Activist Directors and Agency Costs: What Happens When an Activist Director Goes on the Board?

Coffee, John C.; Jackson, Robert J.; Mitts, Joshua; Bishop, Robert

doi:10.2139/ssrn.3100995

Cited by 7 publications

(3 citation statements)

References 3 publications

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“…Relatedly, the negative relationship between board-CEO conflict and director monitoring suggests that emerging trends in board composition, such as the growth in activist-nominated directors may potentially act as double-edged swords. The appointment of these "super directors" to reduce agency costs (Christie, 2019;Coffee, Jackson, Mitts & Bishop, 2018;Kastiel & Nili, 2017;Nili, 2015) will arguably give rise to greater cognitive conflict and in so doing may unwittingly undermine boardroom monitoring. Similarly, the ongoing promotion of board diversity and boards with balanced skillsets (Tasheva & Hillman, 2019) designed to offer divergent ideas and raise critical challenges will also yield a board dynamic that may more easily spiral into dysfunction.…”

Section: Discussionmentioning

confidence: 99%

Too Unsafe to Monitor? How Board–CEO Cognitive Conflict and Chair Leadership Shape Outside Director Monitoring

Veltrop

Bezemer

Nicholson

et al. 2021

AMJ

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Research into boards of directors has provided mixed support for the view that outside directors' independence or leadership by an independent chair improves monitoring. In this study, we use a micro-level approach to provide a better understanding of why outside directors have difficulty in monitoring the CEO. We highlight that an important reason for this lies in the boardroom dynamics associated with (a) outside directors' cognitive conflict with the CEO and (b) the chair's leadership of the board. Our inductive analyses of video observations of board meetings in five Australian corporations revealed the importance of chair participative leadership during disagreement episodes in the boardroom. Follow-up in-depth interviews of board meeting participants highlighted the importance of psychological safety as a key mechanism explaining why participative board chairs appear so effective in dealing with board-CEO cognitive conflict. We corroborate these results with a second, large-scale survey study involving data on 310 outside directors from 64 Dutch boards. Whereas prior work has mostly focused on the chair's relationship with the CEO, we instead highlight the importance of the chair's role as the leader of the board and identify board psychological safety as an important element shaping director monitoring within the confines of the boardroom.We sincerely thank the editor, Brian Connelly, and three anonymous reviewers whose supportive and insightful suggestions helped us to develop our work. We also thank Michael Withers, Christine Shropshire, Craig Crossland, Steven Boivie, Sten Langmann, Gerben van der Vegt, and Floor Rink for their advice on earlier drafts of this article, and Larry Williams and Bob Vandenberg for their advice on our analyses. We thank audiences at

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Section: Discussionmentioning

confidence: 99%

Too Unsafe to Monitor? How Board–CEO Cognitive Conflict and Chair Leadership Shape Outside Director Monitoring

Veltrop

Bezemer

Nicholson

et al. 2021

AMJ

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“…The potential management and dominant shareholders do abuse small shareholders and it has been broadly captured by the theoretical arguments of horizontal and vertical agency cost as entrenched in the agency theory (Coffee et al, 2018). The theoretical argument suggests that small investors are likely to be abused by management and/or dominant shareholders when such parties to the agency arrangement can exploit some avenue to enrich themselves as against the betterment of all shareholders.…”

Section: Related Party Transactions and Earnings Management (Real Versus Discretionary Accruals)mentioning

confidence: 99%

Do related party transactions affect earnings quality? Evidence from East Asia

Rahmat¹,

Muniandy

Ahmed

2020

IJAIM

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Purpose The purpose of this paper is to examine the effect of related party transactions (RPTs) and types of RPTs (complex, simple and loan) on earnings quality in four East Asian countries: Hong Kong, Malaysia, Singapore and Thailand. Design/methodology/approach RPTs and types of RPTs are measured using two approaches, magnitude and abnormal (magnitude change). Earnings quality is measured using proxies for accrual earnings management and identified as discretionary accruals (DAC) and performance matched discretional accruals (PMDAC). Findings The results suggest that firms in these countries experience poor earnings quality when they are engaged in RPT. The effect of RPT-simple on earnings quality is more severe than RPT-complex. However, the presence of higher investor protection and stricter enforcement of regulations in countries like Singapore and Hong Kong reduce the negative impact of RPTs on earnings quality. Research limitations/implications The results support the argument that the presence of controlling shareholders in East Asia is likely to lead to engagement with RPTs, which will increase the likelihood of firms’ earnings manipulation via DAC. This study has two limitations. It only focuses on Hong Kong, Malaysia, Singapore and Thailand, and the results may not be generalizable to other countries. Second, this study only measures the magnitude and abnormal RPTs based on the disclosures available in annual reports. Originality/value This paper contributes to the literature by examining the effect of RPTs and types of RPTs on earnings quality in four selected East Asian countries.

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“…We investigate the effects of activism settlements on a wide array of dimensions, but we do not cover all possibly relevant dimensions. For example, in a recent paper,Coffee et al (2019) focuses on the effect of such settlements with activists on subsequent "information leakage" prior to the issuance of 8-K filings and on bid-ask spreads.6 For recent media accounts, see Reuters, 07/18/2016, "Big Funds Push Back Against Settlement Agreements" and State Street Global Advisors, 10/10/2016, "Protecting Long-Term Shareholder Interests in Activist Engagements." 7 Leading index fund manager State Street Global Advisors expressed such a concern.…”

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confidence: 99%

Dancing With Activists

Bebchuk

Brav

Jiang

et al. 2019

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An important milestone often reached in the life of an activist engagement is entering into a "settlement" agreement between the activist and the target's board. Using a comprehensive handcollected data set, we analyze the drivers, nature, and consequences of such settlement agreements. Settlements are more likely when the activist has a credible threat to win board seats in a proxy fight and when incumbents' reputation concerns are stronger. Consistent with incomplete contracting, face-saving benefits and private information considerations, settlements commonly do not contract directly on operational or leadership changes sought by the activist but rather on board composition changes. Settlements are accompanied by positive stock price reactions, and they are subsequently followed by changes of the type sought by activists, including CEO turnover, higher shareholder payouts, and improved operating performance. We find no evidence to support concerns that settlements enable activists to extract rents at the expense of other investors. Our analysis provides a look into the "black box" of activist engagements and contributes to understanding how activism brings about changes in target companies.

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Activist Directors and Agency Costs: What Happens When an Activist Director Goes on the Board?

Cited by 7 publications

References 3 publications

Too Unsafe to Monitor? How Board–CEO Cognitive Conflict and Chair Leadership Shape Outside Director Monitoring

Too Unsafe to Monitor? How Board–CEO Cognitive Conflict and Chair Leadership Shape Outside Director Monitoring

Do related party transactions affect earnings quality? Evidence from East Asia

Dancing With Activists

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