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The Structure of the Board of Directors

As a standing body of the shareholders assembly, the board of directors in an investment bank in mature international markets is responsible for routine decision making, just like the board of directors of a company in other industries. Without a board of supervisors in investment banks of some major mature international markets, such as the United States, the functions of the board of directors also include auditing and oversight. The board of directors in investment banks in mature international markets generally sets up various committees to help it make operational decisions and fulfill its oversight duties. There can be a wide variety of committees. However, the basic ones are the audit committee, the remuneration committee, and the nomination committee. The audit committee is responsible for overseeing the internal audit process of the company, financial control, and relevant problems that may exist. In combination with supervision and auditing conducted by external audit institutions, the audit committee ensures that the operation and financial reports of the company comply with relevant legal requirements. The remuneration committee is responsible for deciding the salary levels of senior executives of the company and making distribution plans. The nomination committee is responsible for conducting systematic assessment on inside directors and senior executives of the company. The risk-management committee is responsible for overseeing risks facing the company and ensuring that various business units strictly identify, measure, and monitor risks associated with their respective business according to requirements. The top-level decision implementation committee of the company sets the risk-tolerance thresholds for various business lines and approves major risk-management decisions of the company, including changes to important risk policies proposed by the risk-management committee. In addition to assisting the board of directors to exercise its decision-making and overseeing powers, these committees also play an important role in improving the internal management of the company.

Boards of directors of investment banks in mature international markets also have the important role of outside directors, in addition to setting up various committees to help with the board's work. Table 8.7 shows the composition of the boards of directors of the top five investment banks in terms of market value.

Table 8.7 shows that the top five U.S. investment banks have an average of 13.60 members in their board of directors. Of all members, 85.05 percent are outside directors. This is five times more than inside directors. J.P. Morgan has the highest outside director proportion at 91.67 percent. The lowest percentage of outside directors at Goldman Sachs still reaches 75 percent. The outside directors of an investment bank are usually senior experts or scholars in a certain field from outside the company. They have unique expertise or extensive connections in their fields. They are objective and attach great importance to their own credibility and market value. They can actively take part in the discussion and supervision of important operational decision making in the company, playing an important role in supervising and checking the power of the management of the company.

Although inside directors make up only a small portion of the board of directors in mature international markets, most are senior executives in the investment bank. The inside directors of the top five investment banks are all key members of the management of their respective

TABLE 8.7 Board of Directors Makeup of Top Five Investment Banks in Terms of Total Market Value

Total

Number

Percentage

Name of

Number of

of Outside

of Outside

Investment Bank

Directors

Directors

Directors

J.P. Morgan

12

11

91.67%

HBC

17

15

88.24%

Bank of America

13

11

84.62%

Goldman Sachs

12

9

75.00%

Morgan Stanley

14

12

85.71%

Average

13.60

11.60

85.05%

Source: Compiled with data from the official websites of the banks listed.

companies. The CEO is always one of the inside directors. Having inside directors take on management positions concurrently helps follow-through on major operational decision-making activities of the company. This also reflects the blurring boundaries between the board of directors and management in U.S. investment banks. It reduces friction between the board of directors and management. However, it also tends to compromise the ability of the board of directors to effectively supervise and constrain management.

 
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