Board Monitoring Research Articles

Enterprise risk management manufacturing industry quality determinants

Goal: Large manufacturing companies face significant risks due to importing raw materials and exposure to fluctuating exchange rates. Enterprise Risk Management (ERM) is vital in this sector to manage its distinctive risks. This study finds ERM factors in Indonesia and Malaysia that affect company value and empirically evaluates risk management in their organizations. Design / Methodology / Approach: The factors that influence the quality of a company's ERM examined in this study include auditor quality, ownership concentration, board monitoring, gender on the board of commissioners, gender on the board of directors, and human capital. This study's population is 2018-2020; 300 Indonesian and 252 Malaysian manufacturing companies contributed 552 research observations. Results: This study shows that a qualified auditor, board monitoring, gender ratio on the board of commissioners, and human capital may uncover ERM implementation issues. On the other hand, higher share ownership does not affect ERM. Implications for practitioners and suggestions for future researchers are also described. Limitations of investigation: The crucial role of Enterprise Risk Management (ERM) in mitigating these unique industry risks, this study underscores the limitations inherent in factors such as auditor quality, ownership concentration, board monitoring, and gender diversity within corporate leadership. Practical implication: The necessity for manufacturing companies to prioritize specific aspects of Enterprise Risk Management (ERM) in their organizational strategies. Originality / Value: This research illuminates the nuanced interplay of factors shaping Enterprise Risk Management (ERM) efficacy within the dynamic context of the manufacturing industry.

Corporate governance, blockholders, and financial distress: Global evidence

AbstractThis study examines the impact of corporate governance mechanisms and ownership structure on financial distress for 23 developed and 27 emerging countries across different markets and legal systems and during the crisis period. In developed markets, CEO duality increases distress, which can be mitigated through independent boards and majority blockholders. Independent boards, specifically in common‐law countries, alleviate distress, yet, may escalate the adverse impact of blockholders as independent boards may not be effective monitors. In emerging markets (EM), independent boards increase distress, potentially reflecting political appointments. Institutional blockholders hurt firm financial health, though, strategic blockholders may substitute for board monitoring in weak governance environments. During the crisis period, a larger and independent board has the potential to decrease financial distress.

The multilevel determinants of overlapping membership on board committees: Evidence from Chinese banks

This study manually collects data on 4090 board committee members from 36 listed banks in 11 regions of China from 2007 to 2020, uses a hierarchical linear model, and integrates institutional and resource dependence theories to examine the multilevel determinants of overlapping membership on board committees. The results show that low legalization and the absence of chief risk officers promote overlapping membership on board committees. Directors who have financial expertise, are shorter-tenured, and do not have social relationships with senior leaders sit on more board committees. Further analysis shows that information and resource needs are more likely to drive overlapping membership on board monitoring committees, and independent directors with lower information acquisition costs sit on more board committees. The moderating analysis between multilevel factors shows that legalization and the presence of chief risk officers substitute for, while religion and board interlocks complement director-level information and resource needs.

Board diversity and stock price crash risk: exacerbate or mitigate

As China is the largest emerging capital market, stock price crash risk (SPCR) due to corporate governance failures is a frequent phenomenon. The board of directors stands as the cornerstone of corporate governance, wielding a substantial influence on the SPCR. The influence of board diversity (BD) on SPCR remains a topic rife with unanswered questions. To fill this gap, we construct a multidimensional index system to capture BD and examine its impact on the SPCR based on companies listed on the Chinese A-share market from 2010 to 2020. Our findings show that BD mitigates SPCR rather than exacerbates it. The foundational findings remain intact even after addressing issues of endogeneity and executing thorough validity tests. We further identify four mechanisms to lower SPCR through influencing board monitoring, including reducing agency costs, alleviating inefficient investments, improving information disclosure, and appointing diverse executives. Overall, our research underscores the pivotal importance of BD within the capital market and provides new insights into the mitigation mechanisms of the SPCR.

