Abstract
The board of directors is considered pivotal in a company’s corporate governance architecture. However, the board is just one of several governance mechanisms. External shareholders may be more concerned with the overall monitoring of management provided by the market for corporate control, ownership structure, the regulatory environment and board structure than each individual control mechanism. Thus, from their perspective, there may be a substitution effect between monitoring by the board and by other forms of governance. The overall governance of the company could be optimised by very different board structures. On the other hand, management will always be motivated to create a board that is an extension of itself rather than independent. It may have the opportunity to so do if it has sufficient ownership. In this scenario the board structure is the outcome of a bargain struck between the CEO and the outside owners and may therefore complement ownership structure. We examine the relation between ownership and board structure in Irish plcs. We test the substitution and bargaining hypotheses regarding effects of ownership on board structure. We find that the percentage of share capital owned by executives is negatively related to the percentage of the board comprised of non-executive directors and the likelihood of having a non-executive as chairman. We interpret this as evidence in favour of the bargaining hypotheses. Further indirect evidence in favour of this hypothesis is provided by a strong negative relation between the monitoring capacity of a board and company size. In contrast the evidence we report in favour of the substitution hypothesis is weak.
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