Article

The Role of Boards of Directors in Corporate Governance: A Conceptual Framework & Survey

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Abstract

This paper is a survey of the literature on boards of directors, with an emphasis on research done subsequent to the Hermalin and Weisbach (2003) survey. The two questions most asked about boards are what determines their makeup and what determines their actions? These questions are fundamentally intertwined, which complicates the study of boards due to the joint endogeneity of makeup and actions. A focus of this survey is on how the literature, theoretical as well as empirically, deals - or on occasions fails to deal - with this complication. We suggest that many studies of boards can best be interpreted as joint statements about both the director-selection process and the effect of board composition on board actions and firm performance.

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... Literature rooted in strategic management and within the corporate governance framework emphasizes that business behavior and its subsequent performance are, to a large extent, a function of its top management that makes most of the relevant strategic decisions (Carpenter et al., 2004;Adams et al., 2010). Hambrick and Mason (1984) set the theoretical foundations that establish "the organization as a reflection of its top managers" in what is known as the upper echelon theory. ...
... Gender diversity: women representation in the board of directors Boards play a central role in the organization by monitoring managers and provide value- creating knowledge that contributes to the corporate strategy-making process (Rose, 2007;Adams et al., 2010). Within organizations, the board of directors -acting on behalf of shareholders -is an influential entity whose functioning is highly related to performance (Hermalin and Weisbach, 2003). ...
... To exercise their monitoring and advisory roles efficiently, boards require a variety of skills, information, experience and capabilities (Adams et al., 2010). It has been suggested that women represent a source of valuable human capital with value-creation potential and that there are two main advantages of having women on the board (Adams and Ferreira, 2009). ...
Article
Purpose This paper aims to investigate how gender diversity in top management – i.e. boardroom and top management positions – affects business performance among Colombian public businesses. Design/methodology/approach Building on the upper echelon theory which emphasizes that gender in an important characteristic that influences top management’s decision-making, panel data models are used on a sample of 54 Colombian public businesses for the period 2008-2015 to test the proposed hypotheses relating to gender diversity and subsequent business performance. Findings The results support that gender diversity is positively associated with subsequent business performance. More concretely, the relationship between gender diversity at the top of the corporate hierarchy – in the present case, as CEO and in the top management team – and subsequent performance becomes more evident when performance is linked to business operations (ROA), whereas the positive effect of women’s representation in the boardroom and subsequent performance is significant when performance is measured via shareholder-oriented metrics (ROE). Originality/value Few studies have addressed the role of gender diversity on performance in developing economies. This study contributes to better understand how gender diversity affects performance in contexts where women are underrepresented in the top management, and where the appointment of women directors or managers is not driven by regulatory pressures.
... Corporate governance relates to the mechanisms by which an organization is supervised in order to assure suppliers of finance (the shareholders), whom may or may not participate in the day-to-day operations of a company, get a return on their investment. Since most of Moderna's shareholders are not directly involved in the ongoing operations of the firm, governance mechanisms deserve special attention in order to reduce problems associated with principle-agency theory (Tirole, 2006 i ;Adams, Hermalin, & Weisbach, 2010 ii ...
... epped down due to conflicts of interest that will be later discussed (CNBC, 2020 xvii ). Therefore, Moderna's current Board consists of 8 members-with the only non-independent director being CEO Stéphane Bancel. The total number of directors is slightly less than industry standard, but is not cause for concern due to the relatively small firm size (Adams, et. al. 2010 ii ). ...
... In order to monitor executives, directors should be independent, otherwise their accountability may be comprised and result in principle-agency conflicts (Tirole, 2006 i ;Adams, et. al. 2010 ii ). In short, the total amount of directors and independency is not cause for concern. ...
Preprint
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The purpose of this report is to analyze the leadership and governance of Moderna Inc., in order to accurately advise potential investors. The following analysis will concentrate on whether a substantial investment in Moderna Inc. is recommended—in light of firm governance, leadership characteristics, industry makeup, recent events, and leading competitors. Since Moderna is one of a number of firms in the current race for a Covid-19 vaccine, the topics in this report are crucial for the company to remain credible for its shareholders and prospective investors in the near future (Moderna, 2020). Corporate governance relates to the mechanisms by which an organization is supervised in order to assure suppliers of finance (the shareholders), whom may or may not participate in the day-to-day operations of a company, get a return on their investment. Since most of Moderna’s shareholders are not directly involved in the ongoing operations of the firm, governance mechanisms deserve special attention in order to reduce problems associated with principle-agency theory (Tirole, 2006 ; Adams, Hermalin, & Weisbach, 2010 ).
... Hence, we hypothesis that;H2: Ceteris paribus, MNEs that cross-list mitigate institutional governance complexities, diffuse and improve governance disclosure practices, in line with stakeholder provisions of the home country CG code, compared to MNEs that do not cross-list.2.3 Multinational directorship and national corporate governance disclosureIB literature has discussed the significance of hiring multinational directors (MNDs) to enhance board advisory, monitoring and resource capabilities. This is because, working in home and host countries avails MNDs first-hand knowledge of international markets(Adams et al., 2010, Giannetti et al., 2015, Hahn and Lasfer, 2016, Masulis et al., 2012. Consequently, MNDs develop and tap from their contacts and experience in international markets to advice firms and improve on CG practices. ...
... Consequently, MNDs develop and tap from their contacts and experience in international markets to advice firms and improve on CG practices. Following fromAdams et al. (2010),Masulis et al. (2012), we observe that MNEs employ MNDs because they can provide valuable information and support to MNEs operations and CG practices in both home and host countries. As MNEs move into international markets, they face both LOF and liability of newness (LON) in unfamiliar political landscapes, new regulatory requirements, institutional environments, cultural and social norms(Li et al., 2016, Masulis et al., 2012. ...
Article
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We draw on institutional isomorphism perspective to develop a conceptual framework which uncovers how emerging market MNEs manage institutional tensions and complexity in governance regulations, within and across economic environments. Using a sample of 400 firm-year observations (2011-2015) from Nigeria, we show foreign directorship and cross-listing as significant avenues for governance isomorphism. MNEs employ these mechanisms to manage and reconcile foreign and Nigerian CG regulations whilst overcoming institutional weaknesses at home. Specifically, governance isomorphism leads to improvement of home country CG disclosures practices because of associated linkages with international CG systems through cross-listing and employment of multinational directors.
... What role(s) do boards of directors play? Although the topic has received much attention from academics and regulators (see Hermalin and Weisbach (2003) and Adams et al. (2010) for reviews), most of this research assumes the model of a corporation described by Berle and Means (1932)one with a widely dispersed base of shareholders in which control is exercised by management. Yet a growing volume of research shows that such a model is more the exception than the norm; rather, most public corporations around the world-and nearly all privately held companies-have a controlling shareholder or group thereof, for the most part individuals or families (La Porta el al., 1999;Claessens et al., 2000;Faccio and Lang, 2002). ...
... Thus, the board's role in these companies is also likely to be different, in accordance with the problems that it is-or should be-designed to solve. Moreover, as Adams et al. (2010) note, because corporations are legally required to have a board, prior research offers little insight into why companies may or may not want to have one; they simply have no choice. ...
... What role(s) do boards of directors play? Although the topic has received much attention from academics and regulators (see Hermalin and Weisbach (2003) and Adams et al. (2010) for reviews), most of this research assumes the model of a corporation described by Berle and Means (1932)-one with a widely dispersed base of shareholders in which control is exercised by management. Yet a growing volume of research shows that such a model is more the exception than the norm; rather, most public corporations around the world-and nearly all privately held companies-have a controlling shareholder or group thereof, for the most part individuals or This article is protected by copyright. ...
... Thus, the board's role in these companies is also likely to be different, in accordance with the problems that it is-or should be-designed to solve. Moreover, as Adams et al. (2010) note, because corporations are legally required to have a board, prior research offers little insight into why companies may or may not want to have one; they simply have no choice. ...
Article
Using a large survey database on the corporate governance practices of privately held Colombian firms, we investigate why firms have boards, and how that choice, and the balance of power among the board, controlling shareholders, and minority shareholders impact the tradeoffs between control, liquidity, and growth, and ultimately, firm performance. We find that the probability of having a board increases with the number of shareholders and in family firms. When the preferences of controlling and minority shareholders diverge, as with respect to capital structure and dividend policy, boards support controlling shareholders’ decisions, thereby exacerbating the agency conflict between the two groups of shareholders. This article is protected by copyright. All rights reserved
... In the corporate governance literature, the BoD is viewed inter alia as an important internal control mechanism that is intended to safeguard the interests of the shareholders, and reduce the cost of PA conflicts when control and ownership are separated (Jensen & Meckling, 1976). The literature also emphasises the considerable influence that the board has on firms' strategic decisions and general corporate performance (for reviews, see Adams, Hermalin, &Weisbach, 2010 andAguilera &Jackson, 2010). ...
... In the corporate governance literature, the BoD is viewed inter alia as an important internal control mechanism that is intended to safeguard the interests of the shareholders, and reduce the cost of PA conflicts when control and ownership are separated (Jensen & Meckling, 1976). The literature also emphasises the considerable influence that the board has on firms' strategic decisions and general corporate performance (for reviews, see Adams, Hermalin, &Weisbach, 2010 andAguilera &Jackson, 2010). ...
