Majority Of Independent Directors Research Articles

The effect of board independence on dividend payouts: A quasi-natural experiment

Motivated by agency theory, we investigate the effect of board independence on dividend policy. We exploit as a quasi-natural experiment the passage of the Sarbanes-Oxley Act and the associated exchange listing requirement, mandating firms to have a majority of independent directors. Our difference-in-difference estimates show that firms forced to raise board independence are significantly more likely to pay dividends than firms not required to change board independence. Our results are consistent with the notion that stronger board independence forces managers to disgorge more cash to shareholders, thereby reducing what is left for possible expropriation by opportunistic managers. Based on an exogenous regulatory shock, our results are more likely to show a casual effect, rather than merely an association.

Customer concentration, managerial risk aversion, and independent directors: A quasi-natural experiment

Exploiting a quasi-natural experiment based on an exogenous regulatory shock, we explore the effect of board independence on customer concentration. Our difference-in-difference estimates reveal that stronger board independence raises customer concentration. Specifically, a majority of independent directors on the board raise customer concentration by 12.98%− 32.43%. Motivated by managerial risk aversion, managers are in favor of lower customer concentration, resulting in a sub-optimal level of risk-taking. More effective governance in the form of more independent directors increases customer concentration, bringing it closer to the level consistent with shareholder wealth maximization. Additional analysis including propensity score matching and entropy balancing validates the results. Our study is the first to examine the effect of independent directors on customer concentration.

Turnover threat and CEO risk-taking behavior in the banking industry

Abstract We examine how the threat of turnover affects bank CEOs' risk-taking behavior. Using a sample of 212 U.S. banks from 1995 to 2010, in contrast with prior studies focusing on non-banking firms, we find a non-monotonic relationship between CEO turnover threat and CEO risk-taking behavior in the banking industry. Bank CEOs increase their risk-taking when the perceived turnover threat is moderate but reduce risk-taking when turnover threat is more imminent. This effect tends to concentrate on banks with a majority of independent directors.

Governance Issues in Dual Class Share Firms

In a typical public company, shareholders can elect the board, appoint auditors, and approve fundamental changes. Firms with dual class share (DCS) structures alter this balance by inviting the subordinate shareholders to carry the financial risk of investing in the corporation without providing them with the corresponding power to elect the board or exercise other fundamental voting rights. This article fills a conspicuous gap in the scholarly literature by providing empirical data regarding the governance of DCS firms beyond the presence of sunrise and sunset provisions. The summary data suggest that the governance of DCS firms is variable. A large proportion of DCS firms have no majority of the minority voting provisions and no independent chair. By contrast, almost half of the DCS firms have a sunset clause and a majority of independent directors. Finally, just under one-third of DCS firms have change of control provisions over and above existing law. On the basis of this evidence, this article argues against complete private ordering in favor of limited reforms to protect shareholders in DCS firms including: mandatory sunset provisions, disclosure relating to shareholder votes, and buyout protections that would address weaknesses inherent in DCS firms.

Governance in Dual Class Share Firms

In a typical public company, shareholders can elect the board, appoint the auditors, and approve fundamental changes. Firms with dual class share structures (DCS) alter this balance by inviting the subordinate shareholders to carry the financial risk of investing in the corporation without providing them with the corresponding power to elect the board or exercise other fundamental voting rights. This article fills a conspicuous gap in the scholarly literature by providing empirical data regarding the governance of DCS firms beyond the presence of sunrise and sunset provisions. The summary data suggest that the governance of DCS firms is not uniform and DCS firms tend not to adopt governance measures voluntarily. In particular, a large proportion of DCS firms have no majority of the minority voting provisions and no independent chair. By contrast, almost half of the DCS firms have a sunset clause and a majority of independent directors. Finally, just under one-third of DCS firms have change of control provisions over and above existing law. On the basis of this evidence, the article argues against complete private ordering in favor of modest reforms to protect shareholders in DCS firms including: mandatory sunset provisions followed by a shareholder vote if the DCS is going to continue, disclosure relating to shareholder votes, and buy-out protections that would address governance weaknesses inherent in DCS firms.

