Corporate board and board committee independence,firm performance,and family ownership concentration: An analysis based on Hong Kong firms

This study examines whether the relationship between corporate board and board committee independence and firm performance is moderated by the concentration of family ownership. Based on a sample of Hong Kong firms, we find no significant association between the independence of corporate boards or board committees and firm performance in family firms, whereas board independence is positively associated with firm performance in non-family firms. Additionally, our findings show that the proportion of independent directors on the corporate boards of family firms is lower than that of non-family firms, but we find no significant difference in the representation of independent directors on the key committees of corporate boards between family and non-family firms. Overall, these results suggest that the “one size fits all” approach required by the regulatory authorities for appointing independent directors on corporate boards may not necessarily enhance firm performance, especially for family firms. Thus, the requirement to appoint independent directors to the corporate boards of family firms needs to be reconsidered.     

A Family Member or a Professional Manager? The Role of Trust in the Choice of CEO in Family Firms

Using a sample of Chinese family firms from 2008–2015, we investigate the impact of trust on the choice of whether to hire a family member or a professional manager as CEO. We find that the presence of a professional CEO is negatively associated with a higher level of trust in family members. In contrast, it is positively associated with a higher level of trust in non-family members. Our findings suggest that the trust mode in Chinese family firms is like the ‘differential mode of association’, which describes Fei's (1992) social structure of Chinese society. Moreover, a higher level of trust in family members is associated with native entrepreneurial activities, which strengthens the negative relationship between trust in family and the presence of a professional CEO. Furthermore, the role of trust in family firms’ appointment decisions is more pronounced in regions with relatively weak legal protection and firms with relatively poor governance. Our results hold when we control for endogeneity and after a series of robustness checks. This research links the governance of family firms to the informal institution of trust, enriching the literature on trust and family firm behaviours.     

It pays to have friends

Currently, a director is classified as independent if he or she has neither financial nor familial ties to the CEO or to the firm. We add another dimension: social ties. Using a unique data set, we find that 87% of boards are conventionally independent but that only 62% are conventionally and socially independent. Furthermore, firms whose boards are conventionally and socially independent award a significantly lower level of compensation, exhibit stronger pay-performance sensitivity, and exhibit stronger turnover-performance sensitivity than firms whose boards are only conventionally independent. Our results suggest that social ties do matter and that, consequently, a considerable percentage of the conventionally independent boards are substantively not.     

On REIT CEO Compensation: Does Board Structure Matter?

In a perfect world where the board of directors is independent of CEO influence, CEO pay-for-performance compensation contracts should be a function of performance only. If the CEO can influence board structure through his ownership of company stock or chairmanship of the board, however, performance contracts are sub-optimal and agency problems arise, which allow the CEO to extract rent and demand compensation in excess of the equilibrium level. As such, models of compensation contracts must include board and ownership structure variables, in addition to the traditional economic determinants. Our analyses with REITs corroborate this notion. Our data demonstrate that the structure of REIT boards are not independent of CEO influence, and significant agency problems exist allowing the CEO to design boards that reward him at the cost of shareholder wealth. CEO compensation in REITs depends significantly on the usual economic measures of performance including firm size and return on assets; more importantly, CEO compensation is higher in REITs where the board is weak in monitoring because of large size, and older directors; the effect of a blockholder is adverse, however. This study provides additional evidence to the growing literature that observed board structures are ineffective in monitoring and governance.     

The effects of corporate acquisitions on CEO compensation and CEO turnover of family firms

This paper investigates the impact of corporate acquisitions on CEO compensation and CEO turnover of family firms in Continental Europe. We find that CEOs in family firms do not experience an increase in their compensation during the post-acquisition period, while there is a positive and statistically significant association between the compensation of CEOs in non-family firms and their acquisition activity. This finding is consistent with the view that controlling family shareholders provide monitoring for CEOs mitigating managerial agency problems that arise from the separation of ownership and control. Further, we find that the likelihood of CEO turnover declines following an acquisition in non-family firms, suggesting that these acquiring CEOs do not face a higher likelihood of dismissal while they receive a higher level of compensation. In contrast, there is no significant impact of acquisitions on CEO turnover in family firms.     

Why do firms appoint CEOs as outside directors?

Companies actively seek to appoint outside CEOs to their boards. Consistent with our matching theory of outside CEO board appointments, we show that such appointments have a certification benefit for the appointing firm. CEOs are more likely to join boards of large established firms that are geographically close, pursue similar financial and investment policies, and have comparable governance to their own firms. The first outside CEO director appointment has a higher stock-price reaction than the appointment of another outside director. Except for a decrease in operating performance following the appointment of an interlocked director, CEO directors do not affect the appointing firm's operating performance, decision-making, and CEO compensation.     

