The Nature of Board Nominating Committees and Their Role in Corporate Governance

This study examines the association between the employment and composition of nominating committees with board and ownership characteristics. First, the results suggest that the likelihood of using a nominating committee is inversely related to the level of inside ownership and positively weakly, related to the independence, but not the number, of outside board members. Second, the percentage of insiders participating in the committee is positively related to inside ownership, and negatively related to proxies for outside director quality. Finally, outside directors are more likely to serve on the nominating committee the more outside directorships they hold, and the longer their tenure in the firm. The likelihood of insider committee membership rises with a director's equity investment, with board tenure, and with other committee memberships. Taken together, the results are consistent with nominating committees substituting inside ownership in controlling management, mostly improving board quality, and being staffed with independent, experienced, and knowledgable members.     

Managerial Equity Ownership and the Demand for Outside Directors

This paper examines the linkage between the use of outside directors and managerial ownership. We conjecture there are two linkages: the standard incentive‐alignment demand for monitoring when managers own little stock and an entrenchment‐amelioration demand when managerial stock ownership is high. As a consequence, we predict the association between managerial ownership and board composition will be nonlinear (U‐shaped if the entrenchment effect is sufficiently pronounced). Using UK data, we find that both quadratic and logarithmic models outperform the simple linear relationship assumed in prior research and that the substitution between managerial ownership and board composition is stronger than hitherto supposed.     

Bankruptcy outcomes: Does the board matter?

We examine the association between board composition and bankruptcy outcomes. Preliminary analyses provide no evidence that the proportion of outside directors is significantly associated with the likelihood that a Chapter 11 firm liquidates. Further analyses indicate, however, that the relation between the proportion of outside directors and bankruptcy outcomes is a function of the outside directors' ownership. More specifically, we find that the association is positive when outside director ownership is low and negative when it is high. The overall evidence supports the notion that a one-size-fits-all approach to corporate governance is likely to result in suboptimal board structures and hinder firms' strategies for dealing with poor performance.     

Governance Mechanisms and Ownership in an Emerging Market: The Case of Turkish Banks

This study investigates the relations of board structure, ownership concentration, and ownership type with the performance of banks operating in Turkey from an agency theory and resource-dependency perspective. We use financial ratios and established measures of board characteristics and ownership structure. Our results indicate that board size and duality do not significantly influence the returns on assets of Turkish banks. On the other hand, the tenure of board members is negatively related to performance. Our analysis of board composition reveals a curvilinear relationship with banks' performance, implying that boards composed of a majority of either insiders or outsiders enjoy high performance. Also, ownership concentration and ownership type do not influence firm performance. The results of the financial variables are robust in all models.     

Institutional block-holdings of UK firms: do corporate governance mechanisms matter?

Using a sample of UK firms, we find that institutional block-holding is negatively associated with directors’ ownership and is positively associated with board composition, suggesting that institutional block-holders regard directors’ ownership and board composition as substitute and complementary control mechanisms, respectively. We also show that UK institutional block-holders prefer smaller firms and firms with a shorter listing history. The presence of institutional block-holders is associated with smaller boards and lower trading liquidity. Finally, our results indicate that the investment preference of UK institutional block-holders varies with the level of their shareholding.     

Board and Monitoring Committee Independence

This study focuses on the composition of boards of directors and their monitoring committees (audit and compensation) for large Australian companies. For firms whose boards use a committee structure, much of the monitoring responsibility of the board is expected to rest with the independent committee members. We document a positive association between the proportion of independent directors on the full board and its monitoring committees, and a greater proportion of independent directors on both audit and compensation committees than the full board. Our hypotheses tests involve an examination of the impact of other mechanisms used to control agency conflicts on full board and committee independence, and the association between this independence and firm value. We find that full board independence is associated with low management ownership and an absence of substantial shareholders. Audit committee independence is associated with reduced monitoring by debtholders when leverage is low. While we predict a positive relationship between board and monitoring committee independence and firm value, our results do not support this conjecture.     

The Association between Board Composition and Corporate Pension Policies

This study examines the role of board composition in the determination of pension policies. The results suggest that the proportion of outside directors serving on the board is positively related with pension plan funding levels. In addition, the proportion of outside directors mitigates the relation between financial distress risk and plan underfunding. Last, as firms approach distress, boards with a greater proportion of outside directors tend to allocate a lower fraction of plan assets to riskier securities. Together, our findings suggest that outside directors are mindful of their obligations toward pension plan beneficiaries.     

