Within the standard framing, directors monitor managers in order to help align shareholder-manager interests and minimize the agency costs that arise within public companies. A principal goal has been to reinforce director independence in light of the conventional wisdom that independent directors are the most effective monitors. Directors, however, are more than just agency-cost-reducers. As managers, they also bring to bear different perspectives and judgments that are important in formulating business strategies. In addition, their training, expertise, and experience in problem-solving are valuable in managing a business, as well as their knowledge of markets and practices that may be less familiar to firm executives.

The board’s managing function has been under-evaluated by law and finance academics. In our working paper, Lawyers and Fools: Lawyer-Directors in Public Corporations, my co-authors, Lubomir Litov and Simone Sepe, and I offer new insight into how boards operate. Specifically, we analyze the effect on firm value of directors with legal training (“lawyer-directors”) who sit on the boards of public, non-financial corporations.

…continue reading: Board Composition and Firm Value — Lessons from Lawyer-Directors

Although the structure of the board of directors has been the topic of considerable debate and academic research over the past two decades, much of this prior literature focuses on aggregate measures of board composition such as board size or the fraction of independent outside directors. More recent studies recognize that directors with differing backgrounds and expertise are likely to bring different sources of value to the board. However, empirical studies of the importance of these attributes are limited by the ‘stickiness’ of board structures. Specifically, transactions costs associated with board structure adjustments can result in board structures that evolve only very slowly. As a result, observing board structures and their determinants at any given point in time can provide a misleading picture of how boards are formed; most notably, how and why particular individual directors are matched with the specific set of assets that they help govern.

In our paper, Matching Directors with Firms: Evidence from Board Structure Following Corporate Spinoffs, which was recently made publicly available on SSRN, we aim to overcome some of these limitations by analyzing board structure following corporate spinoffs. As part of the spinoff, a board of directors must be created from scratch for the spun off unit. This ‘de novo’ feature provides a unique opportunity to observe boards that are unlikely to be affected by the factors that contribute to the ‘stickiness’ of ongoing boards. In addition, the separation of one publicly traded firm into two publicly-traded firms leads to large discrete differences in asset and operating structure and significant variation in CEO identity and origin. This allows us to examine both the formation of new boards by the spun off units and the changes in parent board structure occasioned by a significant operational restructuring. Perhaps more importantly, our experimental design allows us to link specific assets with specific directors, thereby providing unique evidence on how directors are matched with the assets they govern. Similarly, by tracking the movement of individual CEOs and individual directors, our data can enhance our understanding of the extent to which individual directors are matched with specific CEOs.

…continue reading: Matching Directors with Firms

Since 2003, Fenwick has collected a unique body of information on the corporate governance practices of publicly traded companies that is useful for all Silicon Valley companies and publicly-traded technology and life science companies across the U.S. as well as public companies and their advisors generally. Fenwick’s annual survey covers a variety of corporate governance practices and data for the companies included in the Standard & Poor’s 100 Index (S&P 100) and the high technology and life science companies included in the Silicon Valley 150 Index (SV 150). [1] In this report, we present statistical information for a subset of the data we have collected over the years. These include:

…continue reading: Corporate Governance at Silicon Valley Companies 2012

In the paper, Initiatives to Place Women on Corporate Boards of Directors, forthcoming in the Australian Corporate & Securities Law Review, I investigate initiatives to place women on corporate boards. In the United States, the representation of women on corporate boards of directors has been flat for 6 years now. By contrast, elsewhere around the world the topic is a hot button issue. This includes Australia where the proportion of board seats held by women has suddenly jumped from 8% in 2010 to nearly 14% today. The Australian Stock Exchange (ASX) has adopted a “comply or explain” diversity disclosure requirement (for emphasis termed an “if not, why not” disclosure requirement), which emphasizes gender diversity. The requirement is even more stringent than the London Stock Exchange (LSX) comply or explain regulation adopted after the Lord Mervyn Davies Report on women in corporate governance appeared in February 2011. The Australian Institute of Company Directors also has instituted a mentoring/sponsorship program, the first of its kind in the world, designed to obtain board seats for women. This article reviews these Australian as well as global developments, including enactment of quota laws (especially Norway and France), certificate and pledge programs (“Rooney Rules”), and hard law disclosure requirements (United States).

…continue reading: Initiatives to Place Women on Corporate Boards of Directors

Corporate America often says we are facing a pipeline problem when challenged with the troubling reality that women occupy only 16 percent of Fortune 500 board seats. Yet to bump the percentage of U.S. board seats filled by women up by one percentage point, it would only take about 50 women joining the boards of these companies. There is no doubt there are far more than 50 qualified women interested in U.S. board seats right now.

Despite a professed desire by many U.S. companies for greater diversity and female representation, there has been virtually no improvement in recent years in the senior ranks. In the meantime, on goes the brain drain — as senior women are now being competitively recruited to serve on the boards of non-U.S.-based companies.

The situation is urgent. U.S.-headquartered companies are failing to meet the career needs of half their available highly skilled labor and falling behind international competitors that are taking aggressive action to increase the number of women on their boards. That is the central finding of a new report, Fulfilling the Promise: How More Women on Corporate Boards Would Make America and American Companies More Competitive, from the business-led Committee for Economic Development (CED).

…continue reading: Gender Composition of Boards Important for Competitiveness

The world has changed in the past 10 years. Companies can go from obscurity to an estimated $100 billion market cap (Facebook) or from zero to $1 billion in revenue very quickly (Groupon did it in two years), or from near collapse in the late ‘90s to become one of the world’s most valuable companies (Apple). To succeed today, companies need to embrace change, in ways that include learning to market and sell using digital channels, pursuing global customers, leveraging technology, and relentlessly streamlining operations to remain competitive.