Boards,Executive Excess Compensation,and Shared Power: Evidence from Nonprofit Firms

We investigate how executives, the board, and excess compensation jointly affect the performance of nonprofits. Since the common measure of nonprofit performance often includes salaries, we also use expenses that directly benefit the targeted population. Our results suggest that above average compensation for executives is associated with poor firm performance. However, the negative relation of CEO pay to performance occurs for firms with only one executive, the CEO. We conclude that a powerful CEO with autonomy can harm firm performance, but other executives can mitigate these agency problems. The board also appears to monitor direct community benefits more than indirect benefits.     

Classified boards,firm value,and managerial entrenchment

This paper shows that classified boards destroy value by entrenching management and reducing director effectiveness. First, I show that classified boards are associated with a significant reduction in firm value and that this holds even among complex firms, although such firms are often regarded as most likely to benefit from staggered board elections. I then examine how classified boards entrench management by focusing on CEO turnover, executive compensation, proxy contests, and shareholder proposals. My results indicate that classified boards significantly insulate management from market discipline, thus suggesting that the observed reduction in value is due to managerial entrenchment and diminished board accountability.     

Governance Structure and Firm Performance in Private Family Firms

Although a large proportion of firms are family owned and most family firms are private, our understanding of private family firms is limited. Using confidential information on family relationships between board members, CEOs, and shareholders, this is the first study to provide large‐scale evidence on the association between governance structure and firm performance in family‐controlled private firms. Our sample is unique as it covers almost all private limited liability firms in Norway, spans 11 years, traces firm ownership to ultimate owners, and identifies family relationship using data on kinship, marriage, and adoption. The results show a U‐shaped relationship between family ownership and firm performance. Higher ownership of the second largest owner, higher percentage of family members on the board, stronger family power, and smaller boards are associated with higher firm performance. In addition, the positive association between the ownership of the second largest owner and firm performance also occurs when the second largest owner is a member of the controlling family, but the association is stronger when the second largest owner is a non‐family member. We further test the relative importance of these test variables and find that ownership structure is more associated with firm performance than board structure.     

Does CEO duality constrain board independence? Some evidence from audit pricing

This study examines whether CEO duality affects the association between board independence and demand for higher quality audits, proxied by audit fee. The findings show that there is a positive association between board independence and audit fees. This result is consistent with findings of Carcello et al. (2002) that more independent boards demand higher audit quality and effort. However, this positive association is only present in firms without CEO duality, thus suggesting that CEO duality constrains board independence. The results support recommendations against CEO duality by showing that dominant CEOs may compromise the independence of their board of directors. Additionally, evidence is provided that board size (the number of directors on the board) is positively associated with audit fee pricing. This is consistent with prior studies that indicate that larger board sizes are associated with inefficiency and negative firm performance.     

Corporate governance when founders are directors

We examine chief executive officer (CEO) compensation, CEO retention policies, and mergers and acquisition (M&A) decisions in firms in which founders serve as a director with a nonfounder CEO (founder-director firms). We find that founder-director firms offer a different mix of incentives to their CEOs than other firms. Pay-for-performance sensitivity for nonfounder CEOs in founder-director firms is higher and the level of pay is lower than that of other CEOs. CEO turnover sensitivity to firm performance is also significantly higher in founder-director firms compared with nonfounder firms. Overall, the evidence suggests that boards with founder-directors provide more high-powered incentives in the form of pay and retention policies than the average US board. Stock returns around M&A announcements and board attendance are also higher in founder-director firms compared with nonfounder firms.     

Do corporate governance mechanisms influence CEO compensation? An empirical investigation of UK companies

The aim of this paper is to empirically examine the influence of corporate governance mechanisms, that is, ownership and board structure of companies, on the level of CEO compensation for a sample of 414 large UK companies for the fiscal year 2003/2004. The results show that measures of board and ownership structures explain a significant amount of cross-sectional variation in the total CEO compensation, which is the sum of cash and equity-based compensation, after controlling other firm characteristics. We find that firms with larger board size and a higher proportion of non-executive directors on their boards pay their CEOs higher compensation, suggesting that non-executive directors are not more efficient in monitoring than executive directors. We also find that institutional ownership and block-holder ownership have a significant and negative impact on CEO compensation. Our results are consistent with the existence of active monitoring by block-holders and institutional shareholders. Finally, the results show that CEO compensation is lower when the directors’ ownership is higher.     

The causal effect of board size in the performance of small and medium-sized firms

Empirical studies of large publicly traded firms have shown a robust negative relationship between board size and firm performance. The evidence on small and medium-sized firms is less clear; we show that existing work has been incomplete in analyzing the causal relationship due to weak identification strategies. Using a rich data set of almost 7000 closely held corporations we provide a causal analysis of board size effects on firm performance: We use a novel instrument given by the number of children of the chief executive officer (CEO) of the firms. First, we find a strong positive correlation between family size and board size and show this correlation to be driven by firms where the CEO’s relatives serve on the board. Second, we find empirical evidence of a small adverse board size effect driven by the minority of small and medium-sized firms that are characterized by having comparatively large boards of six or more members.     