Board Overlap, Seat Accumulation and Share Prices

We examine the board overlap among firms listed in Switzerland. Collusion, managerial entrenchment, and financial participation cannot explain it. The overlap appears to be induced by banks and by the accumulation of seats by the most popular directors. We also document that seat accumulation is negatively related to firm value, possibly because of the conflicts of interest that multiple directorships induce and the time constraints directors face. Contrary to popular beliefs, however, the directors of traded firms do not generally hold more than one mandate in other traded firms. They do hold multiple seats in non-traded firms.     

Stock Market Reaction to the Appointment of Outside Directors

This paper examines the UK stock market's reaction to the appointment of outside (non‐executive) board members. Tests conducted using a sample of 714 appointments reported by EXTEL between 1 July, 1993 and 31 December, 1996, indicate a strong interaction between appointee characteristics and the magnitude of the agency problem: the share price reaction to outside director appointments is significantly more favourable when board ownership is low and the appointee possesses strong ex ante monitoring incentives. In contrast, the appointment of independent and manager‐affiliated outside directors does not appear to benefit shareholders on average, even in the presence of serious agency problems.     

Determinants of corporate ownership and board structure: evidence from Singapore

This study examines the determinants and interrelationships among corporate ownership and board structure characteristics using a sample of Singapore listed firms. The institutional environment in Singapore differs from that in many developed Western economies in several important respects, including a weak market for corporate control, more concentrated stock ownership, and significant government ownership in many private sector firms.Three characteristics—board composition, board leadership structure and board size—are used to capture the monitoring ability of the board. These board characteristics are assumed to be endogenously determined, together with two ownership characteristics, managerial ownership and blockholder ownership. We use two-stage least squares regression to estimate the determinants of board and ownership characteristics. Our findings indicate that corporate ownership and board structures are related, and that there are significant interrelationships among board structure characteristics. The proportion of outside directors is negatively related to managerial ownership, board size and government ownership. The use of a dual leadership structure is positively related to blockholder ownership, and negatively related to regulation and to CEO tenure.     

Board composition after mergers,does it matter to target shareholders?

This paper examines whether post-merger board composition affects the premiums paid to target shareholders. Using a sample of 207 stock-for-stock mergers from 1996 to 2004, we show that target merger premiums vary inversely with target director representation on the post-merger board. We also provide some evidence that both inside and outside target directors may trade shareholder wealth for board seats in the combined firms. However, we do not find board ownership moderates the relation between target merger premiums and post-merger board composition. Consistent with previous studies of management incentives in mergers, our empirical evidence supports the non-perfect agency theory. That is, target directors may sacrifice target shareholder interests to obtain a seat on the post-merger board.     

Board Independence,Ownership Structure and Performance: Evidence from Real Estate Investment Trusts

For Real Estate Investment Trusts (REITs), mandatory distribution of income limits free cash flow. But, restrictions on source of income and asset structure result in widely dispersed stock ownership, which makes external monitoring through the takeover market less likely. As such, alternative monitoring mechanisms, including external directors, must be in place to discourage deviant managerial behavior. Using a simultaneous equation system, we conclude that while independent directors enhance REIT performance, the effect is weak. Higher CEO stock ownership and control through tenure and chairmanship of the board reduce the representation by outside directors, and adversely affect REIT performance. Institutional ownership or blockownership fails to serve as alternate disciplining mechanism to (inadequate) monitoring by outside board members, although their presence seems to enhance performance.     

Board of director characteristics and earnings quality surrounding implementation of a corporate governance code in Mexico

Mexico recently enacted a corporate governance code. One objective of the code is to improve board of director oversight and to reveal more transparent information to shareholders by including detailed information regarding the structure of the board and its functions. Research in the U.S. has documented improvement in earnings quality associated with board characteristics. Whether or not board characteristics are associated with improved earnings quality in Mexico is questionable given the business environment in which firms operate, characterized by controlling family ownership and weak legal protection of property rights. The purpose of this study is to investigate whether or not board characteristics other than compliance with board independence (board composition disclosure, family concentrated ownership and shared-directors) are associated with the improvement in earnings quality found in previous research. Earnings quality is measured using income smoothing, timely loss recognition and conditional accruals. We find firms that do not have concentrated family ownership or share directors have greater increases in earnings quality than firms that have concentrated family ownership or share directors. We conclude that applying board-level corporate governance reforms, without considering cultural and legal environments, may limit the desired effects of the change.     