Board characteristics and ESG performance: an evidence from Malaysia

ABSTRACT Sustainable business practices are essential globally, emphasizing the need to study factors influencing ESG performance in corporate governance. This research examines the relationship between board characteristics and ESG outcomes within Malaysia’s mandatory sustainability reporting context for listed companies. Analyzing 357 firm-year observations from 51 Malaysian companies from 2014 to 2020, the study found that increased board meetings and more independent directors correlate with better ESG performance. However, no significant relationship was found between the proportion of female directors and ESG outcomes. These findings, consistent across robustness checks, suggest areas for governance framework improvements, particularly in board oversight of ESG practices. The results support the Malaysian Code on Corporate Governance's principles for enhanced board monitoring of ESG reporting processes.

Ownership concentration and SME IPO underpricing in India – moderating impact of board monitoring and resource provision role

PurposeThe study aims to explore how the monitoring and resource provision function of board of directors impact the association between ownership concentration and small- and medium-sized enterprise (SME) initial public offering (IPO) underpricing in the context of an emerging economy like India.Design/methodology/approachThe sample comprises 390 SME IPOs listed on Bombay Stock Exchange SME platform and National Stock Exchange EMERGE (EMERGE is the NSE new initiative for SMEs to raise the funds from investors) in India. To test the moderating impact of the board monitoring role and resource provision role, the study employs hierarchical moderated regression subject to the fulfillment of assumptions.FindingsThe findings divulge that ownership concentration significantly reduces underpricing, hinting towards the operationalization of alignment of interest hypothesis. With regards to moderating relationship, the study found that while board resource providing role negatively moderates the relationship between ownership concentration and SME IPO underpricing, board monitoring function fails to cast any significant impact on the relationship between ownership concentration and SME IPO underpricing.Research limitations/implicationsThe present study ignores larger firms listed on the main platform which have complex decision-making than smaller firms. Besides, it is confined to only a single country, i.e. India. Extending the study to other countries with similar institutional characteristics would have validated the findings. Furthermore, the moderating impact of other organizational factors like firm age, lifecycle of firm and change in technology would form an interesting avenue for future research.Practical implicationsThe findings of the study have practical implications for managers in designing the adequate board structure that significantly reduces underpricing. It thus further advices the issuers on focusing more on strengthening the resource provision role of board of directors for achieving higher rewards. The findings are helpful to policymakers in framing such policies that enhance the resource-oriented role of board of directors and resource accessibility for SMEs. Furthermore, the results advise the investors to be relatively assured about the SMEs whose board exercises its resource provision role emphatically. Accordingly, findings are helpful to investors in making investment decisions in alternative market settings characterized by the concentrated ownership structure.Originality/valueThe study furthers the debate on the importance of two prominent roles played by board as a moderating variable in the underexplored context of IPO underpricing of small and medium-sized firms in India.

Is chair-CEO generational difference a substitute governance mechanism to debt financing?

PurposeThe purpose of this paper is to examine whether and how chair-chief executive officer (CEO) generational difference is related to debt financing.Design/methodology/approachThis paper adopts the pooled ordinary least squares and system generalized method of moments estimation procedures to analyze listed firms in Malaysia from 2013 to 2017.FindingsThe results reveal that chair-CEO generational difference is negatively associated with leverage. The evidence suggests that substantial age gaps between the chair and CEO precipitate cognitive conflicts, which lead to better monitoring and control. This results in better governance and less information asymmetry, causing firms to depend less on debt as a board monitoring mechanism. The findings provide support to the theory posited in this paper on the substitutability of chair-CEO generational difference and debt financing.Originality/valueThis is the first attempt to investigate the substitutability of chair-CEO generational difference and debt financing.