Article
How do international investors react to announcements of cross-border mergers and acquisitions (CM&As) by emerging market multinational enterprises (EMNEs)? Using a unique and manually-constructed firm-level dataset, this paper examines the stock price reactions to CM&A announcements made over the period 1991-2010 by Chinese MNEs listed on the Hong Kong Stock Exchange and the wealth impacts of their corporate governance. Our empirical findings confirm a positive stock price reaction on average, and suggest that international investors react positively to the presence of large shareholders, but negatively to the presence of institutional shareholders. There is a negative impact if the largest shareholder is either the State or the corporate founder. We suggest that this is because the international investors perceive potential principal-principal conflicts in such ownership/control constellations and discount equity prices accordingly. We also find that Board size and independence have positive effects on the price reaction, but that large supervisory boards engender negative reactions. © 2013 Elsevier Ltd.
... We treat the board of the target firm as a monolithic entity for ease of exposition and simplicity. The board derives pecuniary and non-pecuniary benefits from the directorship (Adams et al., 2008;Fama, 1980;Fama and Jensen, 1983;Hermalin and Weisbach, 2001). Such benefits include the net value of pecuniary compensation benefits, such as cash compensation, as well as non-pecuniary benefits. ...
... Such benefits include the net value of pecuniary compensation benefits, such as cash compensation, as well as non-pecuniary benefits. We denote total pecuniary and non-pecuniary benefit to the target firm board based on its incumbent status as W (Adams et al., 2008;Fama, 1980;Fama and Jensen, 1983;Harford, 2003;Hermalin and Weisbach, 2003). Board compensation is public information. ...
Article
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We study the potential for digital, online information and electronic voting to improve shareholder surplus by facilitating a new governance structure, owner-governance, which shifts control of the takeover decision from the board to shareholders. We compare analytical models of owner-governance to the current practice of delegated-governance in the context of increasing availability of online information which increases public informedness. Our analysis shows that shareholders of the target firm and the acquirer both prefer owner-governance to delegated-governance when informedness is sufficiently high. Interestingly, we find a region where owner-governance offers a higher probability of takeover but delegated-governance offers higher shareholder surplus. Under delegated-governance, the board endogenously sets an entrenchment level that is always greater than the entrenchment level preferred by the shareholders and increasing informedness reduces the probability of a takeover. Our results suggest that owner-governance should be considered because of increasing informedness.
... That is because government and OJK issued regulation. Internal control by independent committee give significant effect for better transparency, especially in sustainability disclosure (Mohamed & Faouzi, 2014;Adams, Hermalin, & Weisbach, 2010). ...
... High profile industry very sensitive with it should have more steps to anticipate it. But today, not only high profile but also medium and low profile concern with environment and social too (Adams, Hermalin, & Weisbach, 2010;Mohamed & Faouzi, 2014). ...
Conference Paper
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Based on stakeholder theory, company not only consider shareholders but also stakholders, all who have interest in the business. Company perform the business should consider not only financial aspects but also non-financial aspects. Non-financial aspects, such as: environment and social are another aspects beside economic aspects. Economic aspects mostly consider only for short term planning than environmental and social aspects that consider medium and long term planning. Indonesia have same issues related environmental, so Otoritas Jasa Keuangan (OJK) as capital market’s regulator and government make some regulation. Company should report all actvity business related with environment and social. Based on GRI 4.0, one of standard that used in the world, evaluation about the company consider with three aspects too, like: economic, environment, and social. Indonesia take contribution to make better world with green company that listed in Indonesian Stock Exchange (ISE), with some regulation. This research’s objective is try to identify corporate governance as a essential element for make sustainability reporting for company, especially that listed in ISE. We use descriptive analysis with sampling company listed in ISE with variable corporate governance, such as: board characteristics, regulation and sustainability reporting issues by GRI 4.0. The interest thing as preliminary finding, not many company listed in ISE make report related with sustainability reporting. Corporate governance, one of variable that consider company to make sustainability reporting. Sustainability reporting is important issue in the world. World now based Triple Bottom Line (TL) who founded by Elkington (1997) try to make “new”world that more concern about environmental and social. Some reseacrh indicate that company concern with enviroment and social (proxy with: sustainability reporting) will have more good perpection in public and for long time can increase the firm’s value.
... My empirical method follows Berger et al. (1997) and is based on exploiting an equity-centric shock to managerial security and examining its effects on covenant choices in bond contracts. To that end, I build on the literature that establishes a key role for independent directors as monitoring agents on corporate boards (e.g., Fama 1980;Fama and Jensen 1983;Weisbach 1988;Hermalin and Weisbach 1998;Adams et al. 2010) and use the mandatory adoption of board independence rules instituted by the New York Stock Exchange (NYSE) and the National Association of Securities Dealers (NASD) as the basis for my identification strategy. ...
... According to Adams et al. (2010), the theory underlying the "busyness problem" is that directors with a high number of outside directorships are likely to devote less effort to each of their duties. 35 Empirical findings that anchor on this theory are nonetheless mixed. ...
Thesis
This thesis consists of three studies that investigate the channels through which corporate governance reforms, accounting choice, and social capital influence contracting in the corporate bond market. In Chapter 1 (solo authored), I examine the public debt contracting consequences of shocks to managerial entrenchment. For identification, I exploit the mandatory adoption of board independence rules under the NYSE and NASD listing requirements as a regulatory reform that enhanced the intensity of CEO monitoring by independent directors. Using a large sample of corporate bond issues, I find that the rules induced economically significant contracting effects in non-compliant firms, namely in the form of lower payout, financing, and event-related covenants as well as higher credit ratings. In further tests, I show that while these effects are not mitigated by shareholder control, they ultimately depend on directors' private incentives and their ability and willingness to engage in costly monitoring. My findings speak to the debate on how equity-centric governance interacts with bondholders' interests and their incentives to impose long-term restrictions on firms' economic activities. Chapter 2 (co-authored with Peter Pope and Ane Tamayo) examines the contracting relevance of the balance sheet in the corporate bond market. Using "accounting bloat" in net asset values as a proxy for balance sheet quality, we predict and find that aggregate covenant intensity in bond indentures is negatively associated with the quality of issuers' balance sheet numbers. The magnitude of this effect is more pronounced for accounting and event-related covenants and is lower in the case of covenants that restrict payouts, refinancing, and investment activities. Our results are robust to controlling for corporate governance quality and the stringency of monitoring by lenders in syndicated loan deals. Turning to market outcomes, we find that offering yields, credit spreads, and credit ratings are decreasing in balance sheet quality, while the likelihood of agreement among credit rating agencies about new bond issues' credit risk increases with balance sheet quality. To establish a causal link between balance sheet quality and covenant structures, we exploit an exogenous court ruling in Delaware that substantially limits the fiduciary duties of directors to creditors. We show how the legal event affected bond issuers' reporting incentives and altered the debt contracting relevance of their balance sheet numbers. Finally, in Chapter 3 (co-authored with Kalr Lins, Henri Servaes and Ane Tamayo), we investigate whether a firm's capital, and the trust that it engenders, are viewed favourably by bondholders. Using firms' corporate social responsibility (CSR) activities to proxy for social capital, we find no relation between CSR and bond spreads over the 2005-2013 period. However, during the 2008-2009 financial crisis, which represents a shock to trust and default risk, high-CSR firms benefited from lower bond spreads. These effects are more pronounced for firms that, when in distress, have a greater opportunity to engage in asset substitution or divert cash to shareholders. High-CSR firms were also able to raise more debt capital on the primary market during this period, and those high-CSR firms that raised more debt were able to do so at lower at-issue bond spreads, better initial credit ratings, and for longer maturities. Our results suggest that bond investors believe that high-CSR firms are less likely to engage in asset substitution and diversion that would be detrimental to stakeholders, including debtholders. These findings also indicate that the benefits of CSR that accrued to shareholders during the financial crisis carry across to another important asset class, debt capital.
... Board independence as a vital corporate governance attribute promotes profitable growth through positively influencing the performance of banks (Kumari and Pattanayak 2017). Financial performance can be attained with a more independent board (Dalton et al. 1998), as it performs a better monitoring role (Carter et al. 2010) because independent directors are alleged to be effective monitors (Adams et al. 2010). Previously, many studies reported a positive relationship between board independence and profitability. ...
... The test of independence principally emanates from the fact whether such person can reasonably be perceived as being able to exercise independent business judgment without being subservient to any form of conflict of interest." 5 Previously, many studies linked diversity with gender and nationality (Adams et al. 2010;Adams and Ferreira 2009;Anderson et al. 2011;Carter et al. 2003;Estélyi and Nisar 2016;García-Meca et al. 2015;Ionascu et al. 2018). We did not find the presence of any women on the boards of Pakistani banks except for a few cases. ...
Article
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This study investigates the impact of corporate governance characteristics and political connections of directors on the profitability of banks in Pakistan. The study uses the data of 26 domestic banks over the latest and large period of 2007–2016. Our findings firstly affirm that bank profitability is negatively affected by the presence of politically connected directors on the board, reporting significantly lower return on assets, return on equity, net interest margin, and profit margin. Secondly, our findings also affirm the negative political influence on the sustainability of the banking industry, reporting significantly lower return on assets, return on equity, net interest margin, and profit margin during the government transition of banks having politically connected directors sitting on their board. Our findings further report an inverted U-shaped relationship between board size and bank profitability, suggesting that a board size beyond 8–9 members decreases the profitability. The study further finds a positive impact of board composition, board independence, and director compensation on bank profitability, while also finding a negative impact of frequent board meetings, presence of foreign directors, and audit committee independence.
