Director Monitoring Research Articles

The Role of National Institutions in Board Monitoring and Executive Compensation

Drawing upon insights from previous comparative corporate governance research that has made the case that national institutions significantly influence the variance in corporate governance effectiveness, we develop and test a contextualized model that addresses the questions of whether and how institutions (formal and informal) alter the firm level bundling relationship between monitoring and executive compensation. Findings show a positive relationship between board of director monitoring and CEO compensation in a macro level study of 42 countries in 2009-2010. Furthermore, we find support for our hypothesized interactive effects of board monitoring with formal and informal institutions on CEO compensation. This paper serves to highlight the importance of considering the national institutional context that firm corporate governance bundles are embedded within, to determine if they are positively or negatively related to one another. This study provides insights for boards of directors who are responsible for monitoring and setting compensation packages for executives. Our results indicating the relationship between board monitoring and CEO compensation is impacted by informal and formal institutions at the national level serves to remind policy makers who are responsible for regulating corporate governance practices that corporate governance is not a one size fits all.

Outside Director Equity Compensation And The Monitoring Of Management

<span style="font-family: Times New Roman; font-size: small;"> </span><p style="margin: 0in 0.5in 0pt; text-align: justify; mso-pagination: none;" class="MsoNormal"><span style="color: black; font-size: 10pt; mso-themecolor: text1; mso-fareast-font-family: Calibri;"><span style="font-family: Times New Roman;">Using a sample of firms that are first time users of outside director equity compensation, I examine the effect of outsider director equity compensation on director monitoring by investigating firm performance and earnings management.<span style="mso-spacerun: yes;"> </span>My results, although lagged and not noticeable until year three, show that those firms that compensate outside directors with a higher percentage of equity compensation have higher stock performance, but lower accounting performance.<span style="mso-spacerun: yes;"> </span>These same firms also have lower discretionary accruals (i.e., less earnings management).<span style="mso-spacerun: yes;"> </span>These results suggest that outside directors do increase their monitoring by lowering discretionary accruals and thereby, lowering accounting earnings.<span style="mso-spacerun: yes;"> </span>In addition, this increased monitoring has a positive effect on stock performance.<span style="mso-spacerun: yes;"> </span>The results indicate that increased monitoring of accounting earnings results in lower discretionary accruals and thus lower, but more accurate earnings, and stock performance for the same period is not negatively impacted. </span></span></p><span style="font-family: Times New Roman; font-size: small;"> </span>

Point-of-View: Community Based Forest Management in India: Policy Transition and Sustainability Initiatives

Atul Jindall1, K .C .Malhotra2, Dr. Sanjay Verma3 1Project Director (Monitoring and Evaluation), Uttar Pradesh Participatory Forest Management & Poverty Alleviation Project. Lucknow, India, atjindal@yahoo.com 2Formerly Professor, Indian Institute of Statistics. Kolkata, India 3Monitoring and Evaluation Specialist, Project Management Consultants, Uttar Pradesh Participatory Forest Management & Poverty Alleviation Project. Lucknow, India

What I Like About You: A Multilevel Study of Shareholder Discontent with Director Monitoring

Each year shareholders, via exercise of their proxy votes, have the opportunity to voice their support or displeasure with firms and director nominees. Examining over 2,000 Fortune 500 director nominees, we explore those indicators available to shareholders at the time of directors' (re)election to provide insight into shareholder discontent with director monitoring. By studying actual voting behaviors, we provide new perspective to understanding director elections as a governance process. Employing a multilevel approach, we find support for agency-theoretic relationships between several firm and director characteristics and shareholder opposition to directors seeking (re)election to the board. At the firm level, we find that CEO compensation level and board size are positively related to the withholding of shareholder votes in director elections, a behavior indicative of shareholder discontent. Complementing these findings, at the director level, we find that affiliated director status, tenure, and number of outside directorships are positively related, and director block ownership is negatively related to shareholder discontent with director monitoring.

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.

