management. Similarly, prohibiting the CEO from chairing the board reduces the amount of decision control authority vested in the CEO, who is also the principal manager with decision management rights. Finally, outside directors are more likely to nominate future board members who have no personal relationships with executives in the company – fewer favors traded between those having decision control and those having decision management.1