... Our results may be applicable to companies in other sectors that are considering a similar conversion to for-profit status. Third, we examine different dimensions of board composition, whereas previous studies have tended to focus on size and independence (see Adams et al., 2010 andJohnson et al., 2013 for a survey). The value of investigating board composition beyond size and independence when examining the impact on firm outcomes has already been explored in the literature ( Johnson et al., 2013;Hillman, 2015). ...
... A number of studies show that board demographic attributes are linked to firms' environment and that they can affect firm outcomes and strategy (Adams et al., 2010;Johnson et al., 2013;Schmidt and Bauer, 2006). Given the major changes in the business environment in which exchanges operate, we expect to observe changes in the demographic attributes of stock exchanges' boards after demutualization. ...
Article
Purpose: The purpose of this paper is to study corporate governance restructuring strategies of companies to adapt to new market conditions following conversion into a for-profit structure. It focuses on the changes in the composition of the board of directors. Design/methodology/approach: The paper conducts a field experiment using stock exchanges, which have become more international over time, and many of which have been forced to demutualize and convert to for-profit structures to compete more efficiently. The paper does a fine-grained analysis of restructuring in the composition of the board using the ANOVA technique. The paper also examines the impact of this board composition restructuring on the reputation of the exchanges using a regression technique. Findings: The authors find that the stock exchanges restructured board composition and refocused them to create better value. Results suggest that the conversion of a company to a for-profit structure brings efficiencies when accompanied by changes in the governing bodies. The authors also find that converting to for-profit firms had a positive impact on the reputation of the exchanges. The positive impact was even greater when accompanied by changes in board composition. Research limitations/implications: A stronger focus on the corporate governance dimension to understand the successful demutualization of stock exchanges is needed. Originality/value: The authors analyze the corporate governance dimension during demutualization processes of an under examined sector. The financial performance of the stock exchanges the authors study significantly improved after their conversion to for-profit organizations and provide an example of successful corporate governance restructuring. Available at: https://www.emeraldinsight.com/eprint/DKSXX8QJGABFD8X324WI/full
... Some survey papers suggest that corporate governance mechanisms follow an economic rationale and help reduce agency frictions [e.g., Bushman and Smith, 2001;Core et al., 2003;Armstrong et al., 2010]. However, other authors point out empirical problems with these conclusions, including issues with measurement [Bhagat et al., 2011] and correlated omitted variables [Adams et al., 2010]. Adding to these concerns, several empirical papers find evidence of managerial rent extraction and opportunistic behavior, suggesting that our current corporate governance system suffers from substantial inefficiencies (e.g., Bebchuk and Fried, 2004). ...
Article
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I review the empirical research on the role of stakeholders in corporate governance with an emphasis in contributions from the accounting literature. In particular, I focus on the following stakeholders: employees, the general public, the media, related firms, the government, private regulators, gatekeepers, and foreigners. This list does not include capital providers (shareholders and debt-holders), as the governance role of these stakeholders has already been covered by prior surveys in the academic literature. The discussion is structured around each stakeholder's incentives to influence managerial behavior, the mechanisms through which stakeholders act on managerial actions, as well as any concerns about this influence. All the analyzed stakeholders appear capable of influencing managerial actions to some extent, but the efficacy of stakeholders' monitoring role is controversial. Empirical research uncovers several factors that undermine stakeholders' incentives to discipline corporate managers. And more critically, in some cases stakeholders' incentives appear to be misaligned not only with shareholders' interests but also with the public interest. Taken together, the reviewed evidence suggests that the monitoring role involves a wide range of actors beyond the board of directors and capital providers. The review also points out that there is still much to learn about stakeholder monitoring.
... Finally, hiring/firing the CEO and top management is often identified as high priority in the job description of board members (Demb & Neubauer 1992). Theoretical and empirical evidence have been established concerning the degree of monitoring to which corporate boards should impose on the selection, dismissal, and succession of the CEO (Weisbach 1988;Hermalin 2005;Adams et al. 2010;Guo & Masulis 2015). Our results expand this line of literature by supporting the idea that the board of directors should exert monitoring effort not only on the succession plan of the CEO, but also on those of other top executives to ensure the optimal balance of power in an organization. ...
Article
Distinct from prior literature that focuses on board quality and CEO characteristics as the main drivers of internal governance, this study focuses on internal governance and links the extent to which subordinate executives are connected with their CEO to corporate investment decisions, where a top manager is assumed loyal to the CEO if he is appointed during the current CEO's tenure. On a sample of S&P1500 companies from 2000 to 2015, we observe a robust declined corporate investment rate, driven by cuts in R&D and acquisitions activity, in firms with strong top management team connectedness after controlling for board and CEO characteristics. Firms with connected top managers tend to underinvest. The findings imply that the connected top managers are likely to collude with the CEO for their personal benefits rather than improving operational efficiency. To substantiate this explanation, we further show evidence of a rise in both selling, general, and administrative (SG&A) expenses as well as executive compensation in firms with strong leadership connection. The adverse effects of top management team connectedness on corporate investment are only moderated by financial analyst coverage but not by any other well-known governance mechanisms including board quality, corporate charters and institutional ownership. This study is novel in establishing the checks and balances of executive suites as a distinguishable aspect in corporate governance system for corporate investment behaviour and firm valuation.
... Ibid: (p. 6) States: ...
Article
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Compliance with rules and regulations is very critical and important issue when organizations are infusing a culture of honesty and integrity in business. Commitment of board of directors and willing of top management and employees to strength corporate governance facilities the role of compliance officers. Failure to adhere to compliance function will increase operational risk and hence impacting interests of stakeholders. Corporate governance is a cornerstone in improving economic efficiency and growth in order to attract investors and gain their confidence. Saudi Arabian Monetary Agency (SAMA) which is the central bank in the Kingdom of Saudi Arabia with Capital Market Authority is thriving continuously to strength corporate governance rules for banks and financial institutions. One of the circulars for banks and financial institutions is the requirements for appointments of senior positions in financial organizations with the objective of appointing persons who possess integrity, honesty, and good reputation. In addition, SAMA issued several guidelines for anti-money laundering, rules for countering fraud and a code of professional ethics of staff. Recently, banks are required to form compliance unit to make sure banks prepare their financials according to International Financial Reporting Standards (IFRS). The aim of this research is to highlight a case of corporate governance and board responsibilities in one of the financial institutions in Saudi Arabia. The case will be presented to show the mechanism followed by the financial institution and whether it is complied with rules and if not what corrective actions are done in order to strength corporate governance principles.
... As the central theme of corporate governance is to align executive's interest to those of stakeholders and thereby increase corporate accountability, corporate governance plays a key role in mitigating conflict of interest (Luo 2005). Hence, corporate governance is usually linked with bank performance (Denis and McConnell 2003;Barth, Sun, and Zhang 2003;Adams, Hermalin and Weisbach 2010). The existence of female director has been empirically linked to higher bank performance (Low, Roberts, and Whiting 2015;Garcia-Meca, Garcia-Sanchez, and Martinez-Ferrero 2015). ...
Article
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The increasing frequency and intensity of catastrophic natural disasters have the potential to stress and imperil banks to the point of compromised viability or even bankruptcy. Using data of approximately 907 domestic/local banks and Spatial Hazard Events and Losses Database for the United States during the period 2010–2019, we explore how natural disasters impact bank stability. Our main findings support the aforementioned hypothesis that natural disasters decrease bank stability because total deposit and equity (capital) become more volatile and the bank is prone to increased lending margins, as well as a provision of loan loss. Thus, banks lose their competitiveness, ROA deteriorates, and Z-score becomes lower. Strong corporate governance and healthy financial strategy, nevertheless, assist bank recovery in the aftermath of these weather extreme events. Last but not least, we find a non-linear relationship between natural disasters and bank stability and posit the role of indemnity paid out from the Federal insurance programme (after natural hazards) in the high-damage group.
... Board structure affects its functionality, and the composition of a board usually reflects the desires of various parties interested in a firm (Adams et al., 2010). Firms often establish a formal board for the first time at the IPO (Wang & Song, 2016). ...
Article
This study investigates whether a company's founders affect the combination of executive, grey and independent directors on its board at the time of initial public offering (IPO) in the UK. Particularly, we analyse how venture capitalists are associated with board structure in founder-managed and non-founder-managed firms. We find that UK IPO firms managed by founders tend to have more executive directors. Further, they are more likely to stack non-executive directors with more independent directors relative to grey directors. Venture capital ownership is not significantly associated with board structure at the IPO stage. However, further evidence suggests that venture capital ownership is negatively related to the percentage of executive directors and positively related to the percentage of grey directors in the founder-managed firms.
... Board structure affects its functionality, and the composition of a board usually reflects the desires of various parties interested in a firm (Adams et al., 2010). Firms often establish a formal board for the first time at the IPO (Wang & Song, 2016). ...
Article
Full-text available
This study investigates whether a company's founders affect the combination of executive, grey and independent directors on its board at the time of initial public offering (IPO) in the UK. Particularly, we analyse how venture capitalists are associated with board structure in founder-managed and non-founder-managed firms. We find that UK IPO firms managed by founders tend to have more executive directors. Further, they are more likely to stack non-executive directors with more independent directors relative to grey directors. Venture capital ownership is not significantly associated with board structure at the IPO stage. However, further evidence suggests that venture capital ownership is negatively related to the percentage of executive directors and positively related to the percentage of grey directors in the founder-managed firms.
