Does Independent Board of Directors Really Make a Difference? Evaluating the Treatment Effects of Increased Board Independence Requirements on Corporate Performance

Abstract

In 2002, President George W. Bush signed the "Sarbanes-Oxley Act” into federal law, which increased the oversight role for independent directors. The induced consequence was that firms which did not satisfy the requirements of the regulation must improve their board independence level. This article empirically examines the relationship between board independence and corporate performance. Firms which did not satisfy board independence requirement prior SOX increased independence level dramatically following the issuance of the Act. The results show that increased audit and compensation committee independence can significantly improve firm performance. The results also provide evidence that the year effect matters: firms which adopt SOX requirement in early years tend to have negative relationship between total board independence and firm performance, and have positive relationship between compensation committee independence and corporate performance, in contrast, firms which chose to comply with the Act in later periods have positive relationship between total independence level and firm performance, but a negative relationship between compensation committee level and corporate performance. The evidence implies that, instead of focusing on total board independence, regulatory agency should take unique features of audit and nominating committee independence level into account.