Unitary Boards Research Articles

Corporate governance changes around bankruptcy

PurposePeriods of financial distress represent an episode during the firm’s life that requires an effective governance structure in the interests of shareholders. Changes in corporate governance structure are examined as firms approach and emerge from Chapter 11 bankruptcy. The purpose of this paper is to posit that firms alter their governance toward a more effective framework during restructuring, leading to emergence as a better performing firm.Design/methodology/approachThe data set includes large firms that filed for bankruptcy between 1998 and 2013. Financial and governance characteristics prior to filing are compared to traits following emergence. The likelihood of emerging from bankruptcy is tested based on governance characteristics prior to filing and the change in these characteristics during bankruptcy.FindingsThe results show that firms use the bankruptcy process to significantly change their governance characteristics. These changes include smaller boards, greater board independence, unitary boards, the separation of the CEO and chairman positions, and changes in the ownership structure. Despite these changes, performance following emergence does not improve, and the changes in governance structure do not alter the likelihood that the firm will emerge.Originality/valueThis study, unlike previous studies, takes a broad look at governance characteristics for firms before and after bankruptcy. The findings imply that “better” governance, as defined in the literature, is not necessarily the pathway to better performance as many posit. The factors that influence the likelihood of emerging from bankruptcy and post-emergence performance require further study.

Freedom of choice between unitary and two-tier boards: An empirical analysis

We examine board structure in France, which since 1966 has allowed firms the freedom to choose between unitary and two-tier boards. We analyze how this choice relates to characteristics of the firm and its environment. Firms with severe asymmetric information tend to opt for unitary boards; firms with a potential for private benefits extraction tend to adopt two-tier boards. Chief executive officer turnover is more sensitive to performance at firms with two-tier boards, indicating greater monitoring. Our results are broadly consistent with the Adams and Ferreira (2007) model and suggest that gains result from allowing freedom of contract about board structure.

Reforming Corporate Governance: Evidence from the Choice between Unitary Versus Dual Boards of Directors

Contemporary governance reform proposals focus on strengthening board monitoring but recent theoretical models find that a passive board is often optimal. We examine board structure choice in France where for 45 years firms have been free to choose between a unitary board and a dual board structure. Our evidence indicates that dual boards are more monitoring intensive and that firms with greater asymmetric information adopt unitary boards, while those with a high potential for private benefit extraction adopt dual boards. Our results imply that freedom of contract about board structure is valuable for shareholders, and run counter to the thesis of convergence to the Anglo-American standard of unitary board structure.

Board Task‐related Faultlines and Firm Performance: A Decade of Evidence

ABSTRACTManuscript Type: EmpiricalResearch Question/Issue: To what extent can group faultlines and their potential value‐destroying effects be detected on corporate boards? Task‐related attributes of the type of directorship, education, board tenure, and financial background of board members are considered as directors' characteristics that give rise to the faultline phenomenon. The impact of task‐related faultlines on firm performance as well as the moderating effects of busy boards, Chief Executive Officer (CEO) tenure, executive directors' (EDs) compensation structure, and the average non‐executive directors' (NEDs) involvement in board committees are examined.Research Findings/Insights: Using a panel of FTSE 350 companies from 1999 to 2008, we find a strong negative effect of task‐related faultlines on firm performance. Further exploration of the moderating effects demonstrates that the condition of a busy board and CEO tenure exacerbate the negative effects of faultlines. At the same time, the executive pay contingency is found to have a remedying effect on boardroom cohesiveness, whereas the involvement of NEDs in board committee work is not likely to make the adverse effects of board faultlines less pronounced.Theoretical/Academic Implications: Based on the arguments of social identity theory, this study shows that task‐related faultlines on corporate boards have strong negative value‐creating implications. The positive moderating impact of the executive compensation structure renders support to agency theory predictions about executive incentive alignment. This work also underlines the usefulness of the concept of faultlines in the corporate governance literature, because unitary boards, where NEDs and EDs share board responsibility, exhibit pre‐existing factions, similar to top management teams of family‐controlled firms and teams managing international joint‐ventures.Practitioner/Policy Implications: This research points to the importance of a careful selection process of directors by nomination committees. It also underlines the role for active leadership on boards, who should be aware of available strategies to ameliorate the negative consequences of board schisms, such as accentuating superordinate board identity and/ or informal meetings.

Toward a More Humanistic Governance Model: Network Governance Structures

This conceptual article suggests a reexamination of current governance structures, specifically those of unitary boards after the financial crisis of 2008. We suggest that the existing governance structures are based on an outdated paradigm of business, rooted in economics. We propose an alternative paradigm, a more humanistic paradigm, which allows conceiving alternative, network-oriented governance structures. As hierarchical firms grow larger and more complex, the risk of failure increases from biases, errors, and missing data in communication and control systems. These problems are exacerbated by information overload on senior managers, directors, and their respective regulators. In contrast to traditional corporate governance, network governance introduces a division of power via multiple boards, checks and balances, and active stakeholder engagement. We argue that those features could have prevented the stresses and failures of financial firms in 2008, since they were anticipated by both individuals within firms and external commentators. However, those exposed to risks possessed insufficient influence in either governing and/or regulating firms to take corrective action.