... Although most of the existing empirical research in economics such as Ferreira (2010), Hermalin and Weisbach (1998), Raheja (2005), Adams et al. (2020), disproportionately focussed on the distinction between independent and non-independent directors as the main source of director heterogeneity, with little or no attention to what can be brought into the boardroom debate based on different experiences of the board. Directors are viewed as providing important resources to the firm such as connections to key outsiders (regulators, suppliers, financiers, and others), advice and counsel. ...
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The purpose of this study was to carry out an investigation on the relationship between experience diversity and earnings quality of quoted insurance companies in Nigeria. The population of the study was all the listed insurance firms whose stocks are quoted on the floor of the Nigerian Stock Exchange as at 31st December 2017. Twenty six insurance companies are listed and a sample of 21 was selected due to availability and completeness of data within the study period. The study exclusively utilized secondary data obtained through published annual reports of the sampled firms. The study relied on positivist philosophy and employed panel data methodology using data covering the period 2008-2017. The analytical technique employed in the study was parametric statistics. The findings of this study showed that: there is significant relationship between experience diversity of the board and the accrual quality of listed insurance companies in Nigeria. It was also found that: experience diversity of the board has significant relationship with earning persistence of listed insurance companies in Nigeria. The study concluded that experience diversity significantly affects a firm's reported earnings quality. Based on these findings and conclusion, the following recommendations were made: When appointing board members, those who have served previously in other boards of directors should be given preference to hold prominent positions. Also, in order to report earnings that can be sustained, minimum experience requirement should be set to enable majority of the board members' position to be occupied by those who are well experienced in board matters
... Russell 3000 from 2001 to 2013. Full committee data has not been widely available (Jiraporn et al., 2009;Adams et al., 2010), especially with coverage of both required committees (audit, compensation, and nominating/corporate governance) and non-required committees (e.g., finance, technology, and strategy). ...
Conference Paper
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... Granger causality test related to a random error of regression models. Like most empirical corporate finance research works, the analysis of the relationship between board composition and firm performance faces the challenge of endogeneity, which can arise from unobserved heterogeneity, simultaneity, and reverse causality ( Adams et al., 2010;Wintoki et al., 2012;Liu et al., 2015). Liu et al. (2015) pointed out that the problem of unobserved heterogeneity appears when there is a set of latent variables that drive the relationship between board characteristics and performance. ...
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Purpose The purpose of this paper is to explore the effect of board independence on firm’s performance from the Stewardship theory perspective. Design/methodology/approach The study uses panel data of 162 firms listed in Bahrain Bourse and Saudi Stock Exchange during the period of 2013-2015. It also uses several econometric techniques to confirm the robustness of the results, such as firm fixed-effect approach and two-stage least squares (2SLS) in order to overcome the endogeneity which exists in such relations. Findings The study found an inverse effect of board independence on firm performance which was measured using two accounting-based measures: return of assets and return on equity. Based on these results, it was found that internal directors are more effective in enhancing performance of the firm than independent directors as information asymmetry problem and lack of firm-specific experience hinders the ability of independent directors of taking proper decisions that enhance firm's performance. Originality/value The study contributes to the ongoing debate about the relation between board independence and firm's performance in emerging markets, focusing on Saudi and Bahraini markets which have recently sought to form a system of laws that aims at protecting investors. The study indicates the importance of such laws rather than traditional governance measurements in enhancing performance.
... Furthermore, it is empirically challenging to study the relation between government involvement in the governance of banks and equity value due to the endogenous relation between governance structure and equity value (Adams, Hermalin, & Weisbach, 2010;Wintoki, Linck, & Netter, 2012). If government representation on the boards of banks is mandatory, there is no meaningful variation to study and, if not, we cannot typically know what causes the results. ...
Article
On March 18, 1976, the Swedish parliament voted on a bill that, if approved, would have substantially increased both the scale and scope of government representation on bank boards. Since parliament was hung, the outcome of the vote was decided by a lottery. We exploit this lottery to study the causal effect on shareholder value of government involvement in the corporate governance of banks. We find that the rejection of the bill resulted in positive abnormal returns that persisted in the following days. The results suggest that unsolicited government involvement in the corporate governance of banks is harmful for owners. © 2018 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology.
... In the same vein, to what extent is diversity relevant for board composition within ventures? Although the effect of gender diversity at the board level on performance remains confounded with potential selection effects ( Adams, Hermalin, & Weisbach, 2010), recent research ( Cumming, Leung, & Rui, 2015) and meta-analyses ( Post & Byron, 2015) indicate that gender diversity produces positive effects overall. Importantly, diversity within venture boards may enhance creativity and innovation, which are significant venture outcomes, but it may also hinder fast decision making, which is critical for ventures ( Eisenhardt, 1989b;Garg & Eisenhardt, in press). ...
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Venture boards are theoretically important and economically relevant. They are at the apex of a venture's organizational hierarchy and have significant influence on the most important decisions related to venture strategy and personnel. This paper reviews the organizational and strategy research on venture boards, clarifying how venture boards differ from venture investors and from public firm boards. It lays out a systematic research agenda to stimulate more research on venture governance, including venture board composition and structure, venture board process, and venture board transitions to public firm boards. This agenda attempts to illuminate the research opportunities related to the distinctive nature of venture boards and enable theoretical engagement with the broader corporate governance scholarship on public firms. A venture's board of directors is highly consequential for its most important strategic and personnel outcomes. Uber and Theranos are just two recent ventures whose boards have come under public spotlight. This paper reviews organizational and strategy research on venture boards, mapping the evolution of the academic literature, summarizing key findings, and identifying the most important limitations. It explains how venture boards are different from venture investors and from public firm boards. Importantly, it lays out a systematic research agenda that draws upon the distinctive nature of venture boards and also creates a bridge to the broader literature on public firm boards. New insights on venture board composition, structure, process, and transition to public firm boards will be relevant to venture executives, investors, and directors.
... These ideal types represent the configuration of sources of identity, legitimacy, and authority as well as the basis for mission, norms, strategy, and attention (Pahnke, Katila, & Eisenhardt, 2015, Thornton, 2004, Thornton & Ocasio, 1999. Within the corporate governance literature, the agency and resource dependence perspectives have been invoked to consider sources of identity (Hillman, Nicholson, & Shropshire, 2008), legitimacy (Certo, 2003), and authority (Adams, Hermalin, & Weisbach, 2010) as well as the basis for mission, norms, strategy, and attention of the board of directors (Khurana & Pick, 2004, Tuggle, Schnatterly, & Johnson, 2010, Zahra & Pearce, 1989. Table 1 provides an overview of the ideal types of the agency-based logics and resource dependence-based logics of the corporate board of directors. ...
... One primary challenge for empirical research is endogeneity (Adams et al., 2010;Garcia-Castro et al., 2010;Hong et al., 2012). From this perspective, this study also contributes to the literature by analyzing a determinant of climate policies that is clearly exogenous. ...
... The composition of the board is an instrument for the implementation of good corporate governance of the company; its diversification is an instrument for checking the correct operation of the various components. From different sources and from the overall context it emerges that the role of the independent members should not be underestimated, indeed today it seems to respond above all to the marked monitoring needs and internal controls of the business organization and to the need to ensure a more varied composition of the board (Adams, Hermalin, & Weisbach, 2010). In addition to providing a monitoring activity on the activities of the executive component, the independent directors may develop a more articulated board debate and help to ensure the substantial and procedural fairness of particularly delicate operations. ...
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It is necessary to distinguish the internal controls from external ones: the former are the responsibility of the appropriate bodies and business functions belonging to the organization of the companies, while the latter are exercised by subjects who fall outside the company and the functional structure of the company (audit company, Consob, Bank of Italy, etc.). In recent decades there have been several scandals that have hit large enterprises, also Italian ones, which have increased interest in the issue of corporate governance and in the inefficiencies presented in internal corporation controls (Munroa & Stewart 2011). Enhancing the effectiveness of controls, in particular the internal ones, has become a need increasingly felt by international and national legislators. Internal controls are an essential tool to achieve business goals (operating constantly in terms of efficiency and effectiveness), and at the same time to avoid wastage of resources, to safeguard corporate assets, producing accounting information and reliable management, to observe the strategies, the policies and the corporate procedures and, especially, to ensure compliance with laws and regulations. in this work, it will discuss, in the italian context, the role of the board of directors and the board of statutory auditors within the (SCIGR) System of Internal Control and Risk Management (Jaggi, Allini, Manes Rossi, & Caldarelli, 2016). Moreover, the study moves the analysis to other corporate figures well determined and in constant evolution, including the head of internal audit, the activity of compliance, the supervisory body ex D.Lgs.231/2001 and the manager in charge of drafting corporate accounting documents.
... Bandiera et al. (2019) use a model in which CEOs have private information about their types and show mismatches are quantitatively important in the data. Adams, Hermalin, and Weisbach (2010) and Hermalin and Weisbach (2017) provide surveys on the role of boards in corporate governance and on top executive assessment. 2 The financial press has reported many examples where the top executive of a large firm has been unable to function due to a health crisis. These examples include CEOs of Akzo, Lloyds, Pfizer, and Tokyo Electric Power taking leave or resigning due to fatigue, stress, overwork, and lack of sleep (Goff and Jenkins, 2011;Hill, 2012). ...
