Increased Board Independence Requirement and its Impact on Governance Inputs, Board Busyness, and Firm Performance

Abstract

In response to the Sarbanes-Oxley Act and stock exchange regulation, firms are forced to increase their board independence level if they did not satisfy the requirements. This article empirically examines the impact of increased board independence requirements on the governance inputs, board busyness, as well as the firm performance. The results show that the increased independence level in the board, audit committee, nominating committee as well as compensating committee have significant impacts on the governance inputs and firm performance. The results are mixed: (1) If the firm experiences an exogenous increase in the audit committee independence, the governance inputs are aggrandized (measured by the increased number of board meetings and increased board meetings attendance), an increase in the firm performance is also observed. (2) If the company increases the total board independence level, then the number of board meetings and the firm performance increase, the board busyness status is weakened (since the number of the outside directorships decreases), but the meeting attendance record is becoming worse (directors do not attend enough meetings as required by the SEC). (3) If the enterprise increases the compensation committee independence level, the number of board meetings and firm performance will increase, but again, the meeting attendance record is worse. (4) If the firm increases the nominating committee independence level, the number of board meetings will decrease and more directors will not attend enough meetings required by the SEC. The results suggest that both the regulation authority and the enterprise need to evaluate their choice of board independence regime by taking into account the trade off between corporate governance inputs and the firm operating performance.