Does control concentration affect board busyness? International evidence

Abstract

Previous literature suggests that shareholders can concentrate control without cash flow rights, creating incentives to expropriate firm resources. However, previous research does not help identify the board structure of firms whose controlling shareholder has an inflated control concentration. We investigate whether and how firm control concentration affects the structure of the board of directors. Building upon the literature on busy boards, we investigate specific characteristics of the board of directors: the number of directors’ directorships and the number of committee positions. We study an initial sample of 8688 firms from 41 countries. After using propensity score matching to mitigate selection bias, we keep 3570 firms. We find that controlling shareholders with higher control concentration select board members with more directorships and fewer committee positions. We interpret this result as evidence supporting the signaling incentive hypothesis, which suggests that controlling shareholders prefer a more shareholder-friendly board structure, possibly to signal the market that they pursue decisions that maximize firm value. The results are robust to several alternative specifications and methods. Our study helps fill gaps in the literature on busy boards by showing the consequences of the incentives of shareholders with concentrated control on how firms allocate the time of their busy directors. Our study also sheds light on the theoretical aspects that affect the preferences of those shareholders who can most harm minority shareholders. Finally, our study has practical implications that could help regulatory institutions make recommendations for the compositions of boards of directors and/or committees.