Role Of Independent Directors Research Articles

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

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

Do the unusual resignations of independent directors affect auditors' professional judgment?

In Kangmei's first trial judgment, where the independent directors faced significant joint and several liabilities, it triggered a "wave" of resignations among independent directors of listed companies. Auditors auditing financial reports of these companies might consider this a significant signal, raising the question: does this signal influence their professional judgment? The study examines the relationship between the resignation of independent directors and auditors' professional judgment in A-share listed companies, following Kangmei's initial trial. This examination is conducted across three dimensions: audit pricing, audit input, and audit opinion.The findings indicate that the unusual resignations of independent directors prompt uditors to pay increased attention to the risk of material misstatements by clients, primarily reflected in audit pricing. However, these resignations do not significantly impact audit input or the judgment of audit opinions. Furthermore, this research enriches the existing literature on audit pricing and the role of independent directors, while also unveiling the specific pathways through which the departure of independent directors impacts auditors' professional judgment.

Do Independent Directors Affect Real Earnings Management Practices? The Case of Indonesian Two-Tier Board System

The question regarding the role of independent directors in corporate governance in general and in limiting real earnings management practices in particular has long been debated. This study, therefore, attempts to address this question by investigating the influence of independent directors on real earnings management (REM) from the perspective of Indonesian two-tier board system.

Board leadership structure and human capital disclosure: Role of independent directors

This study investigates board characteristics, including board leadership structure, which explain the human capital disclosure (HCD) provided by companies. It uses a self-constructed disclosure index to quantify the level of human capital information using content analysis. Generalized method of moment is employed to estimate a dynamic model of the relationship between HCD and the characteristics of boards of directors. The results show that companies are adapting to the new European Union (EU) Regulation Directive 2014/95/EU by increasing their HCD. There has been a change in the topics disclosed by companies that signal a commitment to social responsibility toward their employees and stakeholders. The level of HCD is significantly associated with board leadership structure, and independent directors play a moderating role when a chief executive officer (CEO) duality exists. Additionally, factors such as gender diversity, board size, board activity, company size and age, and the EU Directive approved in 2014 are all associated with HCD. This study enriches the debate on the role of independent directors in HCD because they can exercise a moderating role when CEO duality is present.

Ensuring independence in the exercise of functions by the board of directors of joint-stock companies

This article is devoted to the problem of ensuring the independence of the board of directors of joint-stock companies. The author points out that there are several approaches to recognizing the status of an independent director for a person. The article discusses the ideal model of relationships within the board of directors, in which the objective decisions in the interests of a legal entity is developed. The author focuses on the role of independent directors in the board of directors, including in terms of control the activities of the executive bodies of a legal entity, resolving conflicts of interest in the decision-making process. The article analyzes the problem of maintaining a balance of interests of various subjects in the decision-making process and the approaches developed in judicial practice that indicate that such a balance is not observed. The author considers issues related to the performance by directors of the duty to make independent judgments, determines the criteria for assessing the independence of judgments.

Gender Equality in the role of Independent Directors. Is it linked to sustainability?

The growing interest in social, environmental, and ethical aspects of business has underscored the need for a change of course from the typically male composition of Boards of Directors (BoD). Too often, in the past, management and board positions were delegated to men, not only based on competence, but also because of cultural biases and “male traditions”. Falling behind on this issue, and particularly with reference to gender equality related to the concepts of sustainability and ethics, would certainly mean missing new opportunities in value creation for companies. In this sometimes precarious, yet steadily increasing scenario, the important figure of the Independent Director (ID) and his gender, is too often overlooked. This figure, in fact, works concretely in the interest of the company and shareholders, overseeing and guiding the company itself in the right direction. Due to his non-executive role in the board, the ID, as opposed to the internal members of the BoD, enjoys an autonomous point of view.
 The purpose of this paper, in a nutshell, is to examine this important profile from a gender perspective in order to observe the statistics with respect to the number, effectiveness, and performance of the female gender in this role. In addition to the phenomenon of detecting the performance of the IDs, the issue has also gained ethical importance, for example, in the same sustainable "good governance" strategies that have arisen in the past fifteen years. For this reason, in our view, the presence or absence of female IDs must necessarily also be read in terms of its impact on sustainability, as its cue for encouragement and outreach. The study concludes with a factual discussion of the empirical analysis conducted on a sample of thirteen banks in the Italian scenario, with reference to the present and the gender of the IDs. Through this statistical study, it was possible to draw a clear picture in support of the literature examined for the relationship between sustainable practices and female IDs, creating also a link between the theory analyzed and the practice identified in this field of research.