Towards Humanistic Governance? How Network Governance Structures Can Support Better Decision Making and Risk Management

This paper suggests a reexamination of current governance structures, specifically those of unitary boards after the financial crisis of 2008. We suggest that the existing governance structures are based on an outdated paradigm of business, rooted in economics. We propose an alternative paradigm, a humanistic paradigm, which allows conceiving alternative, network oriented governance structures. As hierarchical firms grew larger and more complex, the risk of failure increased from biases, errors, and missing data in communication and control systems. These problems are exacerbated by information overload on senior managers, directors, and their respective regulators. In contrast to traditional corporate governance, network governance introduces a division of power via multiple boards checks and balances, and active stakeholder engagement (a humanistic alternative). We argue that those features could have prevented the stresses and failures of financial firms in 2008, since they were anticipated by both individuals within firms and external commentators. However, those exposed to risks possessed insufficient influence in either governing and/or regulating firms to take corrective action.

The financial crisis, investor activists and corporate strategy: will this mean shareholders in the boardroom?

The concept of stakeholder engagement is gaining increasing attention in the mainstream media and may feature as part of a corporation’s strategy for corporate social responsibility. Not only are boards considering how they might engage with key stakeholders, but stakeholders are also pursuing greater participation in the strategic decisions of companies in which they invest. While this is an emerging concept in companies governed by unitary boards, as in North America, the issue of stakeholder engagement in various forms is also entering debate in other countries around the world. In general, however, the idea of shareholder or stakeholder representation on the boards of most UK and Commonwealth companies is anathema. Forces now influencing the development of strategies for stakeholder engagement and the rise of active investors include changing corporate governance rules which give investors more power in the election of directors, the increasing role of pension plans and hedge fund investment groups which have produced investors who keep a close eye on company performance and value, and a sluggish or turbulent stock market as a result of the financial crisis initiated by the credit crunch in the sub-prime mortgage markets. In this paper the phenomenon of stakeholder representation is examined and results of a recent survey conducted among a large sample of New Zealand directors are presented. The findings suggest that these traditionally oriented boards are increasingly inwardly focused and are without an agenda for building and managing shareholder and stakeholder relations. Accordingly, such boards are unlikely to regard stakeholder engagement as a serious strategic issue and are thus also likely to miss significant opportunities in the changed business environment to benefit from stakeholder support.

Design Concepts for Governance Architects

Research Question/Issue: The objectives of this paper are to: (a) Identify criteria for custom designing the governance architecture of organisations to enhance their operations and sustainability; (b) Encourage practitioners and policy makers to: (i) custom design governance systems; (ii) apply the science of governance to this task, and (iii) utilise the natural self-governing attributes of individuals.Research Findings/Insights: The form of network structures and governance found in biota provide role models for social organisations to achieve sustainable operating advantages. Unitary boards and/or centralised control of organisations in the private, non-profit or public sectors are inconsistent with furthering self-governance at local, national or global levels. The self-governance of network organisations is empowered by, and facilitates the contrary behaviour of humans to be competitive/cooperative, suspicious/trusting and selfish/altruistic. Contrary attributes in individuals and organisations promote the integrity of their self-governance.Theoretical/Academic Implications: The natural science of governance provides design criteria for organisational architects. It identifies the need to decompose decision-making labour to within the data processing capacity of humans. This resulting division of decision-making powers with stakeholder engagement provides a requisite variety of communication and control channels to cross check the integrity of governance data. This highlights the need for scholars to consider organisations governed by a number of boards and to consider other non-market governance mechanisms as provided by communities, associations and networks.Practitioner/Policy Implications: Provide lawmakers, regulators, lawyers, executives, investors and other stakeholders with criteria to improve the operations of organisations while also allowing the size, cost and intrusiveness of government to be reduced.

Staggered Boards, Managerial Entrenchment, and Dividend Policy

Motivated by agency theory, we explore the potential impact of managerial entrenchment through staggered boards on dividend policy. The evidence suggests that firms with staggered boards are more likely to pay dividends and pay them more generously than do those with unitary boards. We also show that the impact of staggered boards on dividend payouts is substantially stronger (as much as two to three times larger) than the effect of all other corporate governance provisions combined. Overall, the evidence is consistent with the notion that dividends help alleviate agency conflicts. Thus, firms more vulnerable to managerial entrenchment, i.e. firms with staggered board, rely more on dividends to mitigate agency costs. Aware of potential endogeneity, we demonstrate that staggered boards likely bring about, and are not merely associated with, larger dividend payouts. Our results are important as they show that certain governance provisions have considerably more influence than others on critical corporate activities such as dividend payout decisions.