... 68 Since first articulated by Professor Eisenberg, the board's monitoring role has grown over time. 69 The chapters in this section first examine the structure and composition of the board of directors, before turning to issues that go to the heart of board responsibilities, including the exercise of fiduciary duties and the board's monitoring and oversight roles, particularly in risk management, executive compensation, and disclosure. Klaus Hopt and Patrick Leyens explore the structure of the board of directors with a focus on the two most commonly used board models in corporate law: the one-tier board with a significant number of non-executive directors, and the two-tier structure where non-executive directors are members of a supervisory board while executives directors compose the management board. ...
... When time series (13 years) and cross data (four countries and 237 firms) are blended, we get panel data that gives more data information with more disparity, less internal correlation between variables, more degrees of freedom and more efficiency (Gudjratic, 2015). Despite this, it is probable that heterogeneity exists in these units, in addition to simultaneity problem and reverse causality (Adams et al., 2010;Wintoki et al., 2012;Liu et al., 2015). The problem of unobserved heterogeneity appears whenever there exist a group of implicit variables that control the apparent relation between distributions and agency costs in order to achieve exact results on GCC firms of dividends to reduce agency costs. ...
... There is no evidence of significant performance effects from the presence of independent directors on company boards (Bhagat andBlack, 1999, 2002;Hermalin and Weisbach, 2003;Adams et al. 2010). Examining the rise of independent directors as a legal transplant from jurisdictions with dispersed ownership to other systems in which controlled corporations are dominant, Ferrarini and Filippelli (2015) show that countries use different definitions of, and assign different powers to independent directors of dispersed ownership and controlled companies. ...
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Manuscript Type: Original Manuscript Research Issue: The paper focuses on the importance of the nomination committee (NC), a largely ignored aspect of corporate governance compared to the attention paid to other governance committees, such as the remuneration and audit committees. Research Insights: We highlight how the legitimacy and efficacy of the NC relates to different institutional systems and the implication these have on institutional investor engagement. In particular, we compare two liberal market economies: Sweden, which has an external NC made up of shareholders and UK, which has an internal NC made up of directors. The paper shows that there are advantages and disadvantages in both systems. It concludes with a discussion of the possibility of achieving superior outcomes by combining features of the Swedish and UK nomination process. Academic Implications: The paper guides the reader through the two countries different institutional contexts, in particular revealing how the NC is affected by the different roles played by dominant shareholders and independent directors. At a time of growing societal quest for institutions to engage, these insights should help researchers that wish to further the understanding of the role institutional investors can play as corporate governors. The paper also draws on novel research showing how Swedish institutions take larger stakes and increases their engagement in the NC. This indicates that as the role of institutional investors evolve, changes in the NC composition should be developed too. Policymakers and Practitioner Implications: The arguments presented should open for a flexible application of internal and external nomination committees, where the best features of the Swedish and British models are combined. This may help to address many of the issues associated with free-riding and conflicts of interests in corporate governance while promoting sustainable wealth creation in the interest of the company and its shareholders as a whole. Keywords: Corporate Governance, Nomination Committee, Institutional Investors, Block- holders, Engagement
... Serious concerns have been raised both about the democratic legitimacy of boards and their effectiveness, for example the ability of lay board members to effectively supervise senior managers, ensure probity and protect the interests of members and other relevant stakeholders. The present paper [51] is a survey of the literature on boards of directors, with an emphasis on research done subsequent to the Hermalin and Weisbach (2003) survey. The two questions most asked about boards are what determines their makeup and what determines their actions? ...
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Corporate governance is concerned with holding the balance between economic and social goals and between individuals and company goals. The corporate governance frame work is there to encourage the efficient use of resources and accountability for the stewardship of these resources. Its aim is to align as nearly as possible to the interest of individuals, corporations and society. A bibliography of unclassified literature of the research work on corporate governance of recent times is presented.
... They also argue that using a traditional static model to estimate Eq. (1) may induce biased inferences, by ignoring dynamic endogeneity. Furthermore, Adams et al. (2010) underline that there is a general consensus in the literature suggesting that board structures are exogenous. For instance, Weisbach (1998, 2003) show theoretical as well as empirical evidence suggesting that board structures are more likely to be endogenous. ...
Article
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Drawing from a sample of French companies that made up the SBF 120 index over the period 2006–2010 (before the enactment of the Copé–Zimmermann law on gender quotas on boards), this paper investigates the relationship between board gender diversity and firm risk-taking (measured by the variability of the return on assets). Using a generalized method of moments estimation, no evidence is found to support the assumption of a significant relationship between women on corporate boards and firm risk-taking. These results potentially can be relevant for policy makers and academic research.
... In the literature, the most studied characteristics of boards of directors are independence, size, activity, and directors´ participation in company ownership [42][43][44][45][46][47]. According to Spanish law, the composition of the board of directors should be balanced and equilibrated [48]. ...
Article
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Corporate social responsibility (CSR) is one of the pillars of sustainable development. It is the key to operationalizing the strategic role of business in contributing towards the sustainability process. The fact that firms communicate their activities about economic sustainability, environmental sustainability, and social equity shows their commitment to society and their stakeholders. This paper analyzes the influence exerted by the composition of boards of directors on corporate social responsibility disclosure with reference to those companies that undertook an initial public offerings (IPO) in the Spanish capital market during the period 1998–2013. The empirical evidence provided by this study shows that ownership structure and board characteristics are relevant in the context of a firm’s CSR disclosure. The independent directors, non-executive directors, and large shareholder representatives affect the way in which their companies voluntarily disclose information regarding CSR. Our results lend support for a non-linear relationship between the proportion of shares in the IPO belonging to the members of the board of directors and the level of CSR reporting. We also find that the underwriter’s reputation has a positive and statistically significant influence on CSR disclosure for Spanish IPOs.
... When time series (13 years) and cross data (four countries and 237 firms) are blended, we get panel data that gives more data information with more disparity, less internal correlation between variables, more degrees of freedom and more efficiency (Gudjratic, 2015). Despite this, it is probable that heterogeneity exists in these units, in addition to simultaneity problem and reverse causality (Adams et al., 2010;Wintoki et al., 2012;Liu et al., 2015). The problem of unobserved heterogeneity appears whenever there exist a group of implicit variables that control the apparent relation between distributions and agency costs in order to achieve exact results on GCC firms of dividends to reduce agency costs. ...
Article
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This study aims to investigate the moderation role of board independence on the relationship between dividend policy and agency costs. We develop a formal model of a firm that chooses a dividend to minimise the sum of its agency costs of paying dividends with the role independent outsiders board members. The study used panel data with random-effect model for 237 firms from four Gulf Cooperation Council (henceforth, GCC) countries: Bahrain, Oman, Saudi Arabia and United Arab Emirates for a period of 13 years from 2003–2015. We find that dividends are positively related to asset utilisation, the GCC firms resort to dividend policy in order to reduce free cash flow, eventually reducing agency costs. Furthermore, the findings revealed that the inclusion of board independence as a moderating variable has influenced positively the relationship between dividend policy and reducing agency costs.
... Another aspect of the board diversity-firm performance nexus, which appears interesting, but has been ignored by researchers, is the effect of female participation on board committees on firm financial performance (Green and Homroy, 2018). It is argued that female representation on board committees constitutes real participation and reflects female integration in the governance mechanisms that are likely to have more direct effect on firm performance (Adams, Hermalin and Weisbach, 2010;Guo and Masulis, 2015). This is because scholars (e.g., Guo and Masulis, 2015;Green and Homroy, 2018) contend that most of the board work is carried out through committees, hence how board committees are composed may affect the functioning of a firm and its financial performance. ...
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This paper considers the effects of female representation and the proportion of female representation on corporate boards and audit committees on financial performance in an African context where institutions are weak. Employing a panel of 77 firms, our results show that female board representation exerts a positive and significant influence on firm financial performance. The study also finds that the performance effect of gender diversity is stronger for firms with two or more female directors, suggesting that building a critical mass of female representation enhances firm financial performance. Further analysis indicates that the inclusion of females on the audit committee appears to have a positive impact on firm financial performance. Our results are robust after controlling for endogeneity and the use of alternative measures of board gender diversity.
Conference Paper
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In a rapidly changing world, it is stressed that innovation is no longer an option, it is a necessity. This holds for insurance sector as well, where insurance companies offer novel solutions for their corporate customers. The main objective of this research paper is to identify and analyze the types of financial innovations offered by insurance sector in Poland to non-financial enterprises.Two research methods are exploited: internet survey of insurance products offered by ten largest insurance companies and telephone interviews with experienced insurance brokers. Many diverse innovations are observable at Polish insurance market. There are supply-driven as well as demand-driven innovations. Some of them are positively evaluated and other are still not well suited to corporate clients’ needs. There is an urgent need to personalize relationship between insurers and insured.
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Importance of various stakeholders for the company’s financial situation and performance is unequivocal. However, different needs and expectations of different groups of stakeholders may lead to the conflicts of interest. These conflicts may hinder the smooth development of a company. To avoid the negative consequences of conflicts of interest a company has to apply various methods of reducing the risk of conflicts of interest. Most of these methods are related to the corporate governance mechanisms. The main objective of the theoretical part of this study is to present the main types of conflicts of interest in a modern company, to identify their main consequences for the financial performance and market valuation, as well as to indicate the potential methods of conflicts of interest reduction. The objective of the empirical research is to examine whether the companies with lower risk of conflicts of interest are characterized by better financial performance and higher market valuation. Based on the analysis of a sample companies listed on the Warsaw Stock Exchange we have proved the relationship between the risk of conflicts of interest and the activity of board committees as well as the type of ownership structure. Unfortunately, lower risk of conflicts of interest is not accompanied by higher profitability or higher market valuation measured by the price-to-book value ratio.