Independent Directors: One Head, Two Hats - A Mismatch between Delaware Corporate Law and Federal Securities Law

Although both federal securities law and Delaware corporate law have increasingly relied on independent directors in improving corporate governance, there is a fundamental mismatch between these two regimes. Federal securities law relies on independent directors to monitor the management of the corporation, while Delaware corporate law posits the independent directors as the ultimate decision-makers of the corporation, particularly in transactions in which insiders’ interests or incentives are in question. This mismatch emerged in the 1970s, when proponents of the “monitoring board” successfully campaigned for a board structure consisting of a majority of independent directors, in an attempt to transform corporate boards from ceremonial “advisory boards” to active monitors of management performance. While the SEC followed the monitoring board model, several key decisions of the Delaware courts beginning in the 1980s emphasized the decision-making function of the board, and in particular, the role of independent directors in fundamental transactions. This mismatch became salient after the Enron scandal and the 2008 financial crisis, as the SEC gained the authority to promulgate more stringent rules enhancing the independence of the board under Sarbanes-Oxley and Dodd-Frank. The mismatch may be explained either as a philosophical difference between securities regulators and Delaware judges or as an institutional difference between federal legislative bodies and common law courts. One consequence of the mismatch is that, because of the inherent tension between the monitoring and decision-making functions, independent directors are destined to under-perform both functions. I propose several solutions to reconcile the dueling functions of the board.

Corporate governance and intellectual capital disclosure

This study examines whether facets of corporate governance (board size, proportion of independent directors on the board, board committees, and Big 4 auditor) promote the voluntary disclosure of intellectual capital in annual reports in Australia and New Zealand and whether this is country dependent. Data was collected from OSIRIS and annual reports with disclosure detected through a rigorous electronic word search approach. Statistical testing with OLS regression followed. The presence of nomination committees and a majority of independent directors on the board were found to be significant positive predictors of intellectual capital disclosure in both countries, and larger board sizes in Australian companies enhanced intellectual capital disclosure. These results concur with resource dependency and stakeholder theoretical arguments.

Corporate Board Structure in the United States and India: A Comparative View

This study contributes to the existing body of knowledge concerning corporate governance practices by examining the corporate board and governance structures of American and Indian listed companies in a comparative study. Two hundred companies have been considered out of which 100 companies are listed on NYSE (New York Stock Exchange) and 100 companies are listed on BSE (Bombay Stock Exchange). T-test has been used for comparison between sample means from the two data sets (United States and India). To measure the year-wise variation in the mean values of variables, one-way ANOVA (analysis of variance) has been applied. Results of the study demonstrates that boards of US listed companies are relatively larger with majority of independent directors on board, prominence of combined board leadership structure and relatively more gender diverse as compared to Indian boards. The paper can be quite useful to academics and policy makers in terms of understanding developed and developing country corporate governance structures.

Tradeoffs between Internal and External Governance: Evidence from Exogenous Regulatory Shocks

We use the 2002 NYSE and NASDAQ listing requirements mandating firms have a majority of independent directors on the board as an exogenous shock to examine the interaction between internal and external governance. Relative to compliant firms, noncompliant firms significantly reduced exposure to three external governance mechanisms: the market for corporate control, shareholder activism, and credit markets, by adding antitakeover provisions, adopting officer and director protection provisions, and reducing debt levels, respectively. The results are stronger in firms with greater exposure to the relevant external governance mechanism. The evidence suggests that firms treat internal and external governance as substitutes.

Does increased board independence reduce earnings management? Evidence from recent regulatory reforms

We examine whether recent regulatory reforms requiring majority board independence reduce the extent of earnings management. Firms that did not have a majority of independent directors before the reforms (referred to as noncompliant firms) are required to increase their board independence. We find that, while noncompliant firms on average do not experience a significant decrease in earnings management after the reforms compared to other firms, noncompliant firms with low information acquisition cost experience a significant reduction in earnings management. The results are similar when we examine audit committee independence and when we use alternative proxies for information acquisition cost and earnings management. These findings indicate that independent directors’ monitoring is more effective in a richer information environment.

Corporate Governance Principal-Agent Problem: The Equity Cost of Independent Directors

The classic question in corporate governance is how to manage the conflicts-of-interest that arise from fundamental principal-agent problems. One of the most popular methods of solving the problem is by separating ownership and management. Since 2002, the Sarbanes-Oxley Act has set new standards for board composition by using independent directors, especially for audit committees. This article analyzes the impact of board composition, related to a majority of independent directors, on returns. For this purpose we construct a panel dataset of 2919 stocks over a 10 year period. We find that a majority of independent directors on the board has an overall negative effect on stock returns. We also use our panel data set to show the consequences of the Sarbanes-Oxley Act on the defense or offense mechanisms that companies might pursue over their lifespan.