The Effect of Director Monitoring on Bid and Ask Spreads

ABSTRACT: We examine whether the market assesses a lower level of information asymmetry to firms that are perceived to be monitored more intensely by members of the board of directors. We use changes in bid-ask spreads as proxies for changes in information asymmetry between the firm and the market around the time earnings are announced. Our study is innovative in its association of director monitoring with levels of information asymmetry as reflected in quoted spreads.Our sample includes 145 firms included in the Toronto Stock Exchange 300 Index (TSX-300). The TSX’s hybrid market structure provides a unique international setting in which to examine the effects of governance on information asymmetry. Results indicate that the market attributes a lower level of information asymmetry to firms with a larger proportion of outside directors on the board. Contrary to our predictions, we find the larger the proportion of voting rights held by directors, the higher the level of information asymmetry attributed to the firm. We provide some evidence that a separate CEO/Chair leadership structure is associated with reduced information asymmetry. From a practice perspective, we are able to provide some preliminary insight into the potential value attributed by market participants to the imposition of regulation surrounding certain director monitoring activities.

The Myth of the Unbiased Director

In the United States, federal and state laws envision a variety of roles for management and non-management directors on corporate boards. At bottom, the proper and lawful performance of these roles, and the legitimacy of director decision-making and monitoring turns on the extent to which the directors exercise judgment without being unduly swayed by cognitive bias. A recent empirical study conducted by the Cultural Cognition Project at Yale University suggests that cultural-identity-protective cognition - a type of cognitive bias related to one's cultural worldview - influences risk assessment in the general population. This Article proposes that identity-protective cognition may influence systematically director behavior, including recommendations to dismiss shareholder derivative litigation, decisions regarding executive compensation, and director monitoring of conflict-of-interest transactions. Generally, courts and regulators assume that directors' risk assessment may be influenced by financial incentives and familial ties. Courts give greater scrutiny to a board's decision-making process if the process may be tainted by financial incentives and familial ties. Alternatively, courts give more deference to a board's decision-making process if the decision was made by directors who are free of financial and familial ties. However, courts and regulators assume that directors' risk assessment would not be influenced (at least not in any way that needs to be addressed by regulation) by other incentives, such as a need to protect one's cultural identity. While more research is needed to determine the extent of cultural-identity-protective risk assessment on board behavior, and such research should be informed by evidence from directors on their perceptions of their roles and functions, the theory of cultural-identity-protective cognition suggests that changes in corporate governance law and behavior are necessary to promote unbiased decision-making by directors. This Article proposes that such changes should include greater diversity in worldviews on corporate boards. Perhaps this diversity could be accomplished by assuring that directors are educated about different worldviews, and assigning a director (or board committee) the task of chief naysayer - someone whose questions would arise from worldviews not represented in the majority of the board. Also, courts may need to account for directors' identity-protective bias when reviewing directors' decisions.

Corporate boards and regulation: The effect of the Sarbanes–Oxley Act and the exchange listing requirements on firm value

The Sarbanes–Oxley Act of 2002 and recently modified exchange listing requirements impose uniformly high levels of outside director monitoring on all firms. However, recent research in finance suggests that corporate governance structures, including boards of directors, are chosen endogenously by firms in response to their unique operating and contracting environments. Using the relative costs and benefits of outside director monitoring as a benchmark, I find significant cross-sectional variation in the wealth effects around the announcement and passage of these regulations. I find that firms which have high monitoring-costs and fewer benefits from outside monitoring benefited less from the regulations. In particular, I find that the wealth effects around the passage of these new regulations are positively related to firm size and age, and negatively related to growth opportunities and the uncertainty of the firm's operating environment. The results suggest that a blanket “one size fits all” governance regulation maybe detrimental to certain firms, particularly young, small, growth firms operating in uncertain business environments, that are costly for outsiders to monitor.