Competences of an effective director

PurposeThe purpose of this paper is to share the findings of investigations into the competences that an effective director should have. It draws upon the findings of surveys of director development undertaken by the author and others and the author's experience of advising over 100 boards on director and board development.Design/methodology/approachThe surveys examined have mainly involved UK directors and unitary boards. The situation might be different in other countries. It would be helpful if more studies were undertaken of director and board development in other contexts and involving different board structures, e.g. two tier or management and supervisory boards.FindingsThe findings suggest it is possible to identify, categorize and prioritize the competences that directors require to be more effective in their roles. Trainers and developers interested in addressing directorial competence requirements need to understand the distinction between direction and management, and between deficiencies that require individual and collective action, the boardroom context and concerns directors may themselves have about the assessment of their competences. There are certain questions they need to ask to assess the development requirement.Practical implicationsThe competences of individual directors and those of the board as a whole should be periodically reviewed, particularly as the membership of a board changes and it faces new challenges. Trainers and developers can address this requirement by sensitively handling any concerns directors may have about the process used.Originality/valueThe paper highlights the nature of the competences required by a competent director and the challenge of assessing, categorizing, prioritizing and addressing competence deficiencies. The paper should be of value to those who support directors and boards and have an interest in improving the competence of directors and the effectiveness of boards.

Developing directors, key questions for the training and development community

PurposeThis paper aims to share the findings of investigations into how directors have and should be prepared for their boardroom roles.Design/methodology/approachThe paper draws on the findings of surveys of director development undertaken by the author and others and the author's experience of advising over 100 boards on director and board development.FindingsThe findings suggest many directors and boards do not receive the development they require to be more effective in their roles. Trainers and developers interested in addressing their requirements need to understand the development role of the chairman of the board, the distinct nature of director development, obstacles to development at board level, the learning preferences of directors and formal and informal learning options that are available and ask key questions to assess the development context.Practical implicationsThe surveys examined have mainly involved UK directors and unitary boards. The situation might be different in other countries. It would be helpful if more studies were undertaken of director and board development in other contexts and involving different board structures, e.g. two‐tier or management and supervisory boards. Directors need a proper induction and must remain current throughout their directorial career. Trainers and developers can address this requirement by a combination of formal and informal means.Originality/valueThe paper highlights the nature of the director development challenge, and that the boardroom represents a key learning environment. The paper should be of value to those who support directors and boards and have an interest in improving the competence of directors and the effectiveness of boards.

UNITARY BOARDS AND MUTUAL FUND GOVERNANCE

AbstractA unique governance structure for mutual funds is unitary board—one board overseeing all funds in the entire family. We find strong evidence for unitary board as an effective governance mechanism. Funds with unitary boards are associated with lower fees, are more likely to pass the economies of scale benefits to investors, are less likely to be involved in trading scandals, and rank higher on stewardship. In contrast, funds with larger or more independent boards charge higher fees and rank lower on stewardship. Our findings indicate that unitary boards of small size, rather than independent boards, may be more beneficial to fund shareholders.

Capital Structure, Staggered Boards, and Firm Value

Grounded in agency theory, this study investigates whether staggered boards (in which only a portion of directors are elected at one time) influence capital structure choices. Leverage has been argued and shown to alleviate agency costs. Because staggered boards can entrench inefficient managers, they may motivate managers to adopt a lower level of debt, thereby avoiding the disciplinary mechanisms associated with leverage. The empirical evidence supports this hypothesis, showing that firms with a staggered board are significantly less leveraged than those with unitary boards (in which all board members are elected at one time). The impact of staggered boards on capital structure choices exists both in industrial and regulated firms although it seems to vanish after enactment of the Sarbanes–Oxley Act of 2002. The results show that staggered boards are likely to bring about, and do not merely reflect, lower leverage. Finally, the results demonstrate no significant adverse impact on firm value as a result of excess leverage.

Mutual Fund Governance: What Works and What Doesn't?

We evaluate three potentially effective mechanisms for strengthening mutual fund governance: board independence, unitary boards, and directors ownership. We find that more independent boards do not lower fees. Nevertheless, we find weaker evidence that more independent boards negotiate more aggressively on management fees. Funds with more independent boards are less efficient in terms of performance-expense tradeoff. We find some evidence that higher independent director incentive helps lower 12b-1 fees and fund loads. The most robust and consistent results come from unitary boards. Funds with unitary boards charge lower fees and are less likely to be indicted in fund scandals. We demonstrate that better governed funds exhibit less tournament effects. We circumvent the endogeneity problem by examining director actions and investors' preference. We find that directors from unitary boards are more active and vigilant guarding fund shareholders' interests. The reverse is true for directors from more independent boards. Investors prefer funds with unitary boards and less independent boards. Also, investors are able to integrate internal governance with external governance: performance chasing is stronger for funds with unitary boards. Our findings provide robust evidence that unitary board causes lower fees. Fund families should adopt unitary boards.

