Number Of Outside Directors Research Articles

Co‐opted Independent Directors and Firms' Environmental Performance

ABSTRACTResearch Question/IssueConsidering escalating environmental concerns and the important role of board members in shaping strategic corporate decisions, we investigate the relationship between co‐opted independent directors and firms' environmental performance.Research Findings/InsightsExamining US firms from 2002 to 2018, we document a significant negative relationship between co‐opted independent directors and firm environmental performance. Our findings show that while institutional ownership and CEO power exacerbate the negative association, strong corporate governance mitigates this negative impact of co‐opted independent directors on environmental performance. The cross‐sectional results show that the relationship is pronounced in firms with young CEOs, male CEOs, and low CEO compensation. Further, the relationship is also prevalent in boards with fewer meetings, high multiple directors, and higher compensation, indicating a monitoring compromise by independent co‐opted directors.Theoretical/Academic ImplicationsReasonable theoretical arguments are drawn from agency theory and the theory of friendly boards, and our statistical analysis supports the academic position of the theory of friendly boards. The negative effect of independent co‐opted directors on firm environmental performance challenges the role of independent directors in addressing agency issues in environmental efforts, hinting at a departure from conventional agency theory expectations.Practitioner/Policy ImplicationsTo improve environmental performance, firms should reconsider their board structures, acknowledging the potential drawbacks of co‐opted independent directors. Our findings challenge the Sarbanes–Oxley Act's (SOX) emphasis on increasing the number of outside directors, which assumes independent board members will rigorously oversee executives. Such legislation is greatly based on the premise that independent board members strictly monitor executives. However, our findings indicate that not all independent directors are strict monitors, as demonstrated by lower environmental performance when there are more co‐opted independent directors.

The Impact of a Short-Selling-Friendly Environment on Board Composition

This study examines how short selling influences board composition following a tradition in the strategy literature emphasizing the role of the external environment on firms’ strategies. We predict that a short-selling-friendly environment has a negative effect on the number of outside directors, which is supported by our firm and year fixed effect difference-in-differences analysis. We find that the negative effect of a short-selling-friendly environment becomes stronger when outside directors have a larger network and are busy. Furthermore, we investigate the moderating effect of chief executive officer (CEO) influence on the board and find that the negative effect is more pronounced when the CEO serves as the board chair and when the nominating committee is more nonindependent. Our research identifies a novel determinant of board composition and addresses the endogeneity issue in board composition literature. Funding: This work was supported by the Sogang University Research Grant of 202210048.01. Supplemental Material: The online appendix is available at https://doi.org/10.1287/orsc.2022.16506 .

A non-parametric synthesis measure for board quality: empirical evidence from Indian banks

PurposeThe paper aims to craft a non-parametric composite value for the board quality of Indian banks where the weights can be assigned endogenously.Design/methodology/approachThe study employed a non-parametric data envelopment analysis (DEA)-based novel extension known as the benefit of doubt approach. To measure the strength of the Indian bank corporate board in terms of board efficiency (BEF), the study used a mixed approach, i.e. first, the study calculates the percentile ranks of the five attributes that the study assumes are the characteristics of the strong board including board size, number of outside directors, frequency of meetings, non-duality leadership and board gender diversity. Thereafter, the study performs the benefit-to-doubt approach to finally measure the efficiency of the board.FindingsThe findings of the study establish that the methodological framework present in the study to measure the strength of the board in terms of BEF has been a much superior method over the other weighted and non-weighted linear average methods.Practical implicationsThis methodology aids the shareholders, investors and regulatory bodies in rating the Indian banks based on their strength in terms of better monitoring boards and ensuring a smooth agent–owner relationship.Originality/valueThe benefit of doubt approach has been a unique and novel methodology to craft the composite value for any multidimensional phenomenon. One of the major benefits of using this approach is that it assigns the weights endogenously to each dimension and thereafter collectively determines the efficiency of such a phenomenon.