CHALLENGES TO EFFICIENT WORKING OF INDEPENDENT DIRECTORS

Independent directors are appointed in a company to supervise the executive board of the company. Institution of independent directors play a crucial role in ensuring the director’s accountability for their actions, independent directors are appointed on the board of the company in the capacity of trustees of shareholders who would protect their interests in the company. However, there are issues persisting with their actual independence in the company. There have been plethora of scams both in India and in other jurisdictions where the role of independent directors could have prevented them from happening had the independent directors been vigilant and performed their functions as per the standards. Hence, it has been argued that there are various issues subsisting within the institution of independent directors, this paper is an attempt to indentify the issues plaguing them and hampering their effective functioning and it also attempts to provide a framework to counter the issues so identified.

The impact of board-level female directors on firm performance: evidence from India

PurposeThis study investigates the impact of female directors on firms' financial performance by scrutinizing the different roles they are empowered to fulfill.Design/methodology/approachThis study examines the impact of the roles performed by female directors on firms' financial performance using a panel dataset of the top 100 listed Indian firms over a period of 5 years. The study uses an appropriate panel data model for empirical analysis. For the robustness evaluation, a two-stage least square (2SLS) with the instrumental variable model were used.FindingsThe findings reveal a significantly positive impact of the total percentage of female directors on firms' financial performance. Further, by disentangling the impact of the total percentage of female directors between independent directors and executive directors, the study shows that independent female directors make a significant positive contribution to their firms' financial performance. By contrast, the performance impact of female executive directors was insignificant. In addition, the findings reveal that firms with a higher proportion of independent female directors outperform firms with a higher percentage of female executive directors.Originality/valueThis study is the first of its kind to unravel the performance impact of female directors and distinguish between the roles of independent directors and executive directors in the context of the emerging market of India, after the imposition of a gender quota for corporate boards.

The role of independent directors in ensuring good corporate governance

The role of independent directors in ensuring good corporate governance

The effect of geographic distance on independent directors’ performance from the perspective of inefficient investment

Geoeconomics has attracted sustained attention in recent years, but the role of independent directors’ geographic distance in investment efficiency remains unexplored. We explore the governance effects of independent directors from a geographic location perspective. Specifically, the Great Circle Distance Formula is employed to calculate the geographic distance between the independent directors and the enterprise. Then, we measure the inefficient investment. Using a detailed sample in the Chinese market from 2009 to 2018, we find that geographic distance is not conducive to the functioning of independent directors and that there is a positive relationship between independent directors’ geographic distance and inefficient investment. The coefficients are robust to multiple robustness checks. In addition, the positive effect of independent directors’ geographic distance on inefficient investment will increase (become more positive) when there is no high-speed rail and the marketisation process is low in the enterprise’s location. Mechanism tests show that geographic distance does affect inefficient investment by inhibiting independent directors’ access to information as well as their reputation. Our results have important implications for investment policy and corporate governance.

