Independent directors' reputation incentives and firm performance – an Australian perspective

Abstract

This study investigates the association between independent directors' reputation incentives and firm performance using Australia's top 500 listed firms for 2004–2019. Analyses reveal that firm performance is positively (negatively) associated with the proportion of independent directors viewing their directorships as more (less) prestigious. We address endogeneity issues by employing propensity score matching (PSM), Heckman two-stage approach, difference-in-differences analysis and our results are robust. While the ASX recommendation with regard to the independent director composition has an intuitive appeal, we show that increasing the presence of independent directors on company boards is not necessarily a channel for better firm performance. Reputational concerns should be accounted for when evaluating how well independent directors protect shareholders' interests, as well as appointing or retaining independent directors.