NED characteristics, board structure and management turnover in the Netherlands in times of financial distress: a theoretical and empirical survey

Abstract

This paper examines the relationship between corporate governance characteristics and corporate financial distress. There are two main theoretical factors of interest: the structure of the monitoring process, and the personal characteristics of non-executive directors (NEDs). The first approach is basically agency-theory oriented, and emphasises relationships that complicate proper control, such as dependents on the board (Jensen, 1993). The second approach refers to the resource dependency theory, which focuses on the quality of the director(s) involved (Hillman and Dalziel (2003). The relevant relationships are tested on a newly built database consisting of 52 listed companies in the Netherlands that became financially distressed in the period from 1993 to 2003 and a control sample of 167 listed companies. We collected data on NEDs such as age, education, dependency, other board positions (and chairmanships), workload, and the number of executive and non-executive board members. A positive relationship with financial distress was found to exist if the average workload of NEDs on the board was high, or if there was a foreigner on the board. If one of the NEDs has inside knowledge, this is negatively related to financial distress. As a final conclusion, the hypothesis originating in resource dependency theory, which is that the human characteristics of NEDs are important in avoiding financial distress, cannot be rejected with regard to the Netherlands as examined in the period from 1993 to 2003.