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This paper examines the impact of staggered boards on the value of voting rights (i.e., the voting premium) estimated using option prices. We find companies with staggered boards have a higher voting premium. Exploiting plausibly exogenous court rulings, we confirm that weakening the effectiveness of staggered boards decreases the voting premium. Given that the voting premium reflects private benefits consumption and associated managerial inefficiencies, our findings are consistent with the entrenchment view of staggered boards. Analyzing the cross-sectional heterogeneity in our sample, we find the entrenchment effect of staggered boards to be particularly pronounced for firms in noncompetitive industries and for mature firms. (JEL G13, G30, G34, K22)
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Using hand-collected data on CEO noncompete agreements (NCAs), we find that NCAs are less common when CEOs expect to incur greater personal costs from reduced job mobility and more common when firms expect to suffer greater economic harm if departing CEOs leave to work for a competitor. Additionally, turnover-performance sensitivity is stronger when CEOs have NCAs. Finally, total compensation and incentive pay are higher if CEOs have more enforceable NCAs. Our identification strategy exploits staggered state-level changes in NCA enforceability. Overall, our findings suggest that restrictions on job mobility have important implications for how CEOs are monitored and compensated.
Chapter
This chapter presents topics regarding corporate governance, an assessment of its level for companies, and quantitative research aimed at disclosing associations between corporate governance and firm performance and other company characteristics. The methodology of corporate governance research is mainly microeconometrics. We present several examples of microeconometric studies devoted to corporate governance issues such as female representation on management boards, CEO change, and earnings management. We also discuss corporate governance ratings and indices along with the debate on their use and misuse.
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Research Question/Issue The study examines whether the presence of social ties between compensation committee members and executives explains pay‐for‐luck asymmetry in compensation, which means that the compensation contracts reward executives with higher pay for good luck but minimally penalize them with lower pay for bad luck. Research Findings/Insights We find that half of our sample firms have a friendly compensation committee, defined as the majority of the committee members having at least two social ties with executives. For firms with a friendly compensation committee, executives tend to be rewarded for good luck but not be penalized for bad luck, which indicates the presence of pay‐for‐luck asymmetry. For firms without a friendly compensation committee, their executive compensation is not associated with good luck or bad luck. Theoretical/Academic Implications The higher homophily due to social ties between compensation committee members and executives induces the committee to be more mentally close to or loosen the monitoring intensity over executives, and to be less likely to make an unfavorable design of compensation toward executives in the presence of bad luck. We complement existing studies by clearly demonstrating the channel through which executives influence the committee members. We also highlight the decisive role of the compensation committee in examining pay‐for‐luck asymmetry research issues. Practitioner/Policy Implications Our findings inform practitioners that social ties between compensation committee members and executives may impair the monitoring intensity of the committee, and hence, regulators should take measures to mandate or at least encourage firms to provide social ties information. https://www.youtube.com/watch?v=UL9iGjERnRo&feature=youtu.be
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In late 2003, Norway passed a law mandating 40% representation of each gender on the board of public limited liability companies. The primary objective of this reform was to increase the representation of women in top positions in the corporate sector and decrease the gender disparity in earnings within that sector. We document that the women appointed to these boards post-reform were observably more qualified than their female predecessors along many dimensions, and that the gender gap in earnings within boards fell substantially. However, we see no robust evidence that the reform benefited the larger set of women employed in the companies subject to the quota. Moreover, the reform had no clear impact on highly qualified women whose qualifications mirror those of board members but who were not appointed to boards. Finally, we find mixed support for the view that the reform affected the decisions of young women. While the reform was not accompanied by any change in female enrollment in business education programmes, we do see some improvements in labour market outcomes for young women with graduate business degrees in their early career stages; however, we observe similar improvements for young women with graduate science degrees, suggesting this may not be due to the reform. Overall, seven years after the board quota policy fully came into effect, we conclude that it had very little discernible impact on women in business beyond its direct effect on the women who made it into boardrooms.
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Corporate governance is a cornerstone in improving efficiency and creating confidence to attract investors. After collapses of giant companies, worldwide business community are trying to infuse a culture of honesty and integrity in business. Commitment of board of directors and willing of top management and employees to strength corporate governance is essential. Failure to compliance with corporate governance rules will increase operational risk and hence impacting interests of stakeholders.Saudi Arabian Monetary Agency (SAMA) which is the central bank in the Kingdom of Saudi Arabia with Capital Market Authority (CMA) are thriving continuously to strength corporate governance rules for banks and financial institutions. One of the circulars for banks and financial institutions is the requirements for appointments of senior positions in financial organizations with the objective of appointing persons who possess integrity, honesty, and good reputation. Companies should obtain written non-objection form for the appointment of senior managers and it is the responsibility of board of directors to ensure compliance with this regulation. In addition, SAMA issued several guidelines for anti-money laundering, rules for countering fraud and a code of professional ethics of staff. Recently, banks are required to form compliance unit to make sure banks prepare their financials according to International Financial Reporting Standards (IFRS).The aim of this paper is to highlight a case of corporate governance and board responsibilities in one of the financial institutions in Saudi Arabia. The case will be presented to show the mechanism followed by the financial institution and whether it is complied with rules in appointing senior managers and if not what corrective actions are done in order to strength corporate governance principles.
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We synthesise the empirical literature on the determinants and consequences of financial distress, critique the findings and offer suggestions for future research. We categorise these indicators into (i) firm‐level fundamental determinants, (ii) macroeconomic determinants and (iii) firm‐level corporate governance determinants. We categorise the consequences into (i) financial reporting and auditing consequences, (ii) firm‐level operational consequences, (iii) capital market consequences and (iv) corporate governance consequences. We suggest that future research can make a more meaningful contribution, by developing more comprehensive models of predicting financial distress which will entail a departure from the current partial analysis to a more holistic complex analysis.
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Purpose The purpose of this study is to investigate the relationship between the stock return volatility, the outside and the independent directors. Design/methodology/approach The volatility, as the dependent variable in the model, is measured by the standard deviation of annual stock returns. Concerning the independent variable is as follows: The chief executive officer (CEO) is a dummy variable denoting whether or not the chairman of the board holds the position of CEO. The INDD, which represents the independent directors, is measured according to whether the firm appoints independent directors, or by the ratio of independent directors. The FD, which represents the outside directors, is measured according to whether the firm appoints outside directors, or by the ratio of outside directors. In addition, the authors also add the following five control variables to the regression model: the certified public accountant refers to the auditor-related variables including the audit opinion and whether the firm has previously switched accounting firms. The performance (PER) represents the firm performance in terms of the relative return on assets (ROA). The turnover (TURN) is measured by the natural log of the total liabilities. The SIZE is measured by the natural log of the market value of equity, and the leverage ratio (LEV) is the firm’s debt ratio measured by the ratio of total. The TURN is measured by the natural log of the total liabilities. The SIZE is measured by the natural log of the market value of equity and the LEV is the firm’s debt ratio measured by the ratio of total debt to total assets. The sample comprises 89 firms listed on the SBF 120 index over 2006-2012. Findings Results reveal that the outside directors have a positive and significant effect on the stock return volatility. Moreover, the firm’s size and ROA have a negative effect on the stock return volatility, which is clearly evidenced in all the regressions. On the other hand, the CEO, audit size and debt ratio have statically significant and positive effects on the stock return volatility. Originality/value This study indicates the importance of corporate governance and helps investors and financial economists understand the behavior of the stock prices during a financial crisis. Although the existing studies refer to the influence of corporate governance on the stock prices during a crisis, none of these has ever discussed whether better corporate governance can help reduce the stock price volatility in such a situation.
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This paper surveys the empirical and theoretical literature on the mechanisms of corporate governance. We focus on the internal mechanisms of corporate governance (e.g., corporate board of directors) and their role in ameliorating various classes of agency problems arising from conflicts of interests between managers and equityholders, equityholders and creditors, and capital contributors and other stakeholders to the corporate firm. We also examine the substitution effect between internal mechanisms of corporate governance and external mechanisms, particularly markets for corporate control. Directions for future research are provided.
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Sarbanes-Oxley and the accompanying era of heightened corporate governance dramatically changed the composition, role, and responsibilities of corporate boards. As a result of these changes, many of the justifications for traditional director compensation plans no longer apply. As directors struggle with their new responsibilities as independent corporate monitors, the manner in which they are compensated must reflect these changes. A director compensation plan in which directors receive compensation primarily in the form of cash, coupled with finely tailored equityholding requirements, strikes the right balance of director independence and director accountability. It also facilitates the creation of corporate boards drawn from a more diverse pool of talent.
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The paper studies how a person's concern for a future career may influence his or her incentives to put in effort or make decisions on the job. In the model, the person's productive abilities are revealed over time through observations of performance. There are no explicit output-contingent contracts, but since the wage in each period is based on expected output and expected output depends on assessed ability, an "implicit contract" links today's performance to future wages. An incentive problem arises from the person's ability and desire to influence the learning process, and therefore the wage process, by taking unobserved actions that affect today's performance. The fundamental incongruity in preferences is between the individual's concern for human capital returns and the firm's concern for financial returns. The two need be only weakly related. It is shown that career motives can be beneficial as well as detrimental, depending on how well the two kinds of capital returns are aligned.
