Improve Board Effectiveness Research Articles

CEO-director ties and board gender diversity: US evidence

The gender legislation enacted around the world has put enormous pressure on companies to increase the number of women on their boards. Employing US firm-specific data, we document a significant negative relationship between CEO-director ties and female representation on the board, suggesting that socially connected directors are detrimental to gender parity in senior management. We find that the situation improves in firms with female directors with valuable attributes while being moderated by CEO characteristics. Cross-sectional analyses reveal that the association is more pronounced during the low board gender diversity periods and for firms that are led by male CEOs or have weak monitoring mechanism. We rule out endogeneity concerns by performing a battery of analyses. The findings remain robust in a range of sensitivity tests. Our study offers practical implications for regulators and top management teams to improve board effectiveness, thus engendering lasting transformational change in the boardroom.

Board Attributes and Bank Performance in Light of Saudi Corporate Governance Regulations

This study investigates the relationship between various attributes of boards of directors on bank performance in light of Saudi corporate governance regulations. The data set of this study is extracted from the annual reports of all 12 banks listed on the Saudi Stock Exchange (Tadawul) over a period of 10 years from 2009 to 2018. To test the study hypotheses, check the robustness of the results, and address potential endogeneity issues, this study applies different statistical methods, including FGLS, OLS, RE, PLCSE, and 2SLS, using STATA version 17. The results of multivariate analysis show that board size has a significant positive influence only on operational bank performance (ROA). For board composition, the results show that while board independence has a significant negative impact on accounting-based performance (ROA and ROE), it affects positively and significantly the market-based performance (Tobin’s Q). Regarding board education, the results indicate that board members with at least a Bachelor’s degree have a significant negative impact on ROA and ROE. In contrast, PhD holders on the board have a significant positive impact on ROA and ROE, while Master’s holders affect positively and significantly all measures of bank performance. With respect to board diversity, only the CEO nationality has a significant positive effect on ROA and ROE. Board IT experience is found to be significantly and positively associated with ROA and ROE, while board meeting attendance has a significant positive influence only on ROE. These findings have important implications, especially for Saudi regulatory authorities to assess the current practice and compliance with the Saudi corporate governance regulations (SCGRs) and the principles of corporate governance for banks operating in Saudi Arabia (PCGB) regarding board characteristics and provide insights to improve board effectiveness and corporate governance practice in general.

Does gender diversity on boards reduce the likelihood of financial distress? Evidence from Malaysia

PurposeThe purpose of this paper is to examine the impact of board gender diversity on firm financial distress for a sample of 367 non-financial firms listed on Bursa Malaysia over the period from 2011 to 2019.Design/methodology/approachThe study employs both panel logistic regression and dynamic generalized method of moments estimator to determine the impact of board gender diversity on the likelihood of financial distress. Altman Z-score model is used as a proxy for financial distress indicator. The bigger the Z-score, the smaller the risk of financial distress.FindingsThe results show that board gender diversity could help to improve board effectiveness by preventing corporations from being too exposed to financial distress and bankruptcy. In particular, whether they are independent or inside members, women directors are likely to reduce the likelihood of financial distress. The results also show that the effect of female directors on the likelihood of financial distress is strengthened through more board independence. The results are consistent with those in prior research that documents the benefits of board gender diversity.Practical implicationsThis paper provides insights for corporate decision makers in emerging economies, helping them to determine the board's design in terms of roles and composition that promote governance practices and prevent financial troubles. Furthermore, the findings of this study may be useful regulators as they shed light on the importance to undertake measures and reforms to promote board effectiveness by the introduction of gender diversity. Finally, this study also offers implications for society in general, considering that the practice of enhancing board gender diversity can significantly safeguard the interest of a wide range of stakeholders by reducing the chances of corporate bankruptcy.Originality/valueWhile prior research has examined the effect of board gender diversity on firm performance, this study is the first to investigate the effect of board gender diversity on the likelihood of financial distress in Malaysia.

Long‐tenured independent directors and firm performance

AbstractResearch SummaryAgency perspectives suggest long‐tenured independent directors (LTIDs) may be cronies of the CEO, making their boards less effective, but we theorize that LTIDs may have particular expertise and motivation to improve board effectiveness and ultimately firm performance. We find strong support for this prediction using 15 years of data on the S&P 1,500 firms and an instrument based on director age at time of hire. We also find that an LTID adds more value to firms that are complex or mature, had more CEOs during the LTID's tenure, and have less entrenched management. Post hoc analyses of director deaths and shareholder class action lawsuits and activist motions provide additional evidence that LTIDs add value to the firms on whose boards they serve.Managerial SummaryWe study whether having a long‐tenured independent director (LTID) on the board has implications for firm performance. In general, we find that firms with an LTID perform better than firms without one. The performance benefits accrue primarily to firms that have complex operations, are in the mature stage of their lifecycle, and had more CEOs during the LTID's tenure. That said, firms with entrenched management do not benefit from having an LTID. We also find that firms with an LTID experience fewer class action lawsuits and shareholder activist motions and that the stock market reacts adversely to the death of an LTID. Overall, the evidence is that LTIDs offer valuable experience and stability to the firms on whose boards they serve.