Performance and CEO duality in Indian public banks: a moderating role of board independence

PurposeThe study aims to estimate the impact of the vigilant board independence (BIND) dimension that potentially neutralises the unfair influence of chief executive officer duality (CEODU) on Indian public banks' performance.Design/methodology/approachThe study takes into account the fixed-effects model to investigate the potential moderating effect of BIND in the relationship between CEODU and Indian bank performance. The econometric model is also robust against heteroscedasticity, serial correlation and cross-section dependence issues to ensure that the model is free from such biases. The study also addresses the major issue of endogeneity via vector autoregression and performs the analysis by considering one period lag of the explanatory variables.FindingsThe findings demonstrate that CEODU does not always lead to a negative outcome on the performance until or unless the board is monitored by the effective presence of outside directors.Research limitations/implicationsThe regulatory bodies consider the results to strengthen board capital where CEODU can benefit a business entity if vigilance BIND is present at or above a threshold point.Originality/valueThe study evaluated an under-researched role of BIND as a moderator that undermines the negative influence of CEODU on the performance of Indian banks. The study also establishes that the CEO's contribution to performance increases when the number of outside directors is at or above a certain threshold.

Unnatural selection of outside directors: Consequences of Japanese corporate governance reforms

AbstractWe examine how Japanese listed companies increase the number of outside directors to comply with corporate governance reforms. We find that, after the reforms, there has been an increase in the number of cases in which former company auditors (kansayaku) become outside directors in the same company. This trend is more pronounced for hitherto noncompliant firms with insufficient outside directors before the reforms. Moreover, the firms appointing company auditors as outside directors tend to change their corporate structures to maintain existing practices and minimize compliance costs. Our findings imply that Japanese reforms have increased the unnatural selection of outside directors.

Accelerating Innovation Efficiency through Agile Leadership: The CEO Network Effects in China

• Innovation is more efficient when CEO has more outside directorships. • A significant and positive relationship exists between a well-connected CEO and innovation efficiency. • The positive relationship will become non-significant when the number of the CEO's outside directorships is above the yearly median level. • The findings emphasize the contingent value of the CEO's external social capital on agility and digitalization. Digitalization as a business enabler has speeded and scaled innovation in many firms. As the corporate leader, the CEO facilitates strategic agility and enhances network effects to create value. This study uses innovation efficiency as the proxy of digitalization to examine the contribution of the CEO networks to firm-level innovation efficiency in Chinese listed firms. Using 13,516 firm-year observations in Chinese listed high-tech firms between 2007 and 2017, we apply a frontier analysis approach (e.g., DEA and SFA) and measure innovation efficiency based on the scale ratio of innovation output (i.e., patent counts) and input (R&D investment and R&D personnel). First, we find that innovation is more efficient when CEO has more outside directorships. Second, a significant and positive relationship exists between a well-connected CEO and innovation efficiency when the newly appointed CEO has larger networks than the predecessor. Third, the positive relationship between a well-connected CEO and innovation efficiency disappears when the number of outside directorships is above the yearly median level. This empirical study provides evidence for the network effects of a CEO for improving innovation efficiency. The findings emphasize the contingent value of the CEO's external social capital on agility, especially the multiple directorships in a transitional economy.

The Impact of Corporate Governance Mechanisms on the Commitment of Managers in an IPO Setting: Evidence from Korean Small and Venture Firms

Managers’ commitment and dedication crucially affect the sustainable growth of firms. When private companies first offer their shares to the public in an initial public offering (IPO), an IPO lockup is one way of revealing managers’ commitments. IPO lockups are agreements that promise not to sell the shares retained by pre-IPO shareholders for a specified period in the market after the IPO. This paper investigates the impact of corporate governance mechanisms on the length of the lockup period. The paper’s sample consists of IPO firms that have gone public in Korea’s KOSDAQ market, which is a listing venue for small and venture companies. The major findings of this paper are as follows: first, the length of the lockup period increases with the number of outside directors and, second, IPO firms with audit committees have longer lockup periods than those without them. These results indicate that managers of firms with greater board independence choose a longer lockup period when going public. This paper also finds that the lockup period is positively related to the presence of venture capitalists serving as directors of IPO firms, which suggests that venture capital directors may ensure that managers have longer lockups. Overall, these findings suggest that, when small and venture companies go public, managers may use the IPO lockup as a commitment device that complements corporate governance mechanisms in reducing investor concern about the moral hazard problem of managers.

