Competition,Outside Directors and Executive Turnover: Implications for Corporate Governance in the EU

This study examines the relevance of non‐executive outside directors with multiple directorships for corporate governance building on a large panel of European listed firms in the period 2003 to 2011. Focusing on executive turnover as an indicator for effective monitoring, the findings reveal that multiple directorships and product market competition are substitutes. Outsiders increase executive turnover in underperforming firms exclusively if competition in the industry is weak. In environments with effective competition, outsiders do not significantly influence the decision to replace underperforming managers. In fiercely competitive industries, the market pressure seems to effectively limit managerial discretion for opportunistic behavior. Copyright © 2016 John Wiley & Sons, Ltd.     

Antecedents of New Director Social Capital

Prior research shows that firms benefit from the social capital of their boards of directors but has not explored the antecedents of new director social capital. We argue that firms can attract directors with social capital by offering more compensation. We also argue that more complex firms (firms with a greater scale and scope of operations) are more attractive to such directors because of the greater experience and exposure that such directorships provide. Similarly, we argue that firms with high‐status directors on their current boards will be more attractive to directors with social capital. We analyse the social capital of new outside directors added to boards of semiconductor firms between 1993 and 2007. Surprisingly, we find no support for the hypothesis that higher compensation is associated with adding directors with high status or board ties. However, firm complexity is associated with the ability to add new directors who have social capital, and the status of current board members is associated with the ability to add new directors who also have high status.     

Board Effectiveness and CEO Pay: Board Information Processing Capacity,Monitoring Complexity,and CEO Pay‐for‐Performance Sensitivity

We have developed an information processing theory of board effectiveness to examine board‐chief executive officers (CEOs) pay relations. We theorize that CEO pay reflects the information processing context of boards. Boards have limited information processing capacity and therefore prefer to use outcome‐based CEO pay when they have difficulty in processing information for monitoring their CEOs. Using a longitudinal sample of Standard and Poor's (S&P's) large‐, medium‐, and small‐cap manufacturing firms in the United States from 1998 through 2005, we found support for our theory. Large boards and boards in less complex monitoring contexts tend to link CEO pay less tightly to firm performance by providing less stock‐based incentives, and the tendency of large boards to decrease outcome‐based CEO pay is even greater when boards are not busy or when boards are in less complex monitoring contexts. © 2015 Wiley Periodicals, Inc.     

Market Reactions to the Regulation of Executive Compensation

Abstract

This paper investigates equity market reactions to the regulation of executive compensation. We exploit a natural experimental setting in Germany, where recent legislation introduces restrictions on the amount and on the components of board executive compensation packages, and invokes liability for the supervisory board in case of inappropriate remuneration arrangements. We use this exogenous shock to the contracting environment to infer market perceptions of the usefulness of the regulation. Using event study methodology, we investigate market reactions for the first-time announcement of regulatory intent and for a pooled sample of seven events leading to the adoption of the law act. We find weak evidence of an average negative market reaction to the proposed regulation. Multivariate analyses reveal that firms which were particularly affected by the regulation because board members received high abnormal remuneration experienced larger stock price discounts on average. Consistent with this, we find a positive relation between pay-performance sensitivity and the equity market reaction. Taken together, these findings indicate that the regulation was not considered beneficial from a shareholder perspective. This result is consistent with the market perceiving the regulation of executive compensation to impose potentially inefficient contractual arrangements for some firms.     

What have we learnt about board gender diversity as a business strategy? The appointment of board subcommittees

This paper explores whether a board's gender diversity influences the voluntary formation of its board subcommittees. Female board directorship may become a business strategy for firms if it affects the appointment of board subcommittees. We hypothesize that the voluntary creation of board subcommittees is affected by the presence of female directors on boards; the presence of independent, executive, and institutional female directors; and the proportion of shares held by female directors on boards. Board gender diversity has been measured as a proportion and with Blau's index. The results show that independent female directors are positively associated with the likelihood of voluntarily setting up all or some of the committees and a supervision and control committee. The presence of executive female directors negatively influences the probability of forming all or some of the committees, an executive committee and a supervision and control committee. The percentage of shares held by female directors has a positive effect on the voluntary creation of an executive committee. The findings also report that women directors and institutional female directors do not contribute to the voluntary creation of board subcommittees. Our evidence shows that female board directorship impacts the demand of internal control mechanisms such as board subcommittees, suggesting that firms should take it into account as a business strategy. The main implications derived from this research are relevant for Spanish policymakers and researchers because board gender diversity may play a significant role in the decision‐making processes of firms and may influence firms' outcomes.     