Interpersonal population diversity in the bank boardroom and corporate misconduct

PurposeThis research empirically establishes that the interpersonal population diversity of executive board members partly explains the differences in financial misconduct across US banks. It advances the hypothesis that heterogeneity in the composition of an interpersonal population and diverse traits of board members, originating from the prehistoric course of the exodus of Homo sapiens from East Africa tens of thousands of years ago, is an important factor explaining the effectiveness of executive board monitoring with respect to a bank engaging in financial misconduct. The underlying intuition is that population-fragmented societies, characterized by mistrust, preference heterogeneity and corruption, find it difficult to sustain collective integrity action.Design/methodology/approachEmploying a panel of US banks from 1998 to 2019 we find that adding directors from countries with different levels of interpersonal population diversity is positively associated with financial misconduct as measured by enforcement and class action litigation against banks by the main regulatory agencies. Furthermore, we document that the more population-diverse bank boards are more likely to commit misconduct, consistent with a mechanism of inter-generational transmission of cultural norms of mistrust and non-cooperation.FindingsWe find that adding directors from countries with different levels of interpersonal population diversity is positively associated with financial misconduct as measured by enforcement and class action litigation against banks by the main regulatory agencies. These results are robust to controlling for bank-specific variables, including other board characteristics, and to the use of instrumental variables.Practical implicationsThe findings suggest that reducing financial misconduct by banks likely requires reducing the interpersonal population diversity of banks’ executive boards.Originality/valueWe show how bank boards with different interpersonal population diversity impact the likelihood of engaging in misconduct provides evidence of the microeconomic effects of interpersonal population diversity. We show the negative results of diversity that they can have on the management of a firm given that populated diverse boards are more likely to lead to higher levels of misconduct. Our evidence reveals that banks having interpersonal population fragmented boards are more likely to commit misconduct given the cultural norms of mistrust and the lack of societal cohesiveness.

The role of independent directors’ tenure and network in controlling real-earnings management practices

Manipulating real activities is generally regarded as more damaging to a firm’s long-term growth and value than accrual-based manipulations. We consider this point of view and build on the agency theory framework for investigating the role of independent directors’ (INDs’) tenure and connection to several boards in controlling real-earnings management (REM) practices. We analyze a sample of UK listed non-financial companies over the period between 2005 and 2018. The potential endogeneity issue was controlled by the application of the two-step system-GMM estimations. The research findings suggest that REM was lower in those firms whose INDs were connected to several boards at a time. The findings also show that the association between INDs’ tenure and REM varied with the phases of their tenure. Directors in the early stage of their tenure are less effective at controlling REM, however, as their tenure grew, they generate better oversight over the management conduct, thereby reducing REM. Contrary to this, extended tenure is shown as positively associated with higher REM practices. The overall findings thus suggest that the board monitoring role protects the stakes of the shareholders by constraining REM when INDs have better expertise and rich information acquired through their presence on multiple boards—and when they have moderate board tenure, which is neither too short nor too long. We argue that due to the importance of the role of INDs in the current global scenario this study has policy implications.

The Practice of Enterprise Risk Management and Sustainable Performance in Jordan

The primary objective of any organization is to minimize risks and losses while optimizing values, revenues and returns. Therefore, risk management, which is often referred to as risk identification, likelihood of occurrence, and impact on the business, is essential. Recent corporate catastrophes have brought to light how inadequately corporations handle risks. In reaction to these challenges, organizations have shifted from separate and personalized procedures to a more comprehensive and integrated enterprise risk management (ERM) perspective in their risk management strategies. To address these new global sustainable challenges which include hunger, poverty, high unemployment, climate change, and related issues, businesses should place a strong priority on environmental preservation and social responsibility. Jordan is one of the countries dealing with several issues related to sustainability. The sustainable performance of Jordanian firms deserves further attention. Managers in Jordanian industrial businesses must keep a close eye on how the company's environmental environment is being improved to reduce air pollution, the usage of hazardous materials, and other difficulties. Therefore, companies in Jordan must adopt strategies that will allow them to face this issue to improve their social, environmental, and economic performance. Jordan's manufacturing and service industries should be at the forefront of a comprehensive approach to risk management and board monitoring, given the growing concerns regarding the environment, society, and economy. Since ERM is a relatively new concept, its implementation in Jordanian industrial and service companies is still in its early stages. Moreover, there is a lack of comprehensive research regarding the ERM in Jordan.