Determinants of board members' financial expertise — Empirical evidence from France

Very few countries require directors to be financially literate. This article investigates the determinants of boards' financial expertise using a sample of 95 nonfinancial French listed firms. We construct a measure of financial expertise based on educational and career background data for 943 individuals occupying 1140 posts in our sample and explore the determinants of average per-firm financial expertise using a Tobit analysis. We find that average financial expertise is negatively associated with board type (two-tier versus one-tier) and growth opportunities and positively associated with board independence, ownership concentration, and institutional ownership. These findings are robust to sensitivity analyses.     

Board Independence and Corporate Governance: Evidence From Director Resignations

Abstract:  As is evident from recent changes in NYSE and NASDAQ listing requirements, board independence is assumed to be an important and effective governance mechanism. However, the empirical evidence regarding the value of board independence is mixed. We examine board member resignation announcements and their perceived importance in the context of firms' existing governance structures. We find that outside director resignations appear to send negative signals to market participants. However, this market reaction is less negative when the board is more independent before the departure and when institutional ownership is high, but is more negative for higher levels of officer and director ownership and CEO incentive compensation.     

Interdependencies of female board member appointments

We investigate the appointments of female board members of Japanese corporations together with the corporations’ performance. We relate the presence of female board members to the board and ownership networks of the corresponding firms. We find that firms with female board members often show above average performance. We also find that corporate boards and the corresponding members show homophily with respect to gender in their networks. The observed homophily leads to interdependencies in the appointments of new board members. New appointments of female board members are more likely at firms with ties to other boards with female board members.     

Who's Monitoring the Monitor? Do Outside Directors Protect Shareholders' Interests?

The corporate governance literature is rich with empirical tests of the relation between board composition and firm performance. We consider the effect of board composition on a different measure of performance, the probability a firm will be sued by shareholders. We find firms that are defendants in securities litigation have higher proportions of insiders and of gray directors and have smaller boards than a matched group of firms that are not sued, even when controlling for firm value and industry. The results suggest that boards with higher proportions of outside directors do a better job of monitoring management.     

Board Monitoring and Earnings Management: Do Outside Directors Influence Abnormal Accruals?

Abstract:   This paper examines whether the incidence of earnings management by UK firms depends on board monitoring. We focus on two aspects of board monitoring: the role of outside board members and the audit committee. Results indicate that the likelihood of managers making income‐increasing abnormal accruals to avoid reporting losses and earnings reductions is negatively related to the proportion of outsiders on the board. We also find that the chance of abnormal accruals being large enough to turn a loss into a profit or to ensure that profit does not decline is significantly lower for firms with a high proportion of outside board members. In contrast, we find little evidence that outside directors influence income‐decreasing abnormal accruals when pre‐managed earnings are high. We find no evidence that the presence of an audit committee directly affects the extent of income‐increasing manipulations to meet or exceed these thresholds. Neither do audit committees appear to have a direct effect on the degree of downward manipulation, when pre‐managed earnings exceed thresholds by a large margin. Our findings suggest that boards contribute towards the integrity of financial statements, as predicted by agency theory.     

Directors skill and financial reporting quality

Motivated by theoretical models in economics which show that there is matching between CEO skill and firm size, we introduce a new measure of director skill which is based on the aggregate size of firms on which the director serves as an independent director. We validate our measure by showing that it is positively associated with director experience, financial expertise, industry expertise and managerial experience. We then examine whether our average measure of skill across board members is positively associated with monitoring quality. Controlling for the endogenous relationships between board composition and financial reporting quality, we find a positive association between our board measure for skill and monitoring quality, and we show that directors have a causal impact on monitoring effort and outcomes. Furthermore, consistent with the enhanced monitoring provided by skilled directors, we document a positive association between the level of and changes in our measure and firm value.     

Governance and Performance Implications of Diversification Strategies: Evidence from Large U.S. Firms

Recent research focuses on explaining the diversification discount. However, there is little direct evidence regarding the relation among ownership structure, corporate governance, and corporate diversification. The results in this paper suggest that agency issues do not account for firms adopting a particular diversification strategy. Also, the performance consequences of the shift in the diversification strategy and the subsequent changes in institutional and block ownership structures are not related to agency issues. In fact, investors seem not to avoid diversified firms per se. We suggest that observed board and ownership differences between diversified and focused firms are due to their being at different stages of corporate evolution.