Effect of corporate governance practices on bank performance: The perspective of board members

The lingering poor financial performance by banks and bank failure in the past three decades, despite various regulatory actions, has led to a debate on the efficacy of the various regulatory actions and the effectiveness of the practices of corporate governance in Nigerian banks (CBN, 2014; Berger, Imbierowicz, & Rauch, 2016). The study seeks to understand how corporate governance practices influence banks’ performance. The qualitative approach purposively selected three banks and three board interview respondents. Using thematic analysis, the results show that, large board size is not sufficient to improve performance but the broader expertise and other resources the directors bring are the critical elements. The study finds consensus that, outsider directors were desirable, as they provide additional expertise, and assist in making strategic input to improve management decisions. Enhanced monitoring and oversight responsibilities and access to information of board committees improve board effectiveness with favourable effects on bank performance. While the moderating effect of female representation with other governance characteristics on bank performance is subject to the female complementary expertise and their proportion of the board, that of foreign directors appear to be negligible. Bank boards are recommended to be of the right caliber and quantity with adequate resources to offer enhanced monitoring and oversight responsibilities

A Survey of Recent Evidence on Boards of Directors and CEO Incentives

AbstractThis article surveys the recent literature on boards of directors and the interplay between director incentives and CEO incentives. The primary focus is on how the incentives and other characteristics of directors, boards, and CEOs interact to affect firm performance. The article reviews the recent evidence documenting a causal relationship between board independence and measures of firm performance. It also discusses the major limitations of the current measure of director independence. Finally, the article highlights how board independence provides strong incentives for CEOs to create firm value and examines the recent evidence on what other director characteristics improve board effectiveness.

A Survey of Recent Evidence on Boards of Directors and CEO Incentives

This article surveys the recent literature on boards of directors and the interplay between director incentives and CEO incentives. The primary focus is on how the incentives and other characteristics of directors, boards and CEOs interact to affect firm performance. The article reviews the recent evidence documenting a causal relationship between board independence and measures of firm performance. It also discusses the major limitations of the current measure of director independence. Finally, the article highlights how board independence provides strong incentives for CEOs to create firm value and examines the recent evidence on what other director characteristics improve board effectiveness.

Does Independent Industry Expertise Improve Board Effectiveness? Evidence From Bank CEO Turnovers

AbstractThis study explores the impact of independent bank directors’ financial industry expertise on board effectiveness by investigating bank CEO turnovers and post‐turnover bank performance. Empirical results find such expertise increases the probability of forced CEO turnover and the probability of outsider succession. It improves bank performance and reduces bank risk‐taking following a forced CEO turnover. This is likely because industry‐specific expertise enhances boards’ ability to locate a superior successor CEO and to monitor and advise the new management. Market reaction to bank CEO turnover announcements tends to agree with this view.

Board independence, gender diversity and CEO compensation

PurposeThis paper aims to investigate the joint effect of board independence and gender diversity on the effectiveness of boards in monitoring CEO compensation in a continental European context, i.e. France.Design/methodology/approachFixed-effect regressions are used to study the impact of board independence, gender diversity and their interaction, i.e. the proportion of female independent directors on the different components of CEO compensation (total, fixed and variable).FindingsThe authors observe that both the proportions of independent directors and women sitting on the boards positively influence the various components of CEO compensation. However, the interaction of these factors, i.e. the proportion of female independent directors, is negatively associated with CEO compensation. These results suggest that independent women directors improve board effectiveness in monitoring CEO compensation, especially its fixed component.Originality/valueThe results of this research help to elucidate the importance of women being appointed to boards as independent directors to properly monitor managerial pay. These results provide support to the approach of the French Cope-Zimmerman law of January 2011, which promotes female representation on boards as independent directors to enhance board decision-making. Thus, evidence presented and discussed in this paper should provide useful insights for academics, corporate managers and regulators.

"Retired Independent Directors:Implications for Resource Provisioning, Monitoring, & Firm Performance"

As public policy and governance research have advocated for greater independence of directors to improve board effectiveness, firms have increasingly resorted to recruiting retired directors (i.e.,...