How Board Monitoring and Mandated Clawbacks Shape Managers’ Use of Discretion: Experimental Evidence

ABSTRACT We use an experimental setting to examine how an internal governance mechanism—board monitoring—moderates managers’ use of discretion in response to a regulatory governance mechanism—mandated clawbacks. Our study addresses a significant gap in the literature that has largely examined the effects of different governance mechanisms in isolation. We predict and find that mandated clawbacks increase managers’ tendency to use operational discretion (relative to accounting discretion) when board monitoring is weak, but not when board monitoring is strong. Our results have important policy implications by demonstrating that a firm’s internal environment may be more effective than rules in curtailing manager’s opportunistic use of discretion.

Do board monitoring and audit committee quality help risky firms reduce CSR controversies?

Do board monitoring and audit committee quality help risky firms reduce CSR controversies?

Segment disaggregation and equity‐based pay contracts

AbstractWe study the role of segment disaggregation in equity‐based pay contracts in diversified firms. Disaggregated segment disclosures can improve the observability of managerial actions in internal capital markets and thus increase implicit incentives for managers to allocate resources as desired by shareholders, substituting for explicit incentives provided to CEOs. We use the adoption of Statement of Financial Accounting Standards No. 131 as an identification strategy and find that firms affected by this segment reporting mandate significantly decreased the provision of equity‐based incentives in the post‐adoption period, especially for firms with higher operating volatilities. This effect is also more pronounced for firms with weaker board monitoring in the pre‐adoption period but with stronger external monitoring in the post‐adoption period. Overall, our results suggest that disaggregated segment disclosures reduce the use of equity‐based pay contracts in diversified firms by enhancing the monitoring of managers.

Independence of board leadership of acquirers and the success of mergers and acquisitions

Effective board monitoring prevents entrenched managers from undertaking acquisitions that are detrimental to shareholders. It also facilitates a smooth transition during the post-acquisition phase. We examine how independent board leadership affects M&A outcomes. Controlling for many firm, board, and CEO attributes, we find that acquirers with independent board chairpersons earn significantly higher CAR around M&A announcements. The positive effects of independent board chairpersons are more pronounced in acquirers with high monitoring needs. The boards led by independent chairpersons primarily add value by selecting targets with high synergetic gains, avoiding overpaying for targets, and facilitating smooth transition in the post-acquisition phase.

Assessing the Practice of Earnings Management in COVID-19 Era. Landscape of European Companies: An International Comparison

Beginning of 2020, the COVID-19 crisis holds for firms all over the world. Under these circumstances, the purpose of this paper is to evaluate the landscape of the European countries in terms of the earnings manipulation in COVID-19 era. Therefore, we compared companies from 15 European countries. The results show that the deteriorating economic conditions caused by COVID-19 are reflected in the managers’ activity for earnings management in the context of European companies. Moreover, the panorama of earnings management activities in Europe is quite heterogeneous and inconsistent as we observe significant differences between European countries in the practice of earnings management. Additionally, rather than a single incentive or factor, we find a wide range of variables that affected managers’ decisions to engage in earnings manipulation in COVID-19 times. Indeed, the results show that lack of growth opportunity caused by the pandemic, increased amount of debt, volatility of cash flow or sales, even size, age, or book value, were variables that influenced managers’ decisions to manipulate earnings in pandemic. In addition, the industry effect cannot be separated from the impact of COVID-19.  Surprisingly, institutional mechanisms of control, including audit quality or board monitoring, which are widely documented in the literature as limiting earnings management, were ineffective in the COVID-19 period. The presence of mechanisms of control is considered essential variables that limit the practices of earnings management, but even these can occasionally fail, as confirmed our study.