Corporate Boards and Regulation: The Effect of the Sarbanes-Oxley Act and the Exchange Listing Requirements on Firm Value

The Sarbanes-Oxley Act of 2002 and recently modified exchange listing requirements impose uniformly high levels of outside director monitoring on all firms. However, recent research in finance suggests that corporate governance structures, including boards of directors, are chosen endogenously by firms in response to their unique operating and contracting environments. Using the relative costs and benefits of outside director monitoring as a benchmark, I find significant cross-sectional variation in the wealth effects around the announcement and passage of these regulations. I find that firms which have high monitoring costs and fewer benefits from outside monitoring benefited less from the regulations. In particular, I find that the wealth effects around the passage of these new regulations are positively related to firm size and age, and negatively related to growth opportunities and the uncertainty of the firm's operating environment. The results suggest that a blanket one size fits all governance regulation may be detrimental to certain firms, particularly young, small, growth firms operating in uncertain business environments, that are costly for outsiders to monitor.

Board of Director Monitoring, CEO Tenure, and Board Independence

In response to recent high-profile governance failures, policy makers have proposed and implemented regulations designed to improve governance. Many of these changes target the board of directors their relationships with CEOs. At the same time, researchers have increased their focus on board-of-director effectiveness within an equilibrium framework. A growing body of theoretical and empirical literature suggests that observed governance structures likely evolve over time within a bargaining framework. If so, mandated changes to board structures may not have the desired effect. To shed additional light on these issues, we analyze the relations between proxies for CEO power (CEO tenure) and board-of-director monitoring (the number of board meetings in a given year). Examining 496 firms and 3,420 firm-years from 1995-2002, we find that (i) board monitoring declines with CEO tenure, the percentage of insiders on the board, and board size and (ii) board monitoring increases with the use of equity incentives for directors. The number of board meetings increases after poor performance, but the rate of increase declines for CEOs with more tenure. Operating performance improves following a significant increase in the number of board meetings, but only for those firms with more experienced CEOs. Board composition does not influence operating improvements following high board activity, and we obtain mixed results for board size. These results suggest that the overriding characteristic that determines improvement following an increase in board activity is CEO tenure and not board characteristics. CEOs likely attain long tenures because they possess more talent. Thus, our evidence supports a bargaining equilibrium in which the CEO's power depends on his or her ability and performance.

The Impact of Equity Markets on Business Organization: Some Comparative Observations Regarding Differences in the Evolution of Corporate Structures

After World War II it became obvious that the American way of allowing an open and highly competitive economy was superior to the traditional German system of concentrated groups of companies, cartels, and regular government interference. For the organization of large firms it was the "Berle-Means" corporation1 which presented itself as the model for reforming German corporate law. In fact, the separation of ownership and control offered considerable advantages. Management functions were awarded on the basis of merit, abandoning the feudal rule of inheritance. Investors were able to reduce risk by diversification. The dispersion of ownership allowed managers to escape the control of banks or other financial institutions, enabling the corporation to become an autonomous player in competitive markets. Management had to serve the interests of all - and not only of big shareholders; it was held accountable by the judicial enforcement of fiduciary duties, the monitoring of independent directors and the emerging market for corporate control. Ernst Joachim Mestmacker had been the first German author to point to this model; in his path-breaking analysis he confronted the American public corporation with the corporatist German structures and suggested far-reaching changes, mostly following the American example.

Board of Director Monitoring and Firm Value in REITs

This article examines the influence of board of director composition and characteristics on real estate investment trust (REIT) shareholder wealth as measured by firm market-to-book ratios. Results show that increased outside director representation on the board leads to increased market-to-book ratios up to a point. However, as outside representation becomes too large, the market discounts REIT shares. In addition, a positive relationship is observed between REIT market-to-book ratios and the dollar values of director ownership, providing support for alignment benefits associated with increased director stock ownership.