Board independence and firm performance in India

Corporate governance guidelines all over the globe are focusing on adding independent directors to the board to improve board effectiveness. Does the addition of more number of independent directors improve firm performance? The extant literature does not give a unanimous answer. In the given background, the present work explores the impact of board independence on firm performance for the emerging Indian market. The study examines Nifty firms over a period of six years from 2005-2010 using panel regression. The results show board independence to have positive impact on Tobin's Q, the proxy for firm value. The study found no direct impact of board independence on operating performance.

Gender Diversity in the Boardroom and Risk Management: A Case of R&D Investment

Increasing gender diversity in the boardroom has been promoted as a way to enhance corporate governance and risk management. This study empirically examines whether boards with more female directors play a role in reducing R&D risk. We first show that female directors help to reduce the positive relationship between R&D investment and future performance volatility. We then report that firms with more gender-diverse boards exhibit a lower adverse effect of R&D on the cost of debt. These results are robust to endogeneity analysis, alternative measures of gender diversity and risky investment, and other sensitivity tests. Overall, our results suggest that female directors improve board effectiveness in risk management with respect to R&D investment.

The effect of institutional investor type on the relationship between CEO duality and financial performance

Corporate governance literature presents inconclusive evidence regarding the relationship between board characteristics and financial performance. Remembering that certain types of, but not all, institutional investors exert influence on monitoring and influencing management, this study goes beyond the traditional analyses of institutional investors and focuses on the effect of two different types of institutional investors, namely, pressure-sensitive and pressure-resistant, on the relationship between board leadership structure and financial performance. While pressure-sensitive type includes those institutions that are less likely to challenge management, pressure-resistant type incorporates those institutions that have no business relationships with the firms in which they hold stocks, and therefore are better suited to impose controls on management decisions and behaviour. The findings strongly suggest that institutional ownership moderates the relationship between CEO duality and financial performance, with the relationship being positive (negative) in presence of pressure-resistant (pressure-sensitive) institutional ownership. These findings support prior studies that argue that corporate governance mechanisms, and hence board leadership structure, should be neither modelled nor isolated from other organisational variables. The results of this study can be of interest to researchers in corporate governance, policy makers and managers who aim to maximise the value of their firms and improve board effectiveness.

Effectiveness of Independent Directors on the Boards of Indian Listed Companies Are the Recent Regulatory Changes Enough?

Worldwide, the presence of independent directors on the board of listed companies is seen as an integral element of a company’s corporate governance process and has become a pre requisite for good governance. Consequently, in the recent years, governance reforms in India have increasingly pinned hope, as well as responsibility, on independent directors to achieve higher standards of governance in organizations.Unlike the Anglo Saxon world, where the key corporate governance challenge is disciplining the management and making it accountable to the distributed shareholders, the central challenge in corporate governance in India is that of disciplining the dominant shareholder(s) and protecting the interest of the minority shareholders. Therefore independent directors, in Indian business organizations, can become effective only when their appointment process is outside the influence of the dominant shareholders.This paper examines the current state of corporate boards among the S&P CNX 500 companies in India and reviews the impact of the changes that have been introduced in the recently amended Companies Act, 2013 and the suggestions in the consultative paper issued by SEBI on revisions to clause 49 of the Listing agreement dealing with corporate governance. While, with the recent changes, significant steps have been taken to strengthen the role of independent directors on the board of listed companies, the process for the appointment of independent directors needs to be further strengthened so as to improve board effectiveness in listed companies.

Does Board Independence Influence the Top Management Team? Evidence from Strategic Decisions toward Internationalization

Manuscript Type: Empirical Research Question/Issue: Using insights from the upper echelon perspective and agency theory, this paper examines the effects of TMT characteristics on internationalization and the moderating effect of independent directors on the TMT characteristics – internationalization relationship. Research Findings/Insights: Based on a panel of listed firms in Taiwan, this study finds positive associations of TMT tenure and international experience and a negative association of TMT age with internationalization, supporting the upper echelon perspective. There is also some support for agency theory. The findings suggest that the positive relationships of TMT tenure and international experience with internationalization are stronger as more independent directors are included on the board, supporting the view that independent directors as monitors and resource providers may offer better advice and counsel to executives and enhance their strategic action capabilities in moving toward internationalization. However, the support for agency theory is limited, as this study finds no evidence of a moderating effect of independent directors on the relationship between TMT age and internationalization. Theoretical/Academic Implications: This study contributes to corporate governance knowledge by bridging the gap in the relationship between TMT characteristics and internationalization via an empirical inquiry into the influence of independent directors on the TMT. Specifically, it reinforces the important role of the TMT in the strategic decision to internationalize and highlights the significant influence of independent directors on the TMT characteristics – internationalization relationship, expanding our understanding of the important strategic role of boards involved in TMTs' strategic action in a contextually appropriate manner. Practitioner/Policy Implications: This study suggests that the board of a firm realizing that internationalization is a necessary strategy may consider choosing executives who are younger and have a longer tenure and more international experience in order to develop and execute international operations effectively. To improve board effectiveness and the quality of corporate governance, this study also demonstrates that a firm should include more independent directors on the board.