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This study advances research on CEO-board relationships, interlocking directorates, and director reputation by examining how contests for intraorganizational power can affect interorganizational ties. We propose that powerful top managers seek to maintain their control by selecting and retaining board members with experience on other, passive boards and excluding individuals with experience on more active boards. We also propose that powerful boards similarly seek to maintain their control by favoring directors with a reputation for more actively monitoring management and avoiding directors with experience on passive boards. Hypotheses are tested longitudinally using CEO-board data taken from 491 of the largest U.S. corporations over a recent seven-year period. The findings suggest that variation in CEO-board power relationships across organizations has contributed to a segmentation of the corporate director network. We discuss how our perspective can reconcile contrary views and debates on whether increased board control has diffused across large U.S. corporations.
Article
This study examines CEO influence in the board of director selection process and the theoretical mechanism by which CEO influence is presumed to affect subsequent board decision making on CEO compensation. We address both of these issues by linking political and social psychological perspectives on organizational governance. We propose that powerful CEOs seek to appoint new board members who are demographically similar, and therefore more sympathetic, to them. Using a longitudinal research design and data on 413 Fortune/Forbes 500 companies from 1986 to 1991, we examine whether increased demographic similarity affects board decision making with respect to CEO compensation contracts. The results show that (1) when incumbent CEOs are more powerful than their boards of directors, new directors are likely to be demographically similar to the firm's CEO; (2) when boards are more powerful than their CEOs, new directors resemble the existing board; and (3) greater demographic similarity between the CEO and the board is likely to result in more generous CEO compensation contracts. We discuss the implications of the strong effect of demographic similarity for corporate control issues.
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This paper explores the executive origins of firms' competitive moves by focusing on top management team characteristics, specifically on team heterogeneity, rather than on the more often studied environmental and organizational determinants of such behaviors. Arguing that competitive actions and responses represent different decision situations, we develop propositions about how heterogeneity may enhance some competitive behaviors but impair others. With a large sample of actions and responses of 32 U.S. airlines over eight years, we find results that largely conform to our propositions. The top management teams that were diverse, in terms of functional backgrounds, education, and company tenure, exhibited a relatively great propensity for action, and both their actions and responses were of substantial magnitude. Heterogeneous teams, by contrast, were slower in their actions and responses and less likely than homogeneous teams to respond to competitors' initiatives. Thus, although team heterogeneity is a double-edged sword, its overall net effect on airline performance, in terms of changes in market share and profits, was positive.
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The board of directors is considered as an instrument for dealing with the organization's environment. In a random sample of eighty nonfinancial corporations, elements of board size and composition are shown to be systematically related to factors measuring the organization's requirements for coopting sectors of the environment. Organizations that deviate more from an empirically estimated optimal board structure equation are likely to perform more poorly, compared to industry standards.
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Empirical research has typically rested on the assumption that board independence from management enhances board effectiveness in administering firms. The present study shows how and when a lack of social independence can increase board involvement and firm performance by raising the frequency of advice and counsel interactions between CEOs and outside directors. Hypotheses were tested with original survey data from 243 CEOs and 564 outside directors on behavioral processes and dynamics in management-board relationships.
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All public corporations must make a choice regarding board leadership structure. Advocates of more effective corporate governance argue for independent board leadership; yet many firms choose instead to allow the CEO to serve as board chairperson (CEO duality). This study examines the differential financial implications of these choices for 141 corporations over a 6-year time period. Results indicate significant differences in performance between the two groups along a number of performance measures; more specifically, firms opting for independent leadership consistently outperformed those relying upon CEO duality.
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We examine cross-sectional variations in the committee structure of boards of directors for S&P firms during 1997 and 1998. We document that there is a significant amount of variation in the number of committees and the presence of each committee. Number of committees is positively related to the number of directors, and the number of committees is also positively related to firm size. Firms with a higher CEO ownership have fewer committee functions performed by the board. On the other hand, firms with larger boards, more assets, and more board meetings have more committees and committee functions. Dividend-paying firms have more committee functions. Firms with a higher CEO ownership assign fewer tasks to each committee. Firm performance, measured by market to book ratio, is negatively related to the percentage shares held by outside directors on the acquisition committee, ethics committee, succession committee, and technology committee, but is positively related to the percentage of shares held by the outside directors serving on the finance & investment committee as well as on the strategy committee. Consistent with a number of other studies, firm performance is positively related to the percentage of the shares held by the CEOs. Finally, firms with older boards have lower market to book ratios. We do not find that performance is related to the presence of committee or to the fraction of outside directors serving on each committee. Abstract: We examine cross-sectional variations in the committee structure of boards of directors for S&P firms during 1997 and 1998. We document that there is a significant amount of variation in the number of committees and the presence of each committee. Number of committees is positively related to the number of directors, and the number of committees is also positively related to firm size. Firms with a higher CEO ownership have fewer committee functions performed by the board. On the other hand, firms with larger boards, more assets, and more board meetings have more committees and committee functions. Dividend-paying firms have more committee functions. Firms with a higher CEO ownership assign fewer tasks to each committee. Firm performance, measured by market to book ratio, is negatively related to the percentage shares held by outside directors on the acquisition committee, ethics committee, succession committee, and technology committee, but is positively related to the percentage of shares held by the outside directors serving on the finance & investment committee as well as on the strategy committee. Consistent with a number of other studies, firm performance is positively related to the percentage of the shares held by the CEOs. Finally, firms with older boards have lower market to book ratios. We do not find that performance is related to the presence of committee or to the fraction of outside directors serving on each committee.
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This paper uses data on 1542 board committees and director compensation in a sample of 352 Fortune 500 companies in 1998 to analyze variation in board behavior. I use this data to quantify the amount of effort boards devote to their three different functions: monitoring, dealing with strategic issues and considering the interests of stakeholders. I show that boards appear to take their traditional oversight role seriously, since on average boards devote effort primarily to monitoring. However, there is a fair amount of variation across firms in the amount of effort boards devote to their different functions. In particular boards of larger firms and firms that face more uncertainty devote relatively less effort to monitoring, while boards of diversified firms devote relatively more effort to monitoring. Boards of larger, growing and older firms devote more effort to stakeholder interests on both an absolute and a relative basis. Finally, boards of growing firms devote relatively more effort to strategic issues.
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This study investigates the determinants of the adoption of director incentive plans. The tests compare the financial and governance characteristics of 122 firms adopting director incentive plans between 1989 and 1995 to a sample of control firms matched on industry affiliation and sales. The multivariate test results suggest that the likelihood of plan adoption increases with the fraction of outside directors serving on the board and a certain form of director cash compensation. Three years after plan adoption there is a significant increase in the share and option holdings of the outside directors of adopting firms, a relative decline in their cash compensation, and a reduction in the adopting firm?s inside ownership and board size. In general, these results suggest the plans are adopted by firms that rely more on the board as a monitoring device and that related governance improvements bring the adopting firm?s director compensation structure closer to that of control firms.
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This paper examines the relation between a board's size and its monitoring effectiveness by exploring how board size affects different aspects of the CEO replacement process. I find that the probability of CEO turnover is significantly negatively related to board size, and that the abnormal return accompanying turnover announcements decreases with board size. I also find that larger boards are less likely to appoint an outsider to succeed the terminated CEO. These results suggest that a large size hinders the board's ability to perform its monitoring functions, and lends additional support to the current drive toward smaller boards.
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As monitors of management, independent outside directors play an important oversight and monitoring role in corporate governance. By providing directors with a financial stake in the performance of the firm through incentive-based compensation, firms can align the interests of directors and shareholders. In this paper, I examine whether the structure of director compensation affects CEO turnover, a specific corporate event where directors play a crucial role. I document a substantial increase in the use of incentive-based compensation for directors. I also find that incentive compensation for directors influences the level of monitoring by the board. When directors of independent boards receive incentive compensation, the like lihood of CEO turnover following poor performance increases. I also find that the likelihood of a firm adopting a stock-based incentive plan for directors is positively related to the fraction of independent directors on the board and institutional ownership of the firm, which is consistent with firms adopting option and stock plans for directors to provide financial incentives for directors to monitor management.
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Executive compensation and corporate governance problems need to be seen in a larger historical context than is commonly done. The proximate causes of corporate scandals and executive pay problems have been identified, but the real drivers have not. A need for corporate restructuring, which emerged already in the 1970s, led to the remarkable rise in shareholder influence and the relentless pursuit for shareholder value. It placed exceptional demands on boards and led to extreme pay schemes that appear to have served the restructuring purposes well, but had unintended and unfortunate side-effects. In contemplating pay and governance reforms, it is essential to keep in mind the longer chain of events to avoid naive corrective measures that do not take into account the information and incentive constraints under which the various constituents and bodies in the larger governance system, especially the boards and shareholders, operate. Some of the recent advice on executive compensation seems very misguided in a longer historical perspective as is the push for extensive shareholder intervention rights.