Executive pay and performance: the moderating effect of CEO power and governance structure

This paper examines the crucial question of whether chief executive officer (CEO) power and corporate governance (CG) structure can moderate the pay-for-performance sensitivity (PPS) using a large up-to-date South African data-set. Our findings are threefold. First, when direct links between executive pay and performance are examined, we find a positive, but relatively small PPS. Second, our results show that in a context of concentrated ownership and weak board structures; the second-tier agency conflict (director monitoring power and opportunism) is stronger than the first-tier agency problem (CEO power and self-interest). Third, additional analysis suggests that CEO power and CG structure have a moderating effect on the PPS. Specifically, we find that the PPS is higher in firms with more reputable, founding and shareholding CEOs, higher ownership by directors and institutions, and independent nomination and remuneration committees, but lower in firms with larger boards, more powerful and long-tenured CEOs. Overall, our evidence sheds new important theoretical and empirical insights on explaining the PPS with specific focus on the predictions of the optimal contracting and managerial power hypotheses. The findings are generally robust across a raft of econometric models that control for different types of endogeneities, pay, and performance proxies.     

Effects of agency risks and procedural justice on board processes in venture capital-backed firms

This paper builds a model of the effects of agency risk and procedural justice in the boards of directors of venture capital-backed firms. Such boards are unique in that they consist of managers and outside owners with significant power and incentive to be highly involved in venture governance. The authors integrate agency theory and procedural justice perspectives to develop propositions regarding the effects of agency risk and board processes on the responses to poor performance and conflicts of interest. This integrated perspective suggests that factors that increase perceived agency risks will increase outsiders' tendency to focus efforts on monitoring and controlling board decisions and their propensity to resort to formal means to resolve conflicts. However, the authors suggest that through their effects on trust and positive attributions, fair procedures and interactions will reduce these tendencies. A discussion of the practical and theoretical implications of the proposed model concludes the paper.     

The adoption of outside boards by small private US firms

The research issue motivating the present study is concerned with why some small private firms adopt an ‘outside board’ (i.e. larger boards in which the majority of directors are neither managers of the firm nor relatives of the Chief Executive Officer (CEO)) and others do not. This issue is addressed by investigating whether differing contextual conditions distinguish adopters from non-adopters of outside boards. The authors consider the adoption of an outside board to be one part of a larger organizational life-cycle process in which organizations implement more ‘professional management’ structures and practices in response to their evolving internal and external contexts. The authors examine simultaneously three contextual pressures that commonly confront small private firms as they develop over time- firm growth and larger size, the succession of the CEO, and the diffusion of equity to individuals outside the firm- to determine which of these are salient in explaining the presence of an outside board. Logistic regression results (3070 respondents toa cross-industry mail survey) indicate that outside boards are more likely when more equity is held by individuals outside the firm, CEOs are older and CEOs do not intend to implement an intra-family transition of leadership. The results suggest that firms adopt outside boards primarily to satisfy the desires of external owners, and only secondarily for the service and resource benefits that outside directors provide.     

Information disclosure ratings and managerial short-termism: An empirical investigation of the Chinese stock market

Information asymmetry between managers and outside investors creates agency problems and impedes efficient capital allocation. Information disclosure is critical in alleviating information asymmetry in capital markets. This study investigates the effect of information asymmetry on managerial short-termism by examining information disclosure ratings (IDRs). Using real earnings management as a proxy for managerial short-termism, our analysis of a sample of Chinese A-share companies during 2001–2018 indicates that high IDRs mitigate managerial short-termism. The results also indicate that the effect of IDRs in reducing managerial short-termism is driven mainly by stock liquidity. This conclusion holds after consideration of endogeneity and application of two-stage least-squares and generalized method of moments methods, adjustment of the definition of IDRs, consideration of alternative proxies for managerial short-termism, and control for firm characteristics that might affect the extent of managerial short-termism. This study also examines the effects within three subsamples: companies listed on the Shenzhen Stock Exchange main board, small and medium enterprise board, and growth enterprise market board. IDRs substantially reduce managerial short-termism among firms listed on all three boards. These findings indicate that enterprises have corrected previous internal governance problems, and IDRs have helped to improve internal governance through stock liquidity. Therefore, external supervision also helps to reduce the agency problem of managerial short-termism.

