Independent directors and corporate investment: evidence from an emerging market

PurposeThe purpose of this study is to investigate the influence of board characteristics on firms’ investment decisions.Design Methodology ApproachThe study used data sourced from annual reports of firms listed on the Ghana Stock Exchange from 2014 to 2018. Descriptive analysis was performed to provide the background statistics of the variables examined. This was followed by a regression analysis which forms the main data analysis.FindingsThe multiple regression analysis results indicated that the proportion of independent directors and financial experts on the board are negatively related to firm investment. These findings imply that independent directors and financial experts on the board can help firms reduce overinvestment and improve investment efficiency.Originality ValueThe extant literature shows that the board of directors are an effective mechanism to reduce agency problems in firm decisions and operating performance. However, there has been little research on the role of the board of directors in corporate investment policy.

PurposeThis paper aims to investigate the joint effect of board independence and gender diversity on the effectiveness of boards in monitoring CEO compensation in a continental European context, i.e. France.Design/methodology/approachFixed-effect regressions are used to study the impact of board independence, gender diversity and their interaction, i.e. the proportion of female independent directors on the different components of CEO compensation (total, fixed and variable).FindingsThe authors observe that both the proportions of independent directors and women sitting on the boards positively influence the various components of CEO compensation. However, the interaction of these factors, i.e. the proportion of female independent directors, is negatively associated with CEO compensation. These results suggest that independent women directors improve board effectiveness in monitoring CEO compensation, especially its fixed component.Originality/valueThe results of this research help to elucidate the importance of women being appointed to boards as independent directors to properly monitor managerial pay. These results provide support to the approach of the French Cope-Zimmerman law of January 2011, which promotes female representation on boards as independent directors to enhance board decision-making. Thus, evidence presented and discussed in this paper should provide useful insights for academics, corporate managers and regulators.

In this paper, the relevant data of the proportions of major shareholders and independent directors from 2008 to 2017 are examined. Firstly, the functions of the board of directors and the role of independent directors are introduced. Then, the impact of the institutional changes of the board of directors on the proportion of independent directors is investigated. Next, the determinants of the structure of the board of directors are reviewed. Thus, two hypotheses are proposed. According to the regression results of the model, hypothesis 1B presents positive significance. It can be concluded through the influence of the largest shareholder’s shareholding ratio on the proportion of independent directors in the board of directors that the higher the shareholding ratio of the largest shareholder, the higher the proportion of independent directors. By increasing the proportion of independent directors, the voting space of non-independent directors will be squeezed, so as to increase their control. This study reveals that the ownership structure is an essential factor influencing the structure of the board of directors, constituting a crucial supplement to the literature on the determinants of the structure of the board of directors.

Earnings management encompasses the methods and techniques of inflating or deflating reported income to serve some inappropriate objective of the management or the managers of firms. We wanted to examine whether bank loan and institutional holding, and proportion of independent directors in the board have any influence on earnings management in India. We have collected data of 246 firm years of industry representative firms and have computed discretionary accruals for them using Jones model and then computed statistical correlation of discretionary accrual with bank loan and institutional holding, and the proportion of independent directors in the board. As we expected, we have found negative correlation of discretionary accruals with bank loan and institutional ownership, and independent directors. We have finally shown a regression to establish this.

Earnings management encompasses the methods and techniques of inflating or deflating reported income to serve some inappropriate objective of the management or the managers of firms. We wanted to examine whether bank loan and institutional holding, and proportion of independent directors in the board have any influence on earnings management in India. We have collected data of 246 firm years of industry representative firms and have computed discretionary accruals for them using Jones model and then computed statistical correlation of discretionary accrual with bank loan and institutional holding, and the proportion of independent directors in the board. As we expected, we have found negative correlation of discretionary accruals with bank loan and institutional ownership, and independent directors. We have finally shown a regression to establish this.

This paper examines the impact of independent directors on firm performance by using a sample of companies listed in Ho Chi Minh stock exchange over the period from 2012 to 2018. The sample is an unbalanced data panel with 1693 observations. GMM estimation system is employed to control endogeneity as well as other problems in the model, and is suitable for the data with short time periods and a large number of companies. The results show that independent directors negatively affect firm performance. In addition, the study examines the impact of the number of independent directors on listed firm performance, which is also a new contribution of the study. In particular, public companies with one or two independent directors on board have a negative impact on their performance. However, it is unfounded that three or more independent directors cause a reduction in the performance of listed companies. Thus, independent directors have not supported improving firm performance partly due to information asymmetry among the insiders and outsiders as well as the independent director’s governance capacity. Furthermore, this study proposes policy implications aiming to promote the effective governance role of independent directors with the listed firm performance.