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.     

Fiduciary duty or loyalty? Evidence from co-opted boards and corporate misconduct

We examine the effect of co-opted boards on corporate misconduct and document a significant positive relationship. Utilising a large sample of public U.S. companies from the period 2001 to 2015, we find that a one standard deviation increase in the proportion of co-opted directors on a board leads to a 4.3% rise in corporate misconduct. This outcome is robust to a series of sensitivity tests and continues to hold after accounting for potential endogeneity concerns. Further analyses indicate that co-opted directors propose fewer board agenda items, exhibit lower attendance at board meetings, and receive compensation packages in excess of industry norms, which exacerbate stakeholder-agency conflicts. Cross-sectional analysis demonstrates that the documented relationship is most pronounced among firms with weak external monitoring, greater CEO-board social ties, boards whose members have high career concerns, and where CEO power is low. Additional tests reveal that co-opted directors engage in more environmental- and workplace-related violations than other types of stakeholder violations. Overall, our investigation generates original evidence that the presence of co-opted directors aggravates the incidence of corporate wrongdoing. Our study contributes to the continuing debate on the role of boards of directors and has policy implications for those responsible for devising and monitoring effective systems of corporate governance.     

CEO gender and managerial entrenchment

This paper investigates the effect of gender on managerial authority and control over firms. The study examines S&P 1500 firms for the period of 1999–2014. Our findings suggest that accounting performance, firm value, CEO age, firm age, and board size reduce the likelihood of appointing female managers. On the other hand, the appointment of female CEOs is directly associated with the percentage of female directors, board independence, and beta. The study confirms the notion that female CEO appointments are generally associated with firms facing adverse conditions, and shows that female CEOs are more entrenched as compared to male CEOs. We find that the presence of female CEO decreases the turnover-performance sensitivity, increases the E-index, and inflates CEO compensation. Our research suggests that the level of female CEOs’ entrenchment provides them with greater job security, higher level of control, and inflated pay that compensate the risk of accepting the appointment in a high risk and poor performing firm.     

Determination of Executive Compensation in an Emerging Economy. Evidence from India

Most studies of the determination of executive compensation are based on the experience of developed countries, and mainly focus on Chief Executive Officer (CEO) compensation. Determination of board compensation is relatively ignored in the literature. This paper examines the effect of corporate governance, firm performance, and corporate diversification on the board, as well as CEO compensation and its components, in the context of an emerging economy-India-where a managerial market has yet to develop. Data for 462 firms for 1997-2002 in the Indian manufacturing sector have been used. This paper finds that board compensation largely depends on current- and past-year performance and diversification of the firm, whereas CEO compensation depends on current-year firm performance only. Among the personal attributes of the CEO, only in-firm experience has significant influence on CEO compensation. This finding contradicts the existing studies, where current- and past-year firm performance, as well as age, experience, and education of the CEO are important factors in determining CEO compensation.     

The Effects of Outside Directors and Board Shareholdings on the Relation Between Chief Executive Compensation and Firm Performance

Critics of corporate governance have suggested that improvements in board monitoring will arise from more independent boards consisting of outside directors and from increased stock ownership by directors. Presumably these changes should result in more rational, more defensible compensation decisions in which pay is clearly tied to results. In this paper, we test the premise that boards with a relatively higher proportion of outsiders and boards with significant shareholdings maintain a closer link between corporate performance and executive pay than do boards with fewer outsiders and boards holding little stock. The results of the study, based on a sample of 268 large corporations, are mixed. As expected, boards with significant shareholdings maintain a stronger linkage between compensation and firm-level performance. This finding persists even after controls are included for CEO and outsider shareholdings. Contrary to expectations, however, evidence was not found that firms with a higher proportion of outsiders on the board of directors relate compensation more strongly to firm results.     

Military directors,governance and firm behavior

We build a large dataset of board of directors with military experience and document a substantial and persistent presence of independent military directors serving on corporate boards. We find that firms with independent military directors are associated with better monitoring outcomes, including less excessive CEO compensation, greater forced CEO turnover–performance sensitivity, and less earnings management.     

Executive compensation and corporate governance in China

We investigate executive compensation and corporate governance in China's publicly traded firms. We also compare executive pay in China to the USA. Consistent with agency theory, we find that executive compensation is positively correlated to firm performance. The study shows that executive pay and CEO incentives are lower in State controlled firms and firms with concentrated ownership structures. Boardroom governance is important. We find that firms with more independent directors on the board have a higher pay-for-performance link. Non-State (private) controlled firms and firms with more independent directors on the board are more likely to replace the CEO for poor performance. Finally, we document that US executive pay (salary and bonus) is about seventeen times higher than in China. Significant differences in US-China pay persist even after controlling for economic and governance factors.