Governance mechanisms and the Takaful insurance performance: the moderating role of the leader’s seniority

Purpose This paper aims to examine the effect of governance mechanisms (board size, board independence, duality, the Sharia board size, Sharia board meetings and ownership concentration) on the performance of insurance providers of distinguishable Muamalah contracts (wakalah and hybrid), moderated by the length of senior leaders’ servicing time. Design/methodology/approach The full sample includes 21 listed Takaful companies divided into two subsamples – 12 insurance wakalah contracts offered in the South East Asian (SEA) countries and 9 insurance hybrid contracts offered in the Gulf Cooperation Council (GCC) countries over the period of 2012–2018. The methodology is informed by Baron and Kenny’s (1986) moderation process approach. Findings The results of this study indicate that the larger the size of directors’ board and the higher the number of outside directors, the greater the SEA wakalah Takaful insurance performance. Nondual functions and a larger size of Sharia board along with a highly-concentrated ownership structure have a positive effect on the Takaful insurance performance in both the SEA and GCC regions. Furthermore, the higher the Sharia board meetings, the higher performance of all types of Takaful insurance providers in the sample. As for the moderating effect of the director’s seniority, it is found to negatively moderate the relationship between the governance mechanisms and the Takaful performance in both regions. Originality/value This paper highlights that the leader’s entrenchment stands as an obstructing factor impeding the governance mechanisms from enhancing Takaful performance. Thus, it serves to contribute to clearly understanding the appropriate governance mechanisms usefully fit for a Takaful insurance effective performance, applying the wakalah and hybrid contract types. Such a contribution should be appreciated by the concerned regulators engaged in setting up limited serving periods for the directors whereby the Takaful insurance practice could be efficiently managed and supervised.

Corporate Governance Reforms under the Abenomics : the Economic Consequences of Two Codes

Corporate governance reform has been one of the central issues in the third arrow of the Abe administration's economic revival program. The Japanese Stewardship Code was introduced in 2014, followed by the Corporate Governance Code in 2015. This study quantifies how the reform changed the corporate governance of Japanese firms. First, we examine the changes in institutional ownership, cross-holdings and board structure following the reforms. Then, we study whether changes in ownership structure and board structure affect firm behavior and performance. We find that the introduction of the Stewardship Code is associated with more institutional ownership especially in mid-sized firms. Firms with few outside directors increased the number of outside directors to follow the Corporate Governance Code. However, the increase in institutional ownership and outside directors did not promote risk taking behavior or improve firm performance.

Effects of outside directors on firms’ investments and performance: Evidence from a quasi-natural experiment in Japan

This study presents evidence on the impact of outside directors on firms’ investment behavior and performance with a focus on the recent quasi-natural experiment that rapidly increased the number of outside directors in listed firms. Using a panel of Japanese firms, we compare listed and unlisted firms and conduct instrumental variable estimations to examine causal relationships. The results indicate that the rapid increase in the number of outside directors among listed firms did not promote active investments or risk-taking behavior. In addition, it had no significant impacts on the profitability and productivity of the firms.

이사회 구성 및 재임기간이 기업 가치에 미치는 영향: 상호작용에 따른 임원 선임의 시사점 (The Effect of Board Constitution and Tenure on firm Value: Implications of Appointing Directors According to Interaction)