This article systematically reviews the role and challenges of independent directors in curbing overinvestment in enterprises. Based on the agency theory framework, this article analyzes the theoretical path for independent directors to improve investment efficiency through supervision, consultation, and signal transmission mechanisms. Research has found that although independent directors theoretically have governance effectiveness, their actual effectiveness is significantly constrained by practical difficulties such as lack of independence, information barriers, and insufficient incentives. This article further reveals the situational dependence of independent director effectiveness and points out that its effectiveness is deeply influenced by institutional environment and equity structure. Finally, The research findings of this paper show that this article proposes policy recommendations for shifting from formal compliance to substantive effectiveness, including optimizing the selection mechanism and improving the incentive compatibility system. This study provides important insights into the effectiveness of corporate governance mechanisms and has reference value for governance practices in emerging markets.

Board independence is reflected in many aspects, the most common of which is the existence of independent non-executive directors and the separation of Chairman and CEO roles. This study examines whether a highly independent board deters earnings management by its managers. Discretionary accruals are used to measure earnings management while current operating cash flow divided by lagged assets of current and future are used to measure manager's incentives. On a sample of 1230 observations from 244 HOSE listed companies that belong to VNX Allshare index in the period 2012-2017, this study provides significant evidence for corporate governance issues of Vietnamese listed companies. Specifically, the experimental results show that when the current period performance is poor and expected future period performance is good, and if one person holds both Chairman and CEO roles, he will carry out the transfer of a part of the future profits to the present to improve current year’s performance to satisfy personal interests. Unfortunately, all variables related to independent directors are statistically insignificant, confirming the fuzzy role of independent directors in monitoring and preventing earnings management in particular and agency problems in general. This study offers implications for the effectiveness and substance of the independent role of the board of directors in Vietnamese enterprises.

PurposeStudies on corporate boards examine how social ties between the CEO and independent board members affect the effectiveness of board monitoring. Much evidence suggests that social connections between the CEO and independent directors are associated with inadequate monitoring and lower firm value (Hwang and Kim, 2009; Fracassi and Tate, 2012). In this study, the authors note that social connections of the independent directors are of different nature and thus should not be treated as a homogeneous group; that is, the nature of connections among directors can be quite different from that between the CEO and directors, which is the primary focus of previous studies.Design/methodology/approachThe authors classify independent directors into four mutually exclusive groups based on their social connections to the CEO and other independent board members and examine what role each type of connection plays in corporate monitoring using panel data and cross-sectional fixed effect regressions.FindingsThe authors find that Only_CEO%, the proportion of independent directors who are connected only to the CEO, is negatively associated with monitoring intensity. Specifically, firms with higher Only_CEO% have larger CEO compensation, lower likelihood of dismissing the CEO, more co-opted board and worse firm performance. In contrast, No_CEO_Ind%, the proportion of independent directors who have no connection to either the CEO or other independent directors is associated with more effective monitoring. These findings suggest that independent directors with different degrees of social connections exhibit different monitoring qualities.Practical implicationsWhen more independent directors, who are connected exclusively to the CEO, are on the board, they consistently deliver low monitoring quality. However, when more independent directors with no connections to either the CEO or any independent directors are on the board, they enhance monitoring quality. These findings can be used to construct board structures with more effective monitoring ability.Originality/valueThis paper extends the literature on social networks in corporate finance. The authors show that independent directors with exclusive connections to other independent directors do not have a significant effect on board monitoring, but those truly independent directors are associated with better monitoring quality. These findings suggest that different types of social connections of independent directors play a different role in board monitoring and help extend our understanding of the function of social connections of independent directors in corporate governance.