Independent directors and firm innovation: the moderating role of gender and nationality diversity

PurposeAlthough the literature on corporate governance and firm innovation finds that board independence is important, this paper proposes that the presence of independent directors alone is not enough to explain their impact on firm innovation. This study analyses if diversity among independent directors may affect the relationship between board independence and firm innovation.Design/methodology/approachA panel data on a sample of 124 Spanish listed companies for the period 2008–2019 used to test the hypotheses.FindingsResults suggest that independent directors have a negative effect on firm innovation, measured as number of patents, but when there are high levels of gender and nationality diversity among such directors, this negative effect may be mitigated.Originality/valueConsidering that firm innovation is a complex process associated with decision-making and that board independence itself may be not enough, this study goes a step further and delves deeper into the characteristics of independent directors. As far as is known, this paper is the first theoretical and empirical study that considers that independent director diversity as a moderating variable between board independence and firm innovation. Besides, this research contributes to the debate on the role of independent directors in firm innovation and the results may also serve as a guideline for policy makers and firms for structuring boards that are pro-innovation.

Board characteristics, audit committee attributes and firm performance: empirical evidence from emerging economy

PurposeThis study is designed and directed to analyze the effect of board characteristics and audit committee attributes on the firm performance of publicly listed commercial banks of Bangladesh.Design/methodology/approachThirty publicly listed commercial banks of Dhaka Stock Exchange (DSE) have been taken as sample for this study. Data have been collected from annual reports between 2011 and 2017 of the assessed banks. Pooled OLS model has been used for running regression model of this study.FindingsBoard independence has a negative and significant relationship with ROA and Tobin's Q. However, Board Independence has a positive and significant relationship with Stock Return. On the other hand, Board Diversity has a negative and significant relationship with ROA and ROE, which implies inefficiency of diversified board members in the context of Bangladesh. Family duality has a positive and significant relationship with ROA and a negative and significant relationship with Stock return. Board Meeting has a positive and significant relationship with ROA. Audit Committee Size has a negative and significant relationship with Tobins' Q. Independence of audit committee chairman has a negative and significant relationship with Tobin's Q and Stock Returns. Presence of non-executive directors and number of audit meetings have no significant relationship with any of the predicted variables.Research limitations/implicationsAmong all variables of the board characteristics, role of independent directors and participation of female directors have conflicting results in this study. This has raised a question about the fair appointment independent directors and their objective view on the board. Female directors' role is not convincing in the context of Bangladesh as most of the commercial banks are family-owned. Policymakers can tighten and supervise the appointment of independent directors to ensure good governance in the banking sector. Moreover, role of audit committee and independence of audit committee chairman have generated conflicting results in terms of market-based performance measure.Originality/valueBanking sector of Bangladesh experiences huge corruption in the form of excessive NPLs and poor management quality which results in low profit for the firm. This study has explored the problems of management quality and flaws of audit committee which is hampering overall growth of banking industry. Improvement of independent directors' appointment and audit committee formation and reporting will certainly help banking industry of Bangladesh to improve overall performance.

Opposite effects of returnee and non-local independent directors on firm’s environmental disclosure and performance

ABSTRACT Government programmes and policies in China have brought energy conservation and emission reduction issues into focus. Given the positive role of independent directors and media in corporate governance, the study explores the impact of independent director’s characteristics and media exposure on firm’s environmental disclosure and performance. We find that independent director’s overseas background is positively associated with environmental behaviour, whereas non-local independent director is negatively related to environmental behaviour. The split-sample analyses further support that media coverage plays a positive role both through itself directly and via its impact on independent directors. In supplementary analyses, media exposure has a more significant effect on state-owned than on non-state-owned enterprises. Additionally, non-independent director’s overseas experience also improves firm’s environmental behaviour. The findings enable us to identify a specific channel to improve environmental disclosure and corporate governance, which is through the impact of media on certain independent directors such as returnee-independent directors in state-owned enterprises.

How independent directors affect firms’ performance and sustainability: An analysis of Italian firms

