Appointment Of Outside Directors Research Articles

Entrepreneurial intention-action gap in family firms: bifurcation bias and the board of directors as an economizing mechanism

This study investigates under which conditions entrepreneurial intentions will transform into entrepreneurial actions in a family firm context. Although entrepreneurial intentions are often a good predictor for entrepreneurial activity, intentions will not always lead to the expected action. We aim to explain this intention-behavior gap in family firms by investigating the moderating role of bifurcation bias, defined as the de facto asymmetric treatment of family vs. nonfamily assets. Our results support the argument that bifurcation bias in family firms hinders the smooth transition of entrepreneurial intentions into entrepreneurial actions. Nevertheless, results also support the notion that the appointment of outside directors in the board could serve as an economizing mechanism for bifurcation biased family firms to transform entrepreneurial intentions into entrepreneurial actions.

Disciplinary directors: Evidence from the appointments of outside directors who have fired CEOs

Abstract By examining board appointments of outside directors who have previously fired a CEO, we study how directors’ willingness to take disciplinary actions is related to a firm's performance and risk-taking. Such directors (‘disciplinary directors’) appear to benefit firms with weak monitoring, but hurt firms in innovative industries. Firms appointing a disciplinary director subsequently exhibit lower idiosyncratic risk, leverage, and R&D expense, make fewer acquisitions, and are more likely to replace poorly performing CEOs. Overall, disciplinary directors appear to influence managerial behavior and shareholder wealth.

The value of director reputation: Evidence from outside director appointments

This study examines the role of director reputation using a sample of outside director appointments. Relative to existing literature, we focus on outside director appointments involving CEO award winners. Exploiting the award-induced change in a director’s reputation, we are able to show that investors react more positively to the appointment of outside directors they perceive as more reputable. We find that this ’reputation premium’ is approximately 2%, and robust across a range of subtests that control for a wide range of possibly confounding influences.

Director Tolerance: Evidence from the Appointments of Outside Directors Who Have Fired CEOs

By examining board appointments of outside directors who have previously fired a CEO, we study how directors’ intolerance of failure influences firm performance and risk-taking. Such directors appear to benefit firms with weak monitoring, but hurt firms in innovative industries. Firms appointing an intolerant director subsequently exhibit lower idiosyncratic risk and lower leverage, make less risky acquisitions, experience higher acquisition returns, and are more likely to withdraw bad acquisitions and to replace poorly performing CEOs. They, however, tend to manage earnings when performance deteriorates. Overall, directors’ intolerance of failure appears to influence managerial behavior and shareholder wealth.

Corporate Leverage Strategy in an Emerging Market

This study empirically investigates whether the introduction of a new corporate governance system in the Korean economy (where controlling shareholders dominate business groups and corporate-bank relationships are prominent) affects corporate leverage strategies. We find evidence suggesting that improved corporate governance, measured by appointments of outside directors and controlling shareholder’s ownership, constrains corporate borrowing. Chaebol firms, on average, have higher levels of borrowing than stand-alone firms. However, the largest chaebols, who are heavily involved in multinational ventures, showed the opposite trend, ostensibly due to more diversified business opportunities and sources of financing available in international markets. This suggests that government policies designed to improved corporate governance among “average” chaebols may be ineffective (or only partially effective), because such policies do not account the heterogeneity that exists across chaebols. Lastly, we find that intragroup transactions among affiliates increase corporate borrowing, but they are not consistently related to chaebol borrowing as a whole.

Family contingencies and board composition: evidence from Tunisia

Despite the widespread attention given to succession and generational issues by family business researchers, little systematic interest has been given to the relationship between these issues and the firms’ governance system. This paper analyses family-related contingency factors as determinants of board composition in family-controlled firms. Results from a sample of Tunisian family firms show that the composition of board members is determined primarily by variables relating to family complexity and family involvement. Among these firms the appointment of outside directors to their boards tends to begin from the third generation of family ownership. The findings support the argument that board composition in family firms is a reflection of family characteristics. The study contributes a more nuanced understanding of the influence of ownership structure and board composition on the succession process in family firms.

Regulation and Corporate Governance in Private Companies An Empirical Analysis: Amendment 17 to the Companies Law A Light Unto the Nations or a Bureaucratic Burden

Throughout the world, private firms are recommended to adopt the same corporate governance rules that are mandatory for public firms. It is unclear, however, whether the high costs associated with such voluntary adoption of corporate governance rules by private firms are justified. A precedent regulation that exists in the Israeli market provides a unique setting for addressing this question. In Israel, since 2011, private companies with public debt (“bond companies”) must act like public firms in adopting corporate governance regulations. We hand-collected a dataset of 105 daily trading Israeli bond companies spanning various industries to test the market reaction to their first-time implementation of governance rules enacted within the framework of Amendment 17 to the Companies Law. The evidence shows an economically significant positive price change of the bond market throughout the milestone of adopting the new regulation. Consistent with this evidence, we also find a positive and significant market reaction to the appointment of outside directors in those companies. Also we find decrease in the bond reaction to control transaction after this Amendment, as compared to similar transactions that were approved before the Amendment. Our findings indicate that applying corporate governance rules raise bondholders' confidence by lowering the risk of the bonds.