This study suggest that the independent directors role needs to strengthened to achieve the desired goal of corporate governance. In india, despite being listed, there is family ownership structure. This has an important influence on the priorities set by the board, and that these priorities will determine the firm performance and corporate governance, despite independent director monitoring, It is found that where independent directors enjoying good trust with the family councils and have financial experience could ensure success to the best interest of the widely dispersed shareholders and stakeholders. Understanding the influence of family and role of independent directors on the board of directors in turn on firm performance requires greater sensitivity to how corporate governance affects different aspects of effectiveness for different stakeholders and in different contexts. Hence a framework on the interaction between ownership, corporate boards and firm performance could help. This paper looks into the current scenario in Indian Corporate Sector and examine the role of Independent Director in Corporate Governance, in particular. We are looking at Companies Registered in India and how the role of Independent Directors brings about better corporate governance and whether this brings about improved company performance. Recourse to independent directors by private equity investors per se is not tied to performance increases. . Our study shows that independent directors impact the rate of return only on deals which require very specific skills, i.e. turnaround and buyout investments. Besides, busy independent directors do not seem to affect negatively the internal rate of return. Finally, independent directors tend to resign when performance is unsatisfactory and consent to shave losses when performances are negative. We are aware that Independent Directors (IDs) play a critical role in implementing sound corporate governance practices in companies.

Independent versus non-independent outside directors in European companies: Who has a say on CEO compensation?

This article investigates the enforcement of law on the role of independent directors in the US. The purpose is to find suggestions for Chinese policy makers to improve its system of law enforcement on the role of independent directors as effective monitors. In the US, there is a working system of law enforcement in place by way of charter provision, business judgment rule, shareholder litigation and SEC enforcement action. In China, similar elements of law enforcement are missing. Thus, a working system of law enforcement on the role of independent directors is not in place. Unless Chinese legal system can develop a working system of law enforcement on the role of independent directors, there is still a gap between the law on the books and the law in action regarding the role of independent directors, which makes independent directors failed to work as expected in China.

Geoeconomics has attracted sustained attention in recent years, but the role of independent directors’ geographic distance in investment efficiency remains unexplored. We explore the governance effects of independent directors from a geographic location perspective. Specifically, the Great Circle Distance Formula is employed to calculate the geographic distance between the independent directors and the enterprise. Then, we measure the inefficient investment. Using a detailed sample in the Chinese market from 2009 to 2018, we find that geographic distance is not conducive to the functioning of independent directors and that there is a positive relationship between independent directors’ geographic distance and inefficient investment. The coefficients are robust to multiple robustness checks. In addition, the positive effect of independent directors’ geographic distance on inefficient investment will increase (become more positive) when there is no high-speed rail and the marketisation process is low in the enterprise’s location. Mechanism tests show that geographic distance does affect inefficient investment by inhibiting independent directors’ access to information as well as their reputation. Our results have important implications for investment policy and corporate governance.

Stock market reactions to news of cartel prosecutions are muted when indicted firms have a high proportion of independent directors on their boards. This finding is robust to self-selection and is pronounced when independent directors hold more outside directorships and fewer stock options -- when those directors have fewer economic ties to indicted firms. Results are even stronger when independent directors' appointments were attributable to SOX, preceded their CEO's own appointment, or followed class action suits -- when directors have fewer ties to indicted CEOs. Independent directors serving on indicted firms are penalized by losing board seats and vote support in other firms. Firms with more independent directors are more likely to cooperate with antitrust authorities through leniency programs. They are also more likely to dismiss scandal-laden CEOs after public indictments. Our results show that cartel prosecution imposes significant personal costs onto independent directors and that they take actions to mitigate those costs. We argue that understanding these incentive-compatible dynamics is key in designing strategies for cartel detection and prosecution.

The article discusses the role of the independent directors corporate governance. Since the 1990s worldwide there has been a growing recognition on legal and regulatory measures for strengthening the board of directors for effective supervision and monitoring of the top management of companies. Since many internal and external mechanisms for monitoring the management of corporations has not been generally effective several task forces and committees in USA, England, Canada, and Europe have focused on highlighting the role of the non-executive outside independent directors. However, corporate boards in general heave the required number of such directors but have been found devoid of minimum contribution to governance process. Further the growing body of literature on the subject shows a mixed trend and offers the illustrations of Enron, Global Crossing, Tyco, and several such mega corporations where the presence of independent directors did not help the decline and fall of such corporations. The present article identifies some opportunities for enhancing the role efficacy of the independent directors in companies in India.