Korean Abstract: 본 연구에서는 이사회 구성과 이사회 재임기간이 기업 가치에 미치는 영향을 분석하 였다. 특히 이사회 규모, 사외이사 비율 및 이사회 재임기간의 상호작용이 기업 가치에 미치는 영향을 통해 임원 선임에 대한 시사점을 제공하고자 하였다. 2012년~2017년의 기간 동안 국내 유가증권시장 상장기업을 대상으로 한 실증분석결과 이사회 규모, 사외 이사 비율은 기업 가치와 정(+)의 관계가, 이사회 재임기간은 부(-)의 관계가 존재하였 고, 법적 최소기준을 초과하여 선임한 사외이사의 수는 유의성을 확인하지 못하였다. 따 라서 법적 최소기준 초과여부를 기준으로 집단을 구분한 후 주요 변수 간 상호작용 효 과의 발생여부를 분석한 결과 사외이사를 초과 선임한 집단에서는 사외이사 비율과 이 사회 재임기간의 상호작용이 기업 가치에 유의한 정(+)의 영향을, 그렇지 않은 집단에 서는 이사회 규모와 이사회 재임기간의 상호작용이 유의한 부(-)의 영향을 각각 미치는 것으로 나타났다. 이러한 결과는 이사회 재임기간이 상대적으로 긴 기업 중에서 사외이 사를 초과 선임한 기업이라면 사외이사 비율을 높임으로써, 그렇지 않은 기업이라면 이 사회 규모를 줄임으로써 추가적인 기업 가치 제고효과를 얻을 수 있음을 시사한다. 하지 만 이러한 시사점에도 본 연구는 사외이사의 실질적인 독립성 등 기업 가치에 영향을 미칠 수 있는 다양한 요인들에 대한 추가 검증이 이루어지지 않은 한계점이 있다. English Abstract: This study investigates the effect of board constitution and tenure on the firm value. In particular, this study aims to provide implications for the appointment of directors by analyzing the effects of interactions among key variables on firm value. Empirical results for firms listed in the domestic KOSPI market from 2012 to 2017, board size and the ratio of outside directors have a positive (+) relationship with firm value, and board tenure is negative (-) relationship with firm value. But the excess appointed number of outside directors did not confirm the significant effect on firm value. Therefore, after classifying the group based on whether it exceeded the legal minimum standard, we performed additional analysis the interaction effect between the remaining three key variables. We found evidence that in the Excess appointing group, the interaction between the ratio of outside directors and the board tenure had a significant positive (+) effect on firm value, and in the Non-excess appointing group, the interaction between board size and board tenure had a significant negative (-) effect on firm value. These results suggest the following implications for the board constitution. If a firm has a relatively long tenure in each group, through the decision to increase the ratio of outside directors (in the Excess appointing group), or through the decision to reduce the board size (in the Non-excess appointing group), we believe that additional firm value-enhancing effects can be achieved. However, despite these implications, this study has limitations in that no additional test has been performed on various factors that can affect firm value, such as the actual independence of outside directors.

Why Do Boards Let Their CEOs Take Outside Directorships? Entrenchment and Embeddedness

We study the supply side of the market for CEOs as outside board members in the context of increasing legal and shareholder pressure on CEOs to refrain from accepting outside directorships. Consistent with potential benefits to their employing firms, CEOs have been increasingly more likely to accept directorships at vertically-related firms, especially when information and learning about upstream/downstream industries is expected to be particularly valuable. CEO director- ships at vertically-related firms have a significant positive effect on firm value and performance and help their firms handle industry shocks, especially in innovative industries where anticipating demand and supply conditions is crucially important. Consistent with agency/entrenchment costs, CEO outside directorships at unrelated firms are more likely for sending firms with weaker governance and have a significant negative effect on firm value. Taken together, our results suggest that external pressure has reduced the number of outside directorships that CEOs take and has improved their overall quality, although some evidence of agency problems remains.