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This paper examines if non-management director pay packages are set in ways consistent with the optimal contracting theory. Under this theory, directors issue stock option grants as a means for providing non-management directors incentives to monitor adequately the risk-taking and investment opportunities that managers of the firm undertake. Our results are consistent with this theory. Using a sample of over 5,200 observations between 1997 and 2002, we find that (1) agency costs differ substantially across our sample, (2) boards systematically set their compensation contracts to address these agency costs, and (3) significantly positive links exist between the ratio of current stock option grants-to-total compensation and seven future investment, risk and firm performance variables. The investment variables are next period's change in research and development expenditures and change in capital expenditures. The risk variable is next year's stock return volatility. The firm performance variables are next period's Tobin's Q ratio, return on assets (ROA), a market return on current investments, and this period's stock return. Our results are incremental to board characteristics, CEO stock option grants, and economic, firm-specific, yearly, and industry control factors.
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We report evidence on chief executive officer (CEO) turnover during the 1971 to 1994 period. We find that the nature of CEO turnover activity has changed over time. The frequencies of forced CEO turnover and outside succession both increased. However, the relation between the likelihood of forced CEO turnover and firm performance did not change significantly from the beginning to the end of the period we examine, despite substantial changes in internal governance mechanisms. The evidence also indicates that changes in the intensity of the takeover market are not associated with changes in the sensitivity of CEO turnover to firm performance.
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We examine the role of board connections in explaining how the controversial practice of backdating employee stock options spread to a large number of firms across a wide range of industries. The increase in the likelihood that a firm begins to backdate stock options that can be explained by having a board member who is interlocked to a previously identified backdating firm is approximately one-third of the unconditional probability of backdating in our sample. Our analysis provides new insight into how boards function and the role that they play in providing managerial oversight and determining corporate strategy. The Author 2009. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oxfordjournals.org., Oxford University Press.
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This paper models the interaction of firm insiders and outsiders on a corporate board and addresses the question of the ideal size and composition the board board. In the model, the board is responsible for monitoring projects and making CEO succession decisions. Inside directors are better informed regarding the quality of firm investment projects, but outsiders can use CEO succession to motivate insiders to reveal their superior information and help the board in implementing higher value projects. The optimal board structure is determined by the tradeoff between maximizing the incentive for insiders to reveal their private information, minimizing the cost to outsiders to verify projects, and maximizing outsiders' ability to reject inferior projects. I show that optimal board size and composition are a function of the directors' and firm's characteristics. I also develop testable implications for the cross-sectional variations in the optimal board structure across firms.
Article
This paper documents a strong positive relation between the percentage of outside directors and the frequency of outside CEO succession. The likelihood that an executive from outside the firm is appointed CEO increases monotonically with the percentage of outside directors. This monotonic relation is observed for both voluntary and forced departures. Evidence from stock returns around succession announcements indicates that, on average, shareholders benefit from outside appointments, but are harmed when an insider replaces a fired CEO.
In recent years, boards of directors have become more active and independent of management in pursuing shareholder interests. But, up to this point, there has been little empirical evidence that active boards help companies produce higher rates of return for their shareholders. In this article, after describing the new board activism, the authors argue that past failures to document an association between independent boards and superior corporate performance can be explained by two features of the research: its concentration on periods prior to the 1990s (when most boards were largely irrelevant) and its use of unreliable proxies (such as a minimum percentage of outside directors) for a well-functioning board. The authors hypothesize that an independent and resourceful board takes steps that require management to increase earnings available to investors. To test this hypothesis, the performance of a sample of large U.S. corporations was examined over the period 1991-1995 using two proxies for the “professionalism” of each company's board: (1) the letter grades (A+ to F) assigned by CalPERS for corporate governance; and (2) a “presence” or “absence” grade based on three key indicators of professional board behavior. Both of these governance metrics were associated in statistically significant ways with superior corporate performance, as measured by earnings in excess of cost of capital and net of the industry average. While acknowledging that such results do not prove causation, the authors conclude that, in the first half of the 1990s, corporations with active and independent boards added significantly more value for shareholders than those with passive, “rubber-stamp” boards.
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Corporate governance is concerned with the resolution of collective action problems among dispersed investors and the reconciliation of conflicts of interest between various corporate claimholders. In this survey we review the theoretical and empirical research on the main mechanisms of corporate control, discuss the main legal and regulatory institutions in different countries, and examine the comparative corporate governance literature. A fundamental dilemma of corporate governance emerges from this overview: regulation of large shareholder intervention may provide better protection to small shareholders; but such regulations may increase managerial discretion and scope for abuse.
Article
Why do firms allow their executives to accept outside directorships? Are firms acting in the best interests of their shareholders by allowing them to do so? We develop a theoretical model where accepting an outside directorship alters the CEO's effect on the value of the home firm. Our model illustrates that executives will choose to spend more time on external directorships than is optimal for the home firm. Our theoretical model is consistent with other recent empirical finance research on the effects of external directorships.
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Shareholder activists and regulators are pressuring U.S. firms to separate the titles of CEO and Chairman of the Board. They argue that separating the titles will reduce agency costs in corporations and improve performance. The existing empirical evidence appears to support this view. We argue that this separation has potential costs, as well as potential benefits. In contrast to most of the previous empirical work, our evidence suggests that the costs of separation are larger than the benefits for most large firms.
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Using a comprehensive sample of nearly 7,000 firms from 1990 to 2004, we examine the corporate board structure, trends, and determinants. Guided by recent theoretical work, we find that board structure across firms is consistent with the costs and benefits of the board's monitoring and advising roles. Our models explain as much as 45% of the observed variation in board structure. Further, small and large firms have dramatically different board structures. For example, board size fell in the 1990s for large firms, a trend that reversed at the time of mandated reforms, while board size was relatively flat for small and medium-sized firms.
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This paper examines whether differences in the structure of the board of directors and equity ownership contribute to the incidence of hostile takeovers. Evidence from a sample of completed and abandoned hostile takeover attempts that occurred during 1980–1988 indicates that, relative to a control sample, outside directors in hostile targets have lower ownership stakes and hold fewer additional outside directorships. Ownership by blockholders unaffiliated with management raises and that by affiliated blockholders decreases the likelihood of a hostile takeover attempt. These results suggest that the board of directors and hostile takeovers are substitute mechanisms and that unaffiliated blockholdings and hostile takeovers are complementary mechanisms for corporate control.
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We investigate factors affecting the number of outside directorships held by CEOs. CEOs of firms with growth opportunities hold fewer outside directorships than CEOs of firms consisting primarily of assets-in-place. We find evidence consistent with CEOs holding more outside directorships as they transfer decision rights to their eventual successors. We also find that when employees (not necessarily CEOs) of two different firms sit on each other's boards, CEOs hold more outside directorships, suggesting CEO participation bonds the relationship between the two firms. We find little evidence that outside directorships represent unchecked perquisite consumption on the part of CEOs.
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This paper reexamines the relation between firm value and board structure. We find that complex firms, which have greater advising requirements than simple firms, have larger boards with more outside directors. The relation between Tobin's Q and board size is U-shaped, which, at face value, suggests that either very small or very large boards are optimal. This relation, however, arises from differences between complex and simple firms. Tobin's Q increases (decreases) in board size for complex (simple) firms, and this relation is driven by the number of outside directors. We find some evidence that R&D-intensive firms, for which the firm-specific knowledge of insiders is relatively important, have a higher fraction of insiders on the board and that, for these firms, Q increases with the fraction of insiders on the board. Our findings challenge the notion that restrictions on board size and management representation on the board necessarily enhance firm value.
Article
The reciprocal interlocking of chief executive officers is a non-trivial phenomenon: among large companies in 1991, about one company in seven was in a relationship whereby the CEO of one company sat on a second company's board and the second company's CEO sat on the first company's board. We develop hypotheses to distinguish whether this practice furthers the interests of shareholders or the private interests of the CEOs. Using a sample of large companies, we employ a probit model to test these hypotheses. Our empirical findings are that these reciprocal CEO interlocks primarily benefit the CEOs rather than their shareholders.
Article
To date, there has been little modeling of the board of directors as an independent entity in the corporate finance literature. Most theoretical papers omit the board entirely and model only managers and shareholders as active players. In this paper, I model the board as an entity distinct from both management and shareholders. The analysis is based on management's power in the selection and retention of board members and it focuses on the effect of this power on the frequency of open dissent in the boardroom and the board's effectiveness in disciplining management. The model predicts behavior consistent with empirical observation and produces testable implications about the links between board compensation, structure, and information and the frequency of board dissent and the level of board effectiveness.
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We examine the role of the board of directors, the audit committee, and the executive committee in preventing earnings management. Supporting an SEC Panel Report's conclusion that audit committee members need financial sophistication, we show that the composition of a board in general and of an audit committee more specifically, is related to the likelihood that a firm will engage in earnings management. Board and audit committee members with corporate or financial backgrounds are associated with firms that have smaller discretionary current accruals. Board and audit committee meeting frequency is also associated with reduced levels of discretionary current accruals. We conclude that board and audit committee activity and their members' financial sophistication may be important factors in constraining the propensity of managers to engage in earnings management.
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We examine cases where managers announce an intention to de-stagger their boards via proxy proposals or board action. The literature has established the staggered board as the most consequential of all takeover defenses and one that destroys wealth. Thus, dismantling staggered boards benefits shareholders. We study the wealth effects and motives behind this change in governance within a conditional event study. We find that de-staggering the board creates wealth and that shareholder activism is an important catalyst for pushing through this change. Moreover, in the period preceding Sarbanes–Oxley, investor reaction indicates a perception that de-staggering firms are more likely to be takeover targets.