     

Social Capital and Social Influence on the Board of Directors

It is often assumed that directors with human capital such as prior management experience or independence from the company are the most influential board members. By contrast, in a survey of all the board members in 14 companies we found that ties to others in a network of strong ties among those who meet outside of board meetings were more important predictors of social influence than human capital or ties across boards. These ties within the board represent the social capital of members in the form of prior relationships with other directors, ties to others on the board, and membership in cliques within the board's network of ties. These results support a social capital perspective on influence that emphasizes relationships with others on the board as important factors in the social dynamics of board decision-making.     

Returns to acquiring firms: The role of managerial ownership, managerial wealth, and outside owners

Since merger and acquisition activity does not unambiguously benefit the shareholders of acquiring firms, the motivation of managers who undertake such actions is unclear. The present study investigates the extent to which the wealth effects of acquisition activity undertaken by firms in one industry—communications and publishing—are related to (1) the ownership and wealth characteristics of both the executives and the board of directors of these firms and (2) the ownership concentration of large outside shareholders. The motivating hypothesis, supported by empirical results, is that these factors contribute to the alignment of executive and shareholder interests.     

Service on a Stigmatized Board,Social Capital,and Change in Number of Directorships

This article seeks to develop a nuanced understanding about the relationship between service on a stigmatized board and reduced opportunities for future directorships on other boards by examining the moderating effects of different dimensions of director social capital on this relationship. Evidence based on a unique sample of firms with boards that were viewed as being stigmatized by a group of corporate governance experts suggests that while serving on a stigmatized board is related to a reduction in future number of directorships held, this relationship is significantly mitigated for directors of upper‐class origins. However, social capital related to affiliations with other elite institutions does not appear to mitigate reduction in future number of directorships held by outside directors who serve on a stigmatized board. Implications and future directions in research on class‐based influence in the corporate community and stigmatization and devaluation of elites associated with corporate failures are discussed.     

Unionization and CEO turnover

This article investigates whether unions have power to influence turnover of poorly performing chief executive officers (CEOs). Employing the transparency coalition framework, we develop hypotheses regarding CEO tenure given unionization, performance-turnover sensitivity, and firm performance following CEO turnover. We use Cox regression and a data set of US firms from 1993 to 2013 to show that CEO turnover is accelerated at firms that unionize. Discontinuity analysis suggests that the relationship is causal. Overall, the results show the significance of unions in the key corporate governance event of CEO turnover and suggest that, though they may proceed independently and for their own traditional goals of good pay and job conditions for their members, unions can be allies of investors and boards or directors when it comes to removing underperforming CEOs.     

Who Appoints Them,What Do They Do? Evidence on Outside Directors from Japan

Although reformers often claim Japanese firms appoint inefficiently few outside directors, the logic of market competition suggests otherwise. Given the competitive product, service, and capital markets in Japan, the firms that survive should disproportionately be firms that tend to appoint boards approaching their firm‐specifically optimal structure. The resulting debate thus suggests a test: do firms with more outsiders do better? If Japanese firms do maintain suboptimal numbers of outsiders, then those with more outsiders should outperform those with fewer; if market constraints instead drive them toward their firm‐specific optimum, then firm characteristics may determine board structure, but firm performance should show no observable relation to that structure. We explore the issue with data on the 1000 largest exchange‐listed Japanese firms from 1986 to 1994. We first ask which firms tend to appoint which outsiders to their boards. We find the appointments decidedly nonrandom. Firms appoint directors from the banking industry when they borrow heavily, when they have fewer mortgageable assets, or when they are themselves in the service and finance industry. They appoint retired government bureaucrats when they are in construction and sell a large fraction of their output to government agencies, and they appoint other retired business executives when they have a dominant parent corporation or when they are in the construction industry and sell heavily to the private sector. Coupling OLS regressions with two‐stage estimates on a subset of the data, we then ask whether the firms with more outside directors outperform those with fewer, and find that they do not. Instead, the regressions suggest—exactly as the logic of market competition predicts—that firms choose boards appropriate to them.     

Exploring the Political Side of Board Involvement in Strategy: A Study of Mixed‐Ownership Institutions*

abstract This article reports on a comparative study of strategic decision‐making and board functioning in nine firms. Findings indicate that the heterogeneity of interests represented on the board, members' possession of relevant knowledge, and the presence of ex‐ante conflict resolution mechanisms combine in shaping if and how board members engage in strategy‐related activities and how strategic decisions are taken. Findings extend current understandings about the strategic functions of the board (monitoring, advice, and resource‐dependence), suggesting how, under certain conditions, boards may act as negotiation forums where directors search for a reconciliation between diverging shareholders' interests and views.     

