Table Of ContentThe Board of Directors
Corporate Governance
and the Effect on
Firm Value
Ettore Croci
The Board of Directors
Ettore Croci
The Board
of Directors
Corporate Governance and the Effect on Firm Value
EttoreCroci
UniversitàCattolicadelSacroCuore
Milano,Italy
ISBN978-3-319-96615-1 ISBN978-3-319-96616-8 (eBook)
https://doi.org/10.1007/978-3-319-96616-8
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PREFACE
Thousands of articlesand books investigatethe boardof directors and its
impact on firm value and policies. Why? There is a very simple answer:
boards of directors are extremely complicated to study. While, especially
in the literature of the 1980s and the 1990s, the board of directors is
sometimes presented and described as a relatively homogeneous entity,
thispictureisnotentirelyaccurate.Therearedifferencesintermsofboard
characteristics(forexample,one-tierversustwo-tierboards,independence,
staggered versus non-staggered, etc.) and even at the level of the skills,
expertise, and networks of the individual director. All these differences
make boards of directors very complex entities to examine, which is also
why,asAdams(2017)pointsout,theyareintellectuallyinteresting.Thus,
itisnotsurprisingthatShleiferandVishny(1997),intheirexcellentsurvey
ofcorporategovernance,statethatthequestionofboardeffectivenesshas
proved to be controversial, with mixed empirical evidence. More recent
literaturereviewsonboardshavereiteratedthispointindifferentways,but
they have also indicated some explanations for the lack of a clear-cutand
straightforwardanswer to the question of whether andhow boards affect
firmvalueandcorporatepolicies.Forexample,aftercarefullyreviewingthe
literature, Garner et al. (2017) observe that no perfect formula exists for
thebestboardforacorporation.Adams(2017)describesasimilarscenario,
evenmoreforcefully,inherreviewoftheliteratureonboardsofdirectors,
when she astutely suggests that it is necessary to understand the people
whositontheboardifwewanttodeepenourknowledgeoftheboards.
Until recently, the debate about boards of directors (and, in general,
about everything relatedto corporategovernance) has often beenframed
v
vi PREFACE
in terms of good versus bad corporate governance, where a good (bad)
governance is something that helps to create (or contributes to destroy)
value for the shareholders. After decades of research, it seems clear that
thisapproachistoonaïve.AsIwilldocument inthisbook,ithasbecome
difficult to argue that a certain characteristic is inherently good or bad,
especiallywhenyoulookattheimpactofthisattributefordifferentgroups
of firms.Letus makea fewexamplesto clarifythis importantpoint. Take
boardbusyness:earlyliterature(FichandShivdasani2006)documentsthat
board busyness is on average detrimental to firm value. However, later
studies such as Field et al. (2013) provide evidence that busyness may
positivelyaffectthevalueofcertaintypesoffirms,thatis,youngcompanies
that can profit from the connections of these busy directors. Even board
independence,theposterchildofgoodcorporategovernanceintheminds
ofregulators,canbedetrimentalincertainsituations(AdamsandFerreira
2007; Faleye et al. 2011). Finally, staggered boards, boards in which not
alldirectors areelectedatthe sametime,have been found to be useful in
particularcontexts,andrecentarticleshavestronglyquestionedthevalidity
of thenegativerelationshipbetween staggeredboards andfirmvalue(see
Sect.2.5). Thus, as the recent literature suggests, it is certainly the right
time for a more open discussion about board and director attributes that
also accounts for the characteristics of the firms and avoids the one-size-
fits-allapproachoftenemployedbyregulators.Boardsoperateindifferent
contexts,andwhatworksmayvarywiththesedifferentsituations.
Before discussing boards in detail, let us start with a few words about
the objective and the structure of the book. The book seeks to provide a
concisereviewof theresearchonboards ofdirectorsbysummarizingand
reconcilingthefindingsfromacademicresearch.Thebasicideaistoequip
thereadertomakeevidence-basedassessmentofboards ofdirectorsasan
importantgovernancemechanism.Thebookistargetedtowardacademics,
students who are interested in corporate governance, and practitioners.
The role of boards in corporate governance tends to be multidisciplinary
and to span management, strategy, finance, accounting, economics, and
law. While the interdisciplinary importance of corporate governance is
certainly undeniable, the book is mostly based on research that has been
publishedinfinanceacademicjournals,and,therefore,itisheavilyslanted
toward a finance viewpoint. The appeal of the finance perspective is that
it allows a more unitary, coherent, and consistent framework, in which
the characteristics of the board of directors are assessed in terms of their
PREFACE vii
positive or negative contribution to value creation. Since most of the
articles reviewed in this book investigate the US market, it goes without
saying that most of the evidence presented and discussed in the volume
is about the USA. Nevertheless, whenever possible, I will try to bring to
light the specificity of boards in countries other than the USA. Finally, it
is unfortunately an uphill battle to discuss all the literature on corporate
boards.Whilethegoalistobeasthoroughaspossibleinsummarizingthe
literature, many excellent papers are not cited in the book. It is simply
impossible to cover all of them. Since several outstanding reviews and
bookshavealreadybeenwrittenonthistopic,Iwilldevotemoreattention
tothemostrecentliterature.