Friendly boards and capital allocation efficiency

AbstractThis study examines the effect of friendly boards on capital allocation efficiency. We provide evidence that firms with friendly boards have a positive and statistically significant effect on capital allocation inefficiency. We find our results robust to different measures of friendly boards and capital allocation inefficiency, alternative model specifications, omitted variable bias, self‐selection bias and other endogeneity concerns. We also show that the positive association between friendly boards and capital allocation inefficiency is lower in firms with high external corporate governance quality but higher in firms with high financial constraints. The findings imply that poor board monitoring and high agency conflicts in firms with friendly boards lead to high capital allocation inefficiency.

Bankruptcy in the UK: Do Managers Talk the Talk Before Walking the Walk?

AbstractThis study examines whether managers employ annual report textual disclosures as a conduit to communicate the probability of future corporate bankruptcy or to intentionally mislead stakeholders owing to impression management incentives. We conduct various examinations around the information content of the tone conveyed by textual disclosures in unstructured UK annual reports and the probability of corporate bankruptcy. We document that firms that communicate a more net positive tone are associated with lower bankruptcy risk. Importantly, this association is found to be stronger for firms whose managers have a lower incentive to mislead investors owing to better board monitoring, stringent stock market regulation, and Big 4 audits. We also offer complementary evidence that firms conveying a more net positive tone exhibit higher future performance and earnings persistence, and lower future performance volatility. These firms are also less likely to exhibit extreme corporate policies and to receive a qualified auditor's opinion. Overall, this study sheds light on whether managers tend to inform or misinform (bury their heads in the sand) about corporate bankruptcy.

Does managerial pay disparity influence BHC default risk?

This study investigates the relationship between managerial pay disparity (i.e., pay inequality of the CEO with other top executives and other employees) and default risk (measured using an innovative market-based credit default swap spread). The research relies on panel data for 1992 to 2018 from 198 U.S. bank holding companies (BHCs). We find that managerial pay disparity is negatively related to BHC default risk, suggesting greater pay disparity does not necessarily contribute to excessive risk-taking and instability in the banking sector. However, additional analysis reveals that managerial pay disparity is associated with higher default risk among BHCs with assets of less than USD 50 billion. We also find that greater managerial pay disparity is detrimental to BHC stability in the presence of weaker board monitoring (in the form of less gender-diverse boards and higher board co-option). Overall, these findings suggest that BHC size and board monitoring mechanisms are important factors in understanding the influence of managerial pay disparity on BHC stability.

Are all female directors equal? Incentives and effectiveness of female independent directors

We examine how differences in the career incentives of female directors impact their monitoring effectiveness in the context of financial reporting. We find that female independent directors who are sitting senior executives in other firms (executive FIDs) improve financial reporting quality while other female independent directors (non-executive FIDs) do not. Exogenous departure of executive FIDs leads to deterioration of financial reporting quality. Empirical approaches addressing reverse causality and selection problems support our primary findings. We also find that executive FIDs who are younger or not CEOs are more effective in improving financial reporting quality. These findings support the notion that varying career incentives of female directors contribute to the differences in their board monitoring performance. Finally, executive FIDs’ effective monitoring of financial reporting is more prominent in firms with higher monitoring costs and when they serve on more prestigious boards.

Do foreign institutional investors improve board monitoring?

Exploiting the global financial crisis of 2007–08 as an exogenous shock that resulted in a significant decline in the ownership of foreign institutional investors (FIIs) in the Indian equity market, we find evidence of a causal link between FIIs’ ownership and different dimensions of board monitoring. Specifically, the empirical results suggest that higher FIIs ownership leads to lower board size, busyness, network size, CEO power, CEO pay, and improved board diligence. However, we also document a negative link between FIIs’ ownership and board independence, indicating that FIIs do not view independent directors as effective monitors. In terms of implications, our results suggest that improved board monitoring, induced by higher FIIs’ ownership, leads to higher firm valuation and innovation activities.