Outside director appointment in Korean business groups: the role of stakeholder networks

This study sets out to explain what determines the appointment of outside directors in Korean business groups. Building on the extant theoretical literature on social network theory, the effect of stakeholder networks on the appointment of outside directors in Korean business groups is examined. With the assumption that a firm’s social network, which is comprised of the firm’s stakeholders, affects the appointment of outside directors, testable research propositions are presented.

Evaluation of board reforms: An examination of the appointment of outside directors

Existing literature on the evaluation of the economic consequences of board reforms has some limitations including: their estimation results fail to show the causal effects of the regulatory reforms; they have limited policy implications for an economy where family businesses are dominant; and there is a lack of consensus on the impacts of the reforms.Using a unique dataset and program evaluation methodologies, this paper investigated the performance of share prices in response to the newly introduced outside director system in Korea, where family businesses have been dominant. First, we find that the positive impact of the appointment of outside directors on returns is observed only when the proportion of outsiders on a board increases significantly and their appointment is accompanied by the lead-and-lag effect of regulatory reforms. Second, the buy-and-hold abnormal return is more evident for independent firms than for chaebol affiliates, due partly to the high monitoring costs for cross-shareholdings among affiliates.

The Board's Strategic and Control Tasks; Family Firms and their Search for outside Directors to Support Growth: Empirical Evidence from Italian Publicly Listed Companies

This article analyses the appointments of outside directors to family firm boards within a sample of 423 observations (year/firm) regarding Italian publicly listed companies. The aim is to test predictions which suggest that efficient performance of control and service tasks by outside directors has positive effects on a company's capacity to raise capital and to grow. Unlike agency theory, which affirms that independents are efficient when performing functions of control, this article suggests that the adoption of outside directors who are also independent has no effect. The results of this research demonstrate that outside directors who have close ties with banks maintain valuable social capital with bankers in periods when such social capital is threatened by large investment policies requiring a great amount of bank financing.

Outside directors, board interlocks and firm performance: Empirical evidence from Colombian business groups

We investigate the relation of board structure through the appointments of outside directors and the role of busy directors on firm return on assets within an environment of no regulation for privately held firms and voluntary adoption of corporate best practices for security issuers with family controlling blockholders. This study relies on a sample of an average of 335 firms per year for the 1996–2006 period, where 244 are private firms and 285 are affiliated to one of the seven largest non-financial business groups in the country. Five of these groups were, in 2006, still family-controlled. We find a positive relation between both the ratio of outside directors, and the degree of board interlocks, with firm return-on-assets. Outside busy directors turned out to be key drivers of improved firm performance. Appointments of outsiders are endogenous to firm ownership structure. Blockholder activism as well as contestability becomes an internal mechanism that improves director monitoring and ex-post firm valuation.

Compensation and Board Structure: Evidence From the Insurance Industry

ABSTRACT Monitoring by outside board members and incentive compensation provisions in executive pay packages are alternative mechanisms for controlling incentive problems between owners and managers. The control hypothesis suggests that if incentive conflicts vary materially, those firms with more outside directors also should implement a higher degree of pay-for-performance sensitivity. Our evidence is consistent with this control hypothesis. We document a relation between board structure and the extent to which executive compensation is tied to performance in mutuals: compensation changes are significantly more sensitive to changes in return on assets when the fraction of outsiders on the board is high. INTRODUCTION A long-standing proposition in organizational economics is that more diffuse ownership reduces incentives to monitor managers and limit managerial perquisite consumption (Berle and Means, 1932). However, dysfunctional managerial incentives can be controlled through an array of governance mechanisms. In this article, we focus on two such mechanisms--board structure and pay-for-performance compensation. Our analysis provides evidence on the monitoring role of the board of directors as well as the effectiveness of pay-for-performance compensation. Importantly, it identifies a positive association between pay-for-performance sensitivity and board structure in mutual insurance companies, consistent with the hypothesis that these two policies are complements. Others have analyzed these control mechanisms. Fama (1980) argues that monitoring by independent directors helps reduce contracting costs that arise between owners and managers. Rosenstein and Wyatt (1990) provide evidence of the importance of independent directors by documenting significantly positive stock returns at the announcement of the appointment of outside directors but returns that are indistinguishable from zero for announcements of inside-director appointments. (1) There also is substantial empirical research that examines the argument by Holmstrom (1979) and Shavell (1979) that tying pay to performance helps reduce contracting costs. This research documents a positive relation between changes in executive compensation and both accounting- and market-based performance measures. (2) Yet these control mechanisms typically are analyzed in isolation--even though they are endogenous and theory suggests important interactions in their selection. Holmstrom and Milgrom (1991) argue that organizational choices represent the selection of an organizational system. In their model, activities compete for an executive's attention and there is a tendency for the levels of incentives provided for the different activities to be complementary in the severity of the contracting problem. They suggest that a critical aspect of organizational analysis is to explain how various policy choices are intertwined, and they derive sufficient conditions for policy choices to be correlated across firms. But we argue that because ownership concentration varies substantially across most populations of common stock companies, the conditions necessary to ensure that policies will be correlated in the cross-section are usually violated. (3) Our data allow us to control for variation in ownership concentration; it is from the insurance industry--an industry with a large contingent of mutual companies. Unlike stock companies, where ownership concentration varies widely, mutuals are diffusely owned. The more limited variation in ownership concentration within this population of companies increases the likelihood of identifying the hypothesized complementary relation between board structure and pay-for-performance compensation. Our mutual insurance company data also control another potential problem. Mutual ownership rights are inalienable; hence, control mechanisms that require alienable ownership rights (like executive stock options) are infeasible. …

