Power Dimensions in the Board and Outside Director Independence: Evidence from large industrial UK firms

Abstract

This paper examines the independence of outside directors in large UK corporations. It also establishes the presence of different power dimensions in British Boards. The evidence from the study suggests that while the proportion of outside directors is about 48% (consistent with previous studies), only 40% could be regarded as semi‐independent with less than 20% of them truly independent. Using the analytical schema of Finkelstein (1992), the paper found reliable, valid and stable objective estimates of structural, ownership and prestige power in the board of 180 large UK industrial firms (1750 directors) from 28 sectors. The findings have strong implications for the operationalisation and measurement of board composition and structure in empirical work. The study (by incorporating CEO influence on director’s appointment process) offers wide ranging opportunities for examining if board composition and outside director independence matters. Hypotheses that test if the CEO influence of the nomination process affect board independence could be examined. The reliable and valid objective estimates of power in the board will facilitate the consideration of power dynamics (presently largely ignored) in empirical works investigating the performance effect of the board. Finally, the power dimension factors discovered serves as useful solution to the problem of multicollinearity in regression methods employing several governance mechanisms as explanatory variables.