Board and corporate social responsibility disclosure of multinational corporations

PurposeThis paper aims to investigate the effects of board model and board independence on corporate social responsibility (CSR) disclosure of multinational corporations (MNCs).Design/methodology/approachThe authors developed an empirical model in which CSR disclosure is the dependent variable and board model (two-tier vs one-tier), board independence (a proportion of independent directors on a board) and the interaction variable of board model and board independence together with several variables conventionally used as control variables are independent variables. The authors collated the panel dataset of 244 Fortune World’s Most Admired (FWMA) corporations from 2005 to 2011 of which 117 MNCs use the one-tier board model, and 127 MNCs use the two-tier board model from 20 countries. They used the random-effect regression method to estimate the empirical models with the data they collated and also ran regressions on the alternative models for robustness check.FindingsThe authors found a significantly positive effect of a board model on CSR disclosure by MNCs. Two-tier MNCs tend to reveal more CSR information than one-tier MNCs. The results also confirm the significant moderating impact of board model on the effect of board independence on CSR disclosure. The effect of board independence on CSR disclosure in the two-tier board MNCs tends to be higher than that in the one-tier board MNCs. The results do not support the effect of board independence on CSR disclosure in general for all types of firms (one-tier and two-tier board). The impact of board independence on CSR disclosure is only significant in two-tier board MNCs and insignificant in one-tier board MNCs.Practical implicationsThe authors advise the MNCs who wish to improve CSR reporting and transparency to consider the usage of two-tier board model and use a higher number of outside directors on board. They note that once a firm uses one-tier model, number of IDs on a board does not matter to the level of CSR disclosure. They advise regulators to enforce an application of two-tier board model to improve CSR reporting and transparency in MNCs. The authors also recommend regulators to continue mandating publicly traded companies to include more external members on their boards, especially for the two-tier board MNCs.Originality/valueThis paper is the first that investigates the role of board model on CSR disclosure of MNCs.

強い監視による看過の増幅 : コミットメント・エスカレーションに役員が与える影響

人間は他者の持つ自身に対するポジティブなイメージを守ろうとするため，監視や評価をされている状況では，撤退を選ばない傾向にあるとエスカレーション研究は指摘してきた．本研究はその知見を応用し，外部から来た取締役が多いほど，評価や監視が厳しいため，経営者は計画通りに進捗していない案件から撤退しなくなる可能性を議論する．その上で，撤退の事例として銀行の不良債権処理を用い，この可能性を定量的に検討する．, This research employs the escalation theory and demonstrates that increasing management accountability and monitoring by outside directors leads to the commitment escalation. Our argument is that the number of outside directors, which we usually assume increase the quality of corporate governance, has negative relationship with investment escalation. We discuss outside directors will increase the complexity inherent in the acknowledgment of fault by management in earlier decisions, or in the explanation as to why management failed to withdraw and cut losses and they will be vulnerable to replacement. Therefore increasing management accountability or monitoring by outside directors are predicted to cause self-justification effect and self-presentation effect to the currently losing projects and to increase the possibility that management is likely to endeavor to preserve a losing proposition because withdrawal implies responsibility for a sequence of losses and previous decisions. Following Staw, Barsade, and Koput (1997) that is one of the pioneering literatures in escalation studies, we use medium-sized Japanese banks as a sample and demonstrate this hypothesis. Our analysis shows that the escalation factors are evident in firms that there are a large number of outside directors, which implies traditional governance prescription to prevent managers’ self-interest behavior rather worsen them.

Effects of Firm Complexity on the Adaption of Board Structure: Evidence from U.S. Electric Utilities Following Deregulation

This paper reexamines the adaptation of board structure in U.S. electric utilities following deregulation. Post-deregulation changes in board size and the number of outside directors are positively and statistically-significantly associated with changes in the complexity of a firm’s operations. Electric utilities that do not become more complex after deregulation reduce their board size significantly, employing fewer outside and inside directors. In contrast, board size is unchanged for firms that become more complex; these utilities employ more outsiders but fewer inside directors after deregulation. We conclude that electric utility boards adapt to deregulation by accommodating for changes in firm complexity in addition to other effects induced by deregulation.