CTPartners is starting to see changes in the boardroom that mirror these macro changes. There are more than 1,100 directors currently serving on Fortune 1000 boards who are over 70 years old. With these impending vacancies, demand is emerging for a new generation of directors, one which will include individuals capable of contributing new insights into customers, technology, distribution channels, and international markets. The goal is to create a boardroom with diverse perspectives, which leads to better-informed discussions and more effective decision making. With this new generation comes the opportunity to include more women directors. The onus is on boards, management teams, and search firms to ensure that qualified women are given consideration in the director recruitment process.

Among the Fortune 1000, there are 139 boards that have no women directors; and, women comprise fewer than fifteen percent of all directors. Beyond the Fortune 1000, representation by women is even less. CTPartners looked at an additional 1,000 midcap companies with revenue ranging from $500mm to $3 billion and found that 300 still had no female directors. Perhaps most startling is the fact that, among these companies with no women directors, there are many that sell directly to consumers. Women control nearly 75 percent of consumer purchasing decisions, yet there are still 29 Fortune 1000 consumer companies with no women on their boards. On a positive note, there are 54 Fortune 1000 consumer companies with three or more women on their boards. This raises a pressing question: Why is it that some consumer companies embrace women directors and others do not?

…continue reading: Women on Boards: Review & Outlook

In the paper, Board Structure and Monitoring: New Evidence from CEO Turnover, which was recently made publicly available on SSRN, we provide new evidence on the potential benefits of SOX and ensuing new exchange listing rules and the effectiveness of monitoring by independent directors. Although many researchers, regulators and investors believe that increasing the representation of independent directors on corporate boards can improve quality of board oversight, empirical evidence has been mixed and inconclusive. Recent research even raises doubt about the effectiveness of independent directors in monitoring CEOs.

Using the change in NYSE and Nasdaq listing rules following the passage of the Sarbanes-Oxley Act as a source of exogenous variation, we provide the first statistically convincing evidence on a causal relation between board (committee) independence and the sensitivity of forced CEO turnover to firm performance. Specifically, we find that firms that after SOX moved to a majority of independent directors or to a fully independent nominating committee experience increased sensitivity of forced CEO turnover to performance. This evidence suggests that quality of board monitoring is positively related to board independence and nominating committee independence and the causation goes from board structure to quality of board monitoring.

…continue reading: Board Structure and Monitoring

In our forthcoming Journal of Financial Economics paper, Endogeneity and the Dynamics of Internal Corporate Governance, we use a well-developed dynamic panel generalized method of moments (GMM) estimator to alleviate endogeneity concerns in two aspects of corporate governance research: the effect of board structure on firm performance and the determinants of board structure. It is well known that theoretical and empirical research in corporate finance is complicated by the endogenous relation that exists between the control forces operating on a firm and its decisions. Jensen (1993) broadly classifies these control forces (i.e., governance in a broad sense) as capital markets, the regulatory system, product and factor markets, and internal governance. In much of the extant corporate finance research, researchers attempt to either explain the causes or examine the effects of corporate finance decisions as related to one or more of these control forces. Empirical research often involves determining the causal effect, if any, of a firm characteristic (X) on some measure of firm profits or value (Y). This is usually done using the inference from a regression of Y on X along with several control variables (Z). The question is often framed as: holding Z constant, does X have an economically and statistically significant causal effect on Y?

…continue reading: Endogeneity and the Dynamics of Internal Corporate Governance

As the 2012 proxy season approaches, it appears that certain issues in board composition—the separation of the chairman and chief executive officer (CEO) roles (along with the related issue of the independence of the chairman) and board diversity—are likely to be more prominent this year. As boards consider these and other related corporate governance issues, directors should keep in mind that a corporate board is a complex creature, with company history, personal dynamics, and board structure all contributing to, or potentially undermining, the overall effectiveness of the board. No single factor in board composition will have the same significance at one company as it has at another; boards should seek to adopt best practices that will make them more effective, but this does not mean that governance structures such as the separation of chairman and CEO roles should be mandated. Directors facing pressure from activists should be counseled that it is the board’s right and responsibility to determine its own operation, and that it is the board’s duty to do so in a way that, in the business judgment of the directors, best serves the company and its shareholders.

…continue reading: Analyzing Aspects of Board Composition

In our paper, The Independent Board Requirement and CEO Connectedness, which was recently made publicly available on SSRN, we investigate unintended consequences of the independent board requirement.  Following highly publicized corporate scandals in 2001 and 2002, firms listed on the NYSE and NASDAQ are required to have a majority of independent directors. The intent is to better protect shareholders by making boards more independent from managerial influence and thereby more effective monitors. However, the majority requirement represents a ceiling on the percentage of dependent directors a firm may have.

If board composition is endogenous, the quota may trigger reactions by firms affected by the regulation. Board composition is but one of many facets of governance. Imposition of a quota on one governance mechanism may spillover to other governing bodies as firms find ways to counteract it. This paper attempts to identify the spillover effects, analyze their consequences, and answer several questions: How do CEOs react to a regulation that may reduce their influence over the board? How do the reactions, if any, manifest in the softer side of governance, namely, CEO connectedness with other key players in governing the firm? How do the spillover effects impact the regulatory intent?

…continue reading: The Independent Board Requirement and CEO Connectedness