Tradeoffs between Internal and External Governance: Board Structure and Antitakeover Provisions

We use the 2002 NYSE and NASDAQ listing requirements mandating firms to have a majority of independent directors on the board as an exogenous shock to examine the interaction between internal and external governance. Relative to compliant firms, non-compliant firms significantly reduced exposure to three external governance mechanisms: the market for corporate control, shareholder activism, and credit markets, by adding antitakeover provisions, adopting officer and director protection provisions, and reducing debt levels, respectively. The results are stronger in firms with greater exposure to the relevant external governance mechanism. The evidence suggests that firms treat internal and external governance as substitutes.

Are Independent Directors Effective Corporate Monitors? - An Analysis of the Empirical Evidence in the USA and Canada

This thesis explores whether independent directors in the USA and Canada are effective in holding management accountable by: (1) analyzing how the policy of relying on independent directors developed and operates; (2) introducing the main theoretical critiques of independent directors’ monitoring effect; and (3) examining whether empirical studies in the field of management science and financial economics support the policy in both countries of relying on independent directors as corporate monitors. Empirical evidence shows that boards with a majority of independent directors, in some circumstances, were associated with better firm performance (in the post-SOX period) and fulfilled certain board tasks effectively in the United States. Canadian studies, however, have not shown a positive association with improved firm performance. Audit committees composed entirely of independent directors have been effective in ensuring the quality of financial reporting in the United States, but this effect has not been found in Canada. Compensation committees composed fully of independent directors neither constrained the level of executive compensation nor tied CEO pay to firm performance in either country. US firms with an audit committee member who had accounting expertise, rather than financial analysis or supervisory expertise, were associated with a higher quality of financial reporting, while Canadian firms with an audit committee member who has financial expertise, instead of financial literacy, were associated with a similar effect. Studies also showed that independent directors perform better in certain circumstances. Based on empirical evidence, US regulators should consider: (1) changing the current mandatory requirements for an independent board and a completely independent compensation committee to a comply-or-explain requirement; (2) narrowing the qualification of a financial expert to an individual who has accounting expertise; and (3) recruiting independent directors who have two or fewer outside directorships, hold more of the corporation’s shares, have lower cost of acquiring corporate information, and have no social connections with the CEO. In Canada, weak evidence of the monitoring effectiveness of independent directors supports the existing comply-or-explain approach. Canadian regulators may only need to require or recommend that at least one audit committee member has financial expertise, instead of only financial literacy.

Are Independent Directors Effective Corporate Monitors? An Analysis of the Empirical Evidence in the USA and Canada

This thesis explores whether independent directors in the USA and Canada are effective in holding management accountable by: (1) analyzing how the policy of relying on independent directors developed and operates; (2) introducing the main theoretical critiques of independent directors’ monitoring effect; and (3) examining whether empirical studies in the field of management science and financial economics support the policy in both countries of relying on independent directors as corporate monitors. Empirical evidence shows that boards with a majority of independent directors, in some circumstances, were associated with better firm performance (in the post-SOX period) and fulfilled certain board tasks effectively in the United States. Canadian studies, however, have not shown a positive association with improved firm performance. Audit committees composed entirely of independent directors have been effective in ensuring the quality of financial reporting in the United States, but this effect has not been found in Canada. Compensation committees composed fully of independent directors neither constrained the level of executive compensation nor tied CEO pay to firm performance in either country. US firms with an audit committee member who had accounting expertise, rather than financial analysis or supervisory expertise, were associated with a higher quality of financial reporting, while Canadian firms with an audit committee member who has financial expertise, instead of financial literacy, were associated with a similar effect. Studies also showed that independent directors perform better in certain circumstances. Based on empirical evidence, US regulators should consider: (1) changing the current mandatory requirements for an independent board and a completely independent compensation committee to a comply-or-explain requirement; (2) narrowing the qualification of a financial expert to an individual who has accounting expertise; and (3) recruiting independent directors who have two or fewer outside directorships, hold more of the corporation’s shares, have lower cost of acquiring corporate information, and have no social connections with the CEO. In Canada, weak evidence of the monitoring effectiveness of independent directors supports the existing comply-or-explain approach. Canadian regulators may only need to require or recommend that at least one audit committee member has financial expertise, instead of only financial literacy.