Board composition in family-influenced firms: A dynamic perspective

This paper uses a sample of 76 family businesses in Tunisia to investigate the impact of the family firm dynamic on the composition of their boards of directors. We argue that whether or not a transition in ownership is planned, firms have different governance needs and characteristics depending on the generational phase. The empirical results show that board composition is positively influenced by both generational evolution and succession planning. This study provides evidence of an increase in the appointment of outside directors to boards of family firms from the third generation of ownership. This result implies that it is important to consider the generational phase and succession process of the family firm in order to better understand its governance system.

The market reaction to the appointment of outside directors

PurposeThe purpose of this study is to examine the character of any market response to the appointment of outside directors. The main propositions tested are: whether the stock market responds unconditionally to these appointments or whether the market response is conditional on the degree of the agency problem faced by the firm and the affiliation of the appointees.Design/methodology/approachThe authors use a New Zealand sample of the appointments of outside directors during the period from July 1999 to June 2004. The unconditional market response is examined analysing the abnormal returns generated by the appointing companies during the three‐day announcement period. The influences of the agency problem and the affiliation of directors are tested by employing multiple regressions.FindingsThe findings provide strong support for the second proposition; the market considers the degree of the agency problem faced by the firm and the affiliation of outside directors in responding to these appointments. The percentage of outside directors in the board emerged as the strongest governance mechanism which, together with firm size, posed a significant inverse influence on announcement period abnormal returns. A strong interaction effect between appointee status and the agency problem was not present.Originality/valueThe mere appointment of outside directors may not please the firm's investors. Such appointments are more useful for companies with severe agency conflicts; even if such a conflict is present, the affiliations that these outside directors have with the executives and the operations of the appointing companies may need to be considered in determining the value of such appointments.

After Sarbanes-Oxley: Market reaction to the appointment of outside directors

This paper examines the stock market reaction to the appointment of outside directors to the board both before and after the passage of the Sarbanes Oxley Act in 2002. We also examine whether the abnormal returns following outside director appointments are related to audit committee appointments, and whether the outsider has financial expertise. Results show that the market response to the announcement of an appointment of an outsider to the board of directors is mixed, and abnormal returns are not significantly different after the passage of the Sarbanes-Oxley Act compared to those announcements before the Act. Also, we find that the market reaction pre- Sarbanes Oxley is higher when the outsider is expanding the board, lower in cases of CEO/chairman duality, and lower if the outsider is appointed to the audit committee. Post- Sarbanes Oxley CEO/chairman duality has a positive impact on the abnormal returns.

Top Executive Origins: Comparative Study between Japan and Thailand

The origins of directors and executives have been the subject of much recent discussion in Asian countries, with concern being expressed about corporate governance and management effectiveness. As an investigation of the origins and determining factors for East Asian directors and executives, this article is based on a wide array of data taken from corporations listed on the stock exchanges in Japan and Thailand. The results of this investigation show that although there has been much argument over the appointment of outside directors to company boards, and the ongoing collapse of the lifetime employment system in Japan, the ratio of internally promoted directors and executives remains high, particularly in companies with widely held shares. Also, it has been widely assumed that most Thai directors and executives are family owners, that their associates have poor management skills, and that other managers are brought in from outside as needed. Our results, however, indicate a significant increase in well-educated professional managers. The data point to the creation of internal managerial labor markets in Thailand. Regardless of ownership pattern, the companies most likely to have a high level of internally promoted executives are large long-established ones or sometimes those in regulated industries.