The moral regulation of markets: Professions, privatization and the english insolvency act 1986

Both economists and sociologists in the last two decades have pointed to the variety of ways that markets require normative foundations and legitimation. In order to understand better how market morality is constructed through law, this paper examines how Mrs Thatcher's Conservative Government used the 1986 Insolvency Act to produce a reconstruction of market behavior. First, it championed privatization in the administration of bankruptcy and in corporate liquidation and reorganization. To do so required a clean-up of the “unacceptable face of capitalism.” It used the insolvency reforms to develop a moral code that distinguished among three types of commercial behavior — mistakes, recklessness, and criminal activity. Second, the Act attempted to “professionalize” some elements of business practice. It did so by developing codes that exposed reckless and criminal company directors to civil actions with strong punitive sanctions, including personal liability and disqualification from management. And third, the legislation created a new occupational monopoly of insolvency practitioners, which was charged with the monitoring of directors' behavior, and reporting recklesssness and the appearance of criminality to government enforcement agencies. The paper concludes that Mrs Thatcher's Government used the ideals and actuality of professionalization as an instrument to define and improve both market morality and efficiency. This linkage between professionalization and market rejuvenation further demonstrates how states may use professions as agents of economic surveillance and enforcers of commercial morality. It raises questions about the conditions under which states will exert their enormous leverage over licensing to compel professions to act as moral agents on the state's behalf.

A note on board directors

Additional evidence on the importance of independent board directors is provided. A positive and statistically significant link between the shareholder wealth effects of acquisition decisions and the percentage of outside board directors is found. This result is controlled for the possible effects of manager-shareholder interest alignment and synergetic gains. Moreover, the positive wealth effect diminishes as the square of the percentage of outside directors increases, suggesting a critical percentage for outside directors. Also there is evidence that the benefits of outside director monitoring is weakened without a certain level of managerial ownership.

Standards of Conduct for Directors of Nonprofit Corporations

This Article analyzes the standards of care and loyalty that should apply to directors of nonprofit corporations. It suggests that the movement toward corporate principles neither reflects the differences in the types of nonprofit corporationsd nor provides a coherent rationale for the conduct regulated. The trust law-corporate law distinction has often centered upon the label to be applied rather than on an analysis of the principles involved. Too often the selection of the label has determined the result. At other times, the label has been used as a convenient rationalization of a socially desirable conclusion. This Article will attempt to develop a framework for applying a particular standard – corporate, trust, or other. The author contends that corporate standards of directors' conduct are too low in certain situations. Instead, he maintains that there should be shifting standards, the application of which depends upon the type of nonprofit corporation and the nature of a director's conduct and interest in a particular transaction. This Article concludes that if high standards of conduct are clearly articulated, they will be adhered to by most directors and thereby lessen the problem of fiduciaries abusing their power or ignoring their responsibilities. High standards widely communicated to the nonprofit sector will provide the. most cost-efficient monitoring of directors' behavior.

Prudent and proactive board succession planning: A case study of selected companies in South Africa

Orientation: The monitoring and advisory roles of directors are highlighted by escalating corporate uncertainty and diminishing confidence in leaders in the latest phase of the industrial revolution. Nomination committees should thus give due consideration to current and required human capital needs of boards when conducting succession planning, as their decisions have substantial implications for stakeholders.Research purpose: To investigate board succession planning practices and policies at selected companies listed on the Johannesburg Stock Exchange.Motivation for the study: There is an evident need for proactive succession planning that accounts for prudent board renewal and director development to ensure business continuity.Research design, approach and method: Given the well-developed corporate governance framework in South Africa, the views of eight selected directors were gauged on succession planning by conducting semi-structured interviews. Thematic analysis was conducted to derive themes from the qualitative data.Main findings: Nomination committees increasingly account for board composition concerns raised by prominent shareholders. The interviewees suggested that board succession planning is often not formalised. They mentioned that succession policies should be flexible to account for rapid change. Furthermore, the board development mechanisms applicable to executive and non-executive directors differ substantially. Proactive development of the talent pipeline is thus essential.Practical/managerial implications: As heterogeneous boards offer several benefits to companies and their stakeholders, nomination committees should account for diversity considerations when conducting succession planning. Policies pertaining to tenure, diversity and independence should be formalised and annually evaluated and reported on.Contribution/value-add: Several recommendations are offered to enhance board succession planning, based on the lived experiences of directors in an emerging market.