The role of independent directors has been for years in the spotlight of international studies. This phenomenon, which was initially a prerogative of corporations of English-speaking countries, over the last two decades has rapidly spread across Europe, where several countries have introduced specific regulations, borrowing from international best practices. Board independence is thought to buffer the firms against opportunistic behavior (Masulis & Zhang, 2019). This study aims to analyze how independent directors contribute to the decisional processes within Italian boards of directors and to the development of the firms to which they belong. The research hypotheses were formulated based on bibliometric analysis and then they were validated through both a desk analysis and survey data. Therefore, the hypotheses were first connected to the data included within the Assonime reports on corporate governance in Italy in the last 4 years. Then, a quantitative analysis was conducted through a structured survey, administered to a sample of 65 independent directors of Italian firms and belonging to Nedcommunity, the Italian association of non-executive and independent directors, in order to examine the self-perception of independent directors about their own role and effectiveness. This work, combining the structural and the behavioral views, aims at contributing to the literature concerning the impact and the efficacy of independent directors. The findings confirm that the presence of independent directors has a positive effect on corporate performance, on the protection of shareholders’ interests, and especially on the adoption of CSR policies.

The Proportion of Shares Held by the Largest Shareholder and the Proportion of Independent Directors

In this paper, the relevant data of the proportions of major shareholders and independent directors from 2008 to 2017 are examined. Firstly, the functions of the board of directors and the role of independent directors are introduced. Then, the impact of the institutional changes of the board of directors on the proportion of independent directors is investigated. Next, the determinants of the structure of the board of directors are reviewed. Thus, two hypotheses are proposed. According to the regression results of the model, hypothesis 1B presents positive significance. It can be concluded through the influence of the largest shareholder’s shareholding ratio on the proportion of independent directors in the board of directors that the higher the shareholding ratio of the largest shareholder, the higher the proportion of independent directors. By increasing the proportion of independent directors, the voting space of non-independent directors will be squeezed, so as to increase their control. This study reveals that the ownership structure is an essential factor influencing the structure of the board of directors, constituting a crucial supplement to the literature on the determinants of the structure of the board of directors.

Do Corporate Environmental Sustainability Practices Influence Firm Value? The Role of Independent Directors: Evidence from Saudi Arabia

Environmental sustainability has become a significant approach for firms to enhance their competitive advantage and reputation. This study examines the association between environmental sustainability disclosures and firm value, in addition to the moderating impact of independent board directors on this association. Using data from Saudi listed firms, we find that reporting environmental sustainability practices has a positive and significant impact on firm value, suggesting that enhanced responsibility and transparency in addition to improved stakeholder trust are important in promoting firm value. We also find that the influence of the reported environmental sustainability practices on firm value is strongly and positively moderated by the presence of independent directors on firms’ boards, signifying that stakeholders relate environmental reporting by firms to more independent directors providing better accountability to environmental practices. The implications of this study will be of great importance for policymakers, firm management, academia, and investors in considering the adoption and importance of firms’ environmental practices.

Is Board Independence a Panacea for Improved Corporate Performance? Evidence in a Developing Country Setting

Corporate governance was brought back into the limelight over the last decade, with the large number of dramatic corporate collapses around the world which drove some of the financial giants in the finance industry to bankruptcy. The need to revisit the mechanism for monitoring governance, especially since many of the big scandals emanated from the West, where a culture of good corporate governance was seemingly embedded in the corporates. The board of directors has long been recognized as the primary and dominant internal corporate governance mechanism for aligning the interests of managers and all stakeholders to a firm. Separation of ownership from management raises a key issue of how to effectively monitor managers to ensure that they act in the best interest of the shareholders and other stakeholders as well. The role of independent directors in improving the effectiveness of control has been the subject of debate in academic literature, especially in the context of a developing country where unlike in the developed economies, a culture of poor corporate governance is the norm rather than the exception. The paper explores this issue, paying particular attention on the relationship between corporate board independence and firms’ financial performance in a development country setting. Using data obtained from Colombo Stock Exchange, Sri Lanka for the period 2004 through 2009, a sample consisting of fifty firms were used to assess board independence and their impact on performance. Data was gathered through published reports and a primary survey. Independence of the board was deconstructed to board composition as measured by proportion of independent directors and proportion of non-executive directors. The firm performance was measured using both financial and market performance indicators. After controlling for industry, firm size and CEO duality, the results indicate support for stewardship perspective, with no convincing evidence to indicate that inclusion of independent directors is associated with improved financial performance. The weak governance structure which could be exemplified by ownership entrenchment, cross sitting of board members and lack of cumulative voting may explain the lack of evidence found. However, the results indicate that inclusion of independent directors is valued by investors and reflected in enhanced firm value. Keywords: Board independence, corporate governance, performance DOI: 10.7176/EJBM/12-33-06 Publication date: November 30 th 2020