Outside Directors on Korean Boards: Governance and Institutions

Drawing on institutional theory, this study examines the factors that pressured Korean firms to appoint outside directors to their boards. While this practice could be considered to be a management innovation in Korea, in the Anglo‐American corporate governance system it has long been used as one of several mechanisms to mitigate agency costs between management and shareholders. As such, this response by Korean firms, following the 1997–98 currency crisis in Asia, could be seen as an example of corporate governance convergence on the Anglo‐American model, where higher levels of outside director representation on the board are the norm. We examine the antecedents of having a higher proportion of outside directors on Korean boards. Our findings indicate that larger firms that are under stricter control by the government have higher representation of outside directors on the board. We also find a positive and significant relationship between the proportion of outside directors and business group affiliation, poor prior firm performance, higher levels of debt and foreign ownership.     

TOP MANAGEMENT TURNOVER AND CEO SUCCESSION: AN INVESTIGATION OF THE EFFECTS OF TURNOVER ON PERFORMANCE

One strategic action which is often taken by firms in need of a turnaround is to bring in a new chief executive officer (CEO). Many observers argue, however, that having done this the new CEO must replace large numbers of top managers in order to effect a change in the firm's interactions and subsequent performance. Critics of this perspective insist that just the opposite is true. Substantial levels of turnover may only serve to further disrupt the organization decreasing performance still more. This controversy is addressed in the following study using a sample of 84 firms all of which experienced CEO succession during the year 1980. Analyses rely on a three-year-period pre-succession and three-year period post-succession. Three hypotheses are proposed. First, poor performance prior to CEO succession leads to greater turnover afterward. Second, that turnover is curvilinearly related to performance after the succession. And, finally, that successor type (i.e. whether the CEO was an inside or outside candidate) is related to the level of turnover in upper level management positions in the post-succession period. the results from tests of these hypotheses are presented, and the implications of these findings are discussed.     

Board Characteristics and Involvement in Strategic Decision Making: Evidence from Swiss Companies*

abstract Boards of directors have a number of roles. The board's monitoring function has been the subject of much work. Less examined is the role that the board has in setting company strategy. This paper uses agency and network perspectives in developing and testing the relationship between board characteristics and involvement in strategic decision making. Using primary and secondary data, our results suggest that the level of board involvement in strategic decision making is related to a number of governance variables. We demonstrate that involvement is generally lower where boards are highly interlocked. We also show that certain types of board interlocks – namely horizontal (same industry) and those involving direct links with the banking sector – are particularly associated with this negative effect. There is weaker evidence that board strategic involvement is lower where the roles of company chief executive and chair are combined. We find no evidence that factors such as board size, or the percentage of outside directors per se are related to board involvement in strategic decision making. In doing so, this paper adds to the growing literature synthesizing the structural features and processes of boards.     

Shareholder wealth effects when an officer of one corporation joins the board of directors of another

Officers of large corporations, having demonstrated expertise in managing complex organizations, would appear to be ideal additions to the boards of directors of other corporations. Shareholder wealth effects are examined for 124 announcements in which an officer of one public corporation joins the board of directors of another. The results indicate that the values of nonfinancial firms that send directors to other firms decline significantly, while those of financial senders increase significantly. Receiving firms of both types do not gain. The results suggest that for nonfinancial firms the added duties of an outside directorship distract corporate officers from managing their own firms or are signals to the market that managers are available to other firms. For financial senders, the benefits of networking appear to strongly outweigh any drawbacks. Cross-sectional regressions suggest that prediction errors are higher for receiving firms if they have performed poorly prior to the announcement and less negative for sending firms if they have performed well prior to the announcement. Abnormal returns are negatively related to the size of the sender, adding support for the notion that busy executives are less valuable as outside directors.     

The determinants of board composition: An agency theory perspective

This study examines the interrelation between board composition and variables that capture various agency and financial dimensions of the firm. The agency literature suggests that outside directors on the board provide important monitoring functions in an attempt to resolve, or at least mitigate, agency conflicts between management and shareholders. The agency literature indicates that other mechanisms such as managerial equity ownership, dividend payments, and debt leverage also serve as important devices in reducing agency conflicts in firms. This study argues and documents that an inverse relationship exists between the proportion of external members on the board and managerial stock ownership, dividend payout, and debt leverage. This is consistent with the hypothesis that individual firms choose an optimal board composition depending upon alternative mechanisms employed by the firm to control agency conflicts. Board composition is also found to be systematically related to a number of other variables including institutional holdings, growth, volatility, and CEO tenure.