Corporate governance and financial performance of listed banks: evidence form emerging market

One of the important elements in this century's business world that has received attention is corporate governance. The recent economic scandals and financial crisis have made it necessary to investigate the role of corporate governance on firm performance. The survival of firms has thus been associated with the existence and application of good corporate governance practices. This study examines the effect of corporate governance on financial performance of banks listed on the Ghana Stock Exchange. The study employs secondary data collected from 60 firm-year observations, consisting of seven listed banks from 2004 to 2012. The study employs pooled cross-sectional ordinary least squares regression analysis to predict the effect of the corporate governance variables on the financial performance of the listed banks. The findings from the study suggest a negative statistical significant association between board composition and the performance indicators, except for return on equity of the banks. CEO tenure is positively associated with the performance indicators of the banks. It is recommended that the listed banks should implement policies that would define the number of outside directors on their boards to enhance maximum benefits from the practice of good corporate governance.

The impact of board structure on CSR practices on the international scale

This research aims to examine the relationship between several aspects of the board of directors (board size, independence and diversity) and the level of corporate social responsibility (CSR) practices. We used a sample of 1043 international non-financial companies for the period 2003-2009. We find evidence for an inverted U-shaped relation between the board size and CSR practices, specifically in the case of outside directors. A higher number of outside directors is related to more CSR practices; however, when the number of directors is excessively high, CSR practices are reduced. In addition, more diversity on the board is positively associated with economic, social and environmental practices. Theoretically, the study extends the current theory by demonstrating that board diversity has a positive relationship with the strength ratings for CSR. Based on our results, there is a critical number of outside and inside directors that ensures interests beyond those of the shareholders are considered.

The impact of board structure on CSR practices on the international scale

This research aims to examine the relationship between several aspects of the board of directors (board size, independence and diversity) and the level of corporate social responsibility (CSR) practices. We used a sample of 1043 international non-financial companies for the period 2003-2009. We find evidence for an inverted U-shaped relation between the board size and CSR practices, specifically in the case of outside directors. A higher number of outside directors is related to more CSR practices; however, when the number of directors is excessively high, CSR practices are reduced. In addition, more diversity on the board is positively associated with economic, social and environmental practices. Theoretically, the study extends the current theory by demonstrating that board diversity has a positive relationship with the strength ratings for CSR. Based on our results, there is a critical number of outside and inside directors that ensures interests beyond those of the shareholders are considered.

Corporate Governance, Board Composition, Director Expertise, and Value: The Case of Quality Excellence

In this paper, we highlight the strategic role of the board of directors (BOD) in business excellence and its link with firm value. We empirically investigate the relationship between the composition of the BOD and the winning of a Malcolm Baldrige National Quality Award (MBNQA) or a local award explicitly based on the MBNQA criteria, a proxy for business excellence. Using a contingency approach, we examine several characteristics of the BOD, such as the number of inside directors, the number of directors who can be considered industry experts, and the number of directors with management expertise. We show that the likelihood of winning a quality award is positively associated with the number of outside directors with Ph.D. in the main object of business operations, and the number of outside directors with recent industry expertise. Subsequent residual analysis reveals that firm value is positively associated with the degree of the fit between board composition and quality management strategy. Specifically, operating income before depreciation, operating margin, Tobin’s Q, and ten-day raw and market adjusted returns, are positively related to the degree of fit, while cost per dollar of sales, negatively. Thus, we, conclude that an appropriate board structure that fits the QM strategy exists, and this fit is positively associated with firm value.

Multiple directorships, family ownership and the board nomination committee: International evidence from the GCC

In this paper, we investigate the association between outside board directorships and family ownership concentration. Using a sample of 1091 firm-year observations of non-financial publicly listed firms from Gulf Cooperation Countries (GCC) during the 2005 to 2013 period, we find a positive association between family ownership and the number of outside directorships held by board members. This finding is consistent with the notion that family ownership reduces a board's monitoring capabilities. We also test whether the recent corporate governance reforms in GCC, which were designed to protect investors and minority shareholders, affect firms' incentives to establish a board nomination committee (NC). We find the existence of a board NC and the quality and characteristics of NC membership act to suppress the positive association between outside directorships and family ownership. Our results are robust to the use of alternative measures of outside directorships and family ownership and models that test for endogeneity. Overall, our results suggest that the institutional specificities of emerging economies such as those in the GCC can sustain high levels of multiple directorships, which could impair the quality of corporate governance.