Thestructureofthebookissimple.Itakethepragmaticviewoflooking
attheattributesandcharacteristicsrelatedtotheboardofdirectorswithout
ex ante describing them as good or bad governance. The initial chapter
consists of a quicksummaryof the mainfunctions of aboard of directors
as well as a presentation of the boards that exist around the world. After
having laid out the playing field, I will discuss how board characteristics
affect firm value and through which channels. Finally, I will move on to
theindividualdirector’sattributes.Toputitdifferently,theapproachused
inthisvolumeisfrombigtosmall,fromthewholetothepart.Iwillstart
discussing the board as the governing body of a corporation, then I will
digintothecharacteristicsoftheboard,andcontinuewithanalysisofthe
individual board members. A few concluding remarks will complete the
book. It is worth noting that the chapters and even the sections may be
readindependentlyofeachother.Eachsectionofthebookalsocontainsa
tablethatsummarizesthemainpaperspresentedinthatparticularsection.
Ofcourse,thisisnotanovel:readersinterestedinaspecificattributeofthe
boardmayimmediatelyjumptothatsectionwithoutreadingtheprevious
ones. A word of caution: sometimes there is a very fine line between
considering a characteristic as either a board attribute or a director one.
Forthisreason,somechoicesmayappeartobeandarequitearbitrary.
Milan,Italy EttoreCroci
August2018
viii PREFACE
REFERENCES
Adams, R. B. (2017). Boards, and the directors who sit on them
In B. E. Hermalin & M. S. Weisbach (Eds.), The handbook of the
economics of corporate governance (Chap. 6, Vol. 1, pp. 291–382).
Amsterdam: North-Holland. https://doi.org/10.1016/bs.hecg.
2017.11.007. http://www.sciencedirect.com/science/article/pii/
S2405438017300078
Adams, R. B., & Ferreira, D. (2007). A theory of friendly boards. The
Journal of Finance,62(1), 217–250. https://onlinelibrary.wiley.com/
doi/abs/10.1111/j.1540-6261.2007.01206.x. https://onlinelibrary.
wiley.com/doi/pdf/10.1111/j.1540-6261.2007.01206.x
Faleye, O., Hoitash, R., & Hoitash, U. (2011). The costs of intense
board monitoring. Journal of Financial Economics, 101(1), 160–181.
https://doi.org/10.1016/j.jfineco.2011.02.010
Fich, E. M., & Shivdasani, A. (2006). Are busy boards effective mon-
itors? The Journal of Finance, 61(2), 689–724. https://doi.org/10.
1111/j.1540-6261.2006.00852.x
Field, L., Lowry, M., & Mkrtchyan, A. (2013). Are busy boards
detrimental? Journal of Financial Economics, 109(1), 63–82. https://
doi.org/10.1016/j.jfineco.2013.02.004
Garner, J., Kim, T., & Kim, W. (2017). Boards of directors: A litera-
turereview.ManagerialFinance,43,1189–1198.https://doi.org/10.
1108/MF-07-2017-0267
Shleifer, A., & Vishny, R. (1997). A survey of corporate governance.
TheJournalofFinance,52,737–783.
CONTENTS
1 TheBoard of Directors 1
1.1 Introduction 1
1.2 TheBoardofDirectors 2
1.3 TheMonitoringandAdvisoryRolesoftheBoard 4
1.3.1 TheMonitoringFunctionoftheBoard 8
1.3.2 TheAdvisoryFunctionoftheBoard 11
1.4 WhatDoBoardsReallyDo? 13
1.5 DifferentTypesofBoardsofDirectors 16
1.6 DirectorElections 20
1.7 ShouldWeTrusttheEvidence?TheEndogeneityProblem 27
1.8 Summary 32
References 34
2 Board,FirmValue, andCorporatePolicies 41
2.1 Introduction 41
2.2 BoardSize 42
2.3 BoardStructureandComposition 46
2.3.1 Independence 46
2.3.2 IndependenceandtheRoleofCommittees 55
2.3.3 DifferentShadesofIndependence 57
2.3.4 Non-USEvidenceonBoardIndependence 59
ix
x CONTENTS
2.3.5 CreditorsandBoardIndependence 60
2.3.6 BoardIndependence:InsightsfromParticular
Situations 61
2.3.7 Insiders 63
2.4 BoardLeadership 65
2.5 StaggeredBoard 69
2.6 BoardBusyness 72
2.7 BoardDiversity 75
2.7.1 GenderDiversity 75
2.7.2 DiversityinGeneral 84
2.7.3 EmployeeRepresentation 86
2.8 BoardsintheBankingIndustry 87
2.9 Summary 95
References 97
3 TheCharacteristicsof theDirectors 107
3.1 Introduction 107
3.2 ConnectednessandSocialTies 108
3.3 ReputationandIncentives 115
3.4 GeographicProximity 124
3.5 Expertise 129
3.5.1 IndustryandGeneralExpertise 129
3.5.2 Financial Expertise and Experiencein the
FinancialIndustry 137
3.5.3 ExpertiseasCEO 138
3.6 Summary 141
References 142
4 Conclusions 151
4.1 Conclusions 151
References 155
Index 157