Why Regulation of Financial Institutions Cannot be Assured with a Unitary Board

This paper indicates why the integrity of financial institutions cannot be assured with a unitary board with its manifold conflicts of self-interest that can jeopardise the financial integrity of the institution. While block holders can mediate conflicts of director self interest they may introduce their own from related party dealings. Unitary boards exacerbate information overload and bounded rationality while paradoxically not providing sufficient information, independent of management, to monitor and control management. Examples of watchdog boards mandated in Europe are presented. The laws of information and control science are introduced to indicate the impossibility of regulation being assured without supplementary boards representing the interest of shareholders, creditors and other stakeholders. Conditions for self-regulation are identified and recommendations made that the licence condition for the operation of financial institutions require the introduction of governance and operating watchdog boards to supplement the role of regulators and provide competitive advantages to the institution.

The Competitive Advantages of Compound Boards

The paper identifies the manifold conflicts of interest inherent in firms governed by a single board and how a unitary board exacerbates information overload and bounded rationality while paradoxically not providing sufficient information, independent of management, to direct, monitor, control, and change management. Firms governed by a multiple boards, described as a compound board, introduce a division of power to mediate conflicts, allow access to superior feedback information from stakeholders, and enhance the cybernetic integrity of how a firm is governed. Compound boards are identified as a necessary condition for reducing the cost of finance and developing (i) self-regulation and self-governance, (ii) sustainable employee and/or other stakeholder participation in governance, and (iii) superior performance. This makes unitary boards inconsistent with knowledge intensive or network firms seeking to bond human capital through employee ownership or for firms with a large degree of employee ownership. Performance, Self-governance, Self-regulation, Social tensegrity, Unitary boards

Why Unitary Boards Are Not Best Practice: A Case for Compound Boards

The paper identifies the manifold conflicts of interest inherent in firms governed by a unitary board and how they exacerbate information overload and bounded rationality while paradoxically not providing sufficient information, independent of management, to direct, monitor, control, and change management. Compound boards introduce a division of power to mediate conflicts, allow access to superior feedback information from stakeholders, and enhance the cybernetic integrity of how a firm is governed. Transaction byte analysis is used to explain bounded rationality and identify how compound boards decompose decision making labour. Compound boards are identified as a necessary condition for reducing the cost of finance and developing (i) holonic architecture, (ii) social tensegrity, (iii) self-regulation and self-governance, (v) sustainable employee and/or other stakeholder participation in governance, and (vi) superior performance. This makes unitary boards inconsistent with convergence and knowledge intensive or network firms seeking to bond human capital with employee ownership.

Flaws and Remedies in Corporatisation and Privatisation1

This paper analyses the inherent operational defects of centrally controlled hierarchies which are common to both the public and private sectors in Anglo-Saxon corporate architecture and suggests how these defects may be ameliorated. The defects arise from the use of unitary boards which introduce conflicts of interest for directors and reduces both their ability and incentive to improve operational performance. The use of supervisory boards and stakeholder councils to decentralise control, provides a basis for improving the operational performance of directors and their organisation. Also, stakeholder participation provides a way to convert ‘open’ hierarchies into several decentralised ‘closed loop’ information and control systems to improve operating performance. Practical examples are found in Japanese keiretsu firms, the employee/consumer co-operatives found around the town of Mondragón in Spain and in the governance of the Australian Aboriginal and Torres Strait Islander Commission. This paper considers the opportunities for public and private sector organisations using Anglo-Saxon corporate architecture to improve their performance, social accountability and competitiveness by introducing stakeholder governance.

Cumulative Voting: The Value of Minority Shareholder Voting Rights

W HEN investors purchase shares of common stock, they typically acquire the right to vote in the election of the firm's board of directors and on other major issues facing the corporation. In most corporations board members are elected through "straight voting." In straight voting each shareholder is entitled to cast votes equal to the number of shares held for each director position. If a group controls 51 percent of the vote, it can elect the entire board of directors by casting all of its votes for the candidate that it favors for each position. Some firms do not use straight voting but elect their board members through "cumulative voting" instead. In cumulative voting each share entitles the shareholder to as many votes as there are directors to be elected. A shareholder may cast all votes for a single candidate or distribute them among more than one nominee. With cumulative voting it may be possible for minority shareholders to elect some board members even if the majority of shareholders oppose their election. To elect these directors, the minority shareholders would cumu-