Academic Master

Business and Finance

Directors’ Expertise In Financial Matters And Its Impact On Policy Decisions

The paper under review studies the idea of directors’ expertise in financial matters and its impact on policy decisions. Further, it studies if the directors’ association with financial institutions hamper their advisory role. An assertion from the paper is that there is a need for financial experts on boards as they have an appreciation of GAAP rules and financial statements. Such an appreciation translates to better attendance for the welfare of shareholders.

From the paper, it is evident that when a firm has some of its directors coming from commercial banks, and the bank does carry out lending services to the firm, the result will be that the firm will get higher loans, display less investment-cash flow sensitivity, exhibit undesirable investment prospects and poorer returns. Consequently, firms that would otherwise have received the loan do not. This is an indication that creditors, but not shareholders, benefit from the lending.

Another finding is that firms that have investment bankers on their boards get into worse acquisitions. Additionally, the firms will always be focused on issuing grander bonds with lower underwriting fees in cases where the investment banker’s institution is not part of the transaction. As a result, the banker’s decisions usually do not cater to the interests of the shareholders.

A third finding focuses on experts in finance whose presence on boards only affects decisions that have a clear consequence for their home institutions. Otherwise, they would not really be keen to make decisions that do not have a consequence for their institutions.

Although it is difficult to completely measure the impact on shareholders’ value by having financial experts on a firm’s boards, the paper posits that the quest for having financial experts as members of boards should be cautiously implemented as their impact on policy decisions is influenced by their firm’s interest which is usually in conflict with interests of shareholders.

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