Board of Directors’ Composition: Representation of Large Shareholders and Type of Ownership

Abstract

We investigate the link between large shareholder representation in the governing bodies of the firm, shareholder’s governance relations and the independence of the board of directors. This research shows that the relation between ownership concentration and board independence is not linear. We also show that the combination of shareholders’ representation in the governing bodies and shareholders’ type shapes this relation. Board composition reflects shareholders’ needs of monitoring and access to information and other agency relations. Our results shed some theoretical and empirical light on the dynamics between ownership structure and board composition in a non-Anglo-American setting. We propose a classification of large shareholders considering the involvement in the governing bodies and the agency issues related to the type of ownership. Our research has implications for regulators and investors in countries with high ownership concentration. The independence of the board of directors is a critical mechanism for shareholder protection. Our results suggest that a well-established good governance practice may not tackle the issue it was originally designed for, since it was intended for contexts with atomistic ownership. This research highlights how the ‘good governance’ practice of board independence is contingent on ownership characteristics.