The role of the audit committee and the informativeness of accounting earnings in East Asia

Policy makers around the world have focused on corporate governance reform since the Asian financial crisis and scandals in the United States such as the Enron debacle. In particular, policy makers have focused on the establishment of independent audit committees to improve investor confidence in reported accounting information. In a sample of East Asian companies, we find that the negative relation between concentrated control and earnings informativeness that was documented prior to the Asian financial crisis persists in a more recent period, even though many corporate governance reforms have been adopted since the crisis to improve financial disclosure. We do, however, find that earnings informativeness is strengthened by both fully independent audit committees and audit committees with a majority of independent directors with accounting financial or legal expertise. In addition, the increased reliability that is associated with these audit committee characteristics appears to more than offset the detrimental effect that is associated with concentrated control. The results in this paper suggest that an emphasis on audit committee independence alone may not be enough to enhance earnings informativeness. Instead, focusing on both complete independence and the financial or legal expertise of independent directors who are appointed to the audit committee may be a more fruitful way to increase investor confidence in accounting information, especially when ownership is concentrated.

Improving Performance in New Zealand's Public Corporations: The Effect of Governance Practices

This article examines whether the corporate governance practices recommended by the New Zealand Securities Commission (NZSC) in 2004 have affected the financial performance of public sector corporate entities in New Zealand. The findings indicate that these entities have universally adopted the Securities Commission recommendations by establishing subcommittees for audit and remuneration, and having a majority of independent directors on the boards. The results show that leverage has a statistically significant positive effect on all performance measures. Both the Remuneration Committee and dividend payout have positive effects on performance when measured by sales to total assets. Board size and an Audit Committee have a positive effect on reducing agency cost. Results also show that entity risk and industry type also have a positive effect on performance and agency cost reduction. Entity size has a consistent negative effect across all performance measures.

Lucky CEOs and Lucky Directors

ABSTRACTWe study the relation between opportunistic timing of option grants and corporate governance failures, focusing on “lucky” grants awarded at the lowest price of the grant month. Option grant practices were designed to provide lucky grants not only to executives but also to independent directors. Lucky grants to both CEOs and directors were the product of deliberate choices, not of firms’ routines, and were timed to make them more profitable. Lucky grants are associated with higher CEO compensation from other sources, no majority of independent directors, no outside blockholder on the compensation committee, and a long‐serving CEO.

Governance, board diversity and firm value: The case of the Italian publicly listed firms

This paper investigates the relations firm on board diversity and firm value on a sample of Italian Publicly listed firm. Specifically, we look at the composition of boards (as defined board size, Majority of independent directors, leadership structure) and at his diversity (defined as the percentage of women and directors of other, average age of the board, other board’s member appointment). We provide evidence that board diversity positively affect performance.

Governança corporativa na América Latina: a relevância dos princípios da OCDE na integridade dos conselhos e autonomia dos conselheiros

Os conselhos de administração são caracterizados como um importante elemento da boa governança corporativa. Nesse sentido, este trabalho busca identificar as práticas de governança das empresas latino-americanas aos princípios recomendados pela Organização para Cooperação e Desenvolvimento Econômico, OCDE, para essa região (Brasil, Argentina, México e Chile). Dentre os sete princípios por ela recomendados para a América Latina, este trabalho tem como foco apenas o quinto princípio, que trata das "Responsabilidades do Conselho de Administração", mais especificadamente das recomendações com respeito à "Integridade dos Conselhos e Autonomia dos Conselheiros". O principal objetivo é de verificar o posicionamento das empresas em relação às responsabilidades e a supervisão dos administradores como forma de garantir o controle e os resultados esperados pelos acionistas. Para atingir esse objetivo, formulou-se um questionário que expressa as principais recomendações de governança da OCDE para a América Latina e confrontou-se com as legislações desses quatro países e com as práticas societárias das empresas da amostra, de modo a identificar procedimentos adicionais em relação aos exigidos pela legislação. Os resultados evidenciam que o México é o país com maior índice de atendimento às recomendações da OCDE, seguido do Brasil, Argentina e Chile. Os principais pontos fracos, de modo geral, são a ausência de comitês específicos, compostos, no mínimo, por maioria de conselheiros independentes, e proibições de práticas como reuniões prévias ou instruções de voto dadas por acionistas controladores a conselheiros.

Key Corporate Governance Indicators and their Relation to the Decision to Profit Maximize

The paper identifies a number of key indicators that have been suggested in recent reports to encourage good governance within firms. These variables (the separation of CEO and Chairperson, committee structures and board structures) are used in a binary probit model to test for a link between good governance and a firm aiming for a maximum level of profit. The findings from this study suggest that there is a statistically significant relationship between a firm being classified as a profit maximzer and that firm having a majority of independent directors on the main board.