Demonstrating the interconnection of hierarchical order disturbances in CEO succession with corporate social responsibility and environmental sustainability

AbstractThis study contemplates the negative interconnection between hierarchical order disturbance in chief executive officer succession and corporate social responsibility. The study contributes while formulating corporate social responsibility ratio index, hierarchical order disturbances, and hierarchical order disturbance intensity. Significantly, corporate social responsibility index has been formulated through demonstrating 13 attributes constituting the GRI sustainable and environmental sustainable development reports. We have analyzed the data of 2,644 listed firms for the years 2014–2018. 2SLS instrumental regression and GMM techniques have been executed for confirmation of the authenticity of the results. Empirical results enunciate that incumbent chief executive officers via hierarchical order disturbance having technical education are more orientated toward corporate social responsibility activities. It has been evaluated that medium and high hierarchical order disturbance and intensity in chief executive officers succession influence the corporate social responsibility activity negatively. Specifically, firms having large number of employees prefer to adopt activity. Conclusively, the role of independent directors has been contemplated as moderators while orientating the novel successor toward corporate social responsibility activity.

Drivers and value-relevance of CSR performance in the logistics sector: A cross-country firm-level investigation

The purpose of this study is to explore the drivers and value-relevance of corporate social responsibility performance in the logistics sector by particularly focusing on board characteristics and ownership structure. Corporate social responsibility performance is measured with a composite ESG (environmental, social, and governance) score and with its three sub-dimensions between 2011 and 2018. Fixed Effects regression analysis was run to test the hypotheses, and subsequently, Ordinary Least Squares regression was run to test the robustness of the results. The results suggest that board gender diversity is positively associated with overall corporate social responsibility performance and governance performance. Moreover, the firms which have a sustainability committee are more likely to have greater corporate social responsibility performance (both overall and social) than those do not. Furthermore, firms with diffused ownership structures are more likely to show greater performance in the Social Pillar of corporate social responsibility. Board independence has a weak association with only governance performance. Contrary to expectations, the results regarding the value-relevance of corporate social responsibility performance did not produce significant positive outcomes. These findings confirm that women on boards and corporate social responsibility committees are an essential factor to achieve corporate social responsibility goals. However, the insignificant relationship between board characteristics and the Environmental Pillar of corporate social responsibility performance is quite surprising, and the discovery sparks various queries. Finally, logistics firms need to reconsider the competency or role of independent directors in corporate social responsibility issues as currently they are weakly influential.

Evaluating the moderating impact of family on the relationship between board independence and corporate social responsibility using propensity score matching

Purpose: Owing to the voluntary nature of CSR activities, the decision to participate or not could be affected by the motives of corporate directors. The purpose of this research was to investigate whether family involvement in business moderates the relationship between board independence and sustainability performance of firms. Design/methodology/approach: Firstly, propensity score matching is employed to control for the problem of potential endogeneity in the sample by generating a matched sample. Later, regression analysis is conducted on this matched sample to check for the moderating impact of family-led firms on the relation between board independence and CSR performance (CSRP) of firms. Findings/results: We document about Chinese firms with independent boards exhibiting socially responsible behaviour which shows that they serve in a monitoring capacity over the management on behalf of rest of the stakeholders. Moreover, our results show that the role of independent directors is compromised in establishing effective monitoring in family-led firms. Practical implications: Our results would help regulating agencies in designing regulatory programs by guiding them in developing customized policies for different governance and ownership systems in place. Our findings recommend that in a bid to attain improved sustainability performance, diversified shareholding may be favoured or requisite codes may be framed to enhance the social performance of firms having concentrated ownership. Originality/value: This work essentially clears the varying results in literature with regard to the relationship of board characteristics and firms’ CSRP.