Enhancing Board Effectiveness: What About Induction and Training Programs for Directors?

The paper discusses the idea that an institutionalized and effective board induction and training process could maximize the director’s contribution and thus improve board effectiveness in banks, especially if training and induction are done in a board that respects good practices with regards to board independence, board diversity, presence of board committees, degree of directors’ turnover, recommended by regulators and institutions. In the wake of the recent financial crisis, in fact, a growing “professionalisation” of directors may be considered as a tool to improve the board effectiveness in banks. Contrary to the relevance of the topic, the available literature is very poor. Using the qualitative research methods, the paper shows, first of all, the state of the art on board induction and training programs for directors in the 25 largest European banks and, then, the results of a survey about the opinions of an Italian panel on the topic. Findings confirm that induction and training programs for directors are a fundamental tool to improve the effectiveness of corporate governance. However there is a substantially limited dissemination of these practices in banks and, in those cases where these practices are used more extensively, it is possible to spot some areas of improvement compared to best practices. Overall, the most disappointing results, in terms of the dissemination of induction and training programs for directors, emerge from the interviews carried out on the Italian panel. Based on the results, some motivation and managerial implications are proposed.

The complex relation between director independence and board effectiveness

PurposeThroughout the world, reform initiatives have been set up to fix perceived and actual corporate governance shortcomings. One of the proposed remedies has been to improve the independence of the board of directors. The main purpose of this paper is to examine the issue of independence as one element to improve board effectiveness. In doing this, the focus is mainly on the monitoring role, and to a lesser extent on the strategic role of the board of directors.Design/methodology/approachA comparison of the definitions of independence provided by the corporate governance codes and recommendations reveals that they approach the concept of independence mainly from a formal point of view, where independence equals being in a position free of any possible conflicts of interest. It is stated that this approach does not capture all the aspects of independence and that independence cannot be an end in itself. Instead of emphasising independence, the paper hypothesises that, to ensure board effectiveness, a board of directors is needed which, among other things, vigilantly monitors the company and pursues an objective decision‐making process.FindingsWithout neglecting the importance of other elements in achieving this two‐fold goal, the paper highlights the need for directors to have the “right attitude”. To achieve this, three conditions have to be jointly fulfilled: each director should have the ability as well as the willingness to be a critical thinker, with an independent mind, however, the environment should also be such as to facilitate directors to display this attitude.Originality/valueThese three factors – ability, willingness and environment – are discussed in depth and integrated into a tentative framework for evaluating the chance that a given director will display this attitude. As such, this paper is of value both for practitioners as academics and will mostly affect their understanding of the concept of independence.

Improve Board Effectiveness: the Need for Incentives

Roberts, McNulty and Stiles (2005) focus on the attitudes and behaviours of non‐executive directors in their recommendations for improving board effectiveness. This paper addresses the importance of providing incentives for non‐executives in order to improve board effectiveness. It first points out that the current norms and practices in corporate governance suggest that, without strong incentives, non‐executive directors are unlikely to become engaged in corporate governance, to challenge executive decision, and to remain independent of executive influences. It then proposes that, for non‐executive directors to develop the attitudes and behaviors recommended by Roberts, McNulty and Stiles, it is important to require them own a significant amount of company stocks over a long period of time. It also addresses some concerns regarding the use of stock ownership to improve the effectiveness of non‐executive directors in corporate governance.

Board Leadership 2000– Critical Roles for the New Century

SUMMARY In the turbulent and ever-changing human services arena, the meaningful involvement of an active, diverse and committed board of directors may be the key to survival for many nonprofit organizations. This article explores the changing role of a nonprofit agency's board of directors in areas of leadership, planning, strategic affiliations, community development and advocacy. Specific tools and strategies to improve board effectiveness and development to meet the increased demands of a competitive marketplace are recommended.

Politics in the Schools: A Case for Partisan Board Elections

In this article the author contends that the selection of school board members through partisan elections can improve board effectiveness. Prior to developing his position through five propositions, he reviews the causes and effects of the traditional separation of politics and education in America and identifies a recent trend toward greater political awareness in the schools.