Board Independence and Corporate Governance: Evidence From Director Resignations

Abstract

Abstract:As is evident from recent changes in NYSE and NASDAQ listing requirements, board independence is assumed to be an important and effective governance mechanism. However, the empirical evidence regarding the value of board independence is mixed. We examine board member resignation announcements and their perceived importance in the context of firms' existing governance structures. We find that outside director resignations appear to send negative signals to market participants. However, this market reaction is less negative when the board is more independent before the departure and when institutional ownership is high, but is more negative for higher levels of officer and director ownership and CEO incentive compensation.

The king reports, independent non-executive directors and firm valuation on the Johannesburg stock exchange

“…Fama (1980) and Fama and Jensen (1983a, b) argue that once top internal management gains control of a corporate board, they are more likely to connive and collude among themselves to engage in opportunistic activities, including expropriating shareholders' wealth. On the other hand, it has been suggested that the possibility of such internal managerial connivance might be reduced, and the viability of the board as a market-induced mechanism for low-cost transfer of control might be enhanced, by the addition of INEDs (Fama, 1980, Fama, 1983aGupta and Fields, 2009). …”

“…A strand of the empirical literature reports that boards dominated by INEDs are associated with higher market valuation (Kiel and Nicholson, 2003;Gupta and Fields, 2009) (Fama, 1980;Fama and Jensen, 1983a, b;Jensen, 1993).…”

“…Similarly, Sanda et al (2010) report that Nigerian firms with a low percentage of INEDs were valued higher than those with more INEDs. This suggests that whilst INEDs can bring independence, objectivity and experience to bear upon board decisions (Gupta and Fields, 2009;Ben-Amar and Zeghal, 2011), they may also stifle managerial initiative through excessive monitoring (Haniffa and Hudaib, 2006;Kyereboah-Coleman, 2007).…”

“…Firstly, there is the issue of clearly defining who constitutes an INED, with most past studies simply classifying all outside directors as non-executive directors (NEDs) (Hermalin and Weisbach, 1991;Weir and Laing, 2000). However, some outside directors may have significant interests or connections with corporate executives (Zahra and Stanton, 1988;Bozec, 2005;Gupta and Fields, 2009), which can impair their independence, and thereby their ability to effectively advise, monitor and discipline management (Vafeas and Theodorou, 1998;Jiraporn et al, 2009). This suggests that a much subtle and stricter definition of who is an INED has to be introduced if her/his independence and monitoring capacity is not to be compromised.…”

Governance and Shareholder Response to Chief Risk Officer Appointments

“…Stulz 3 establishes a direct link between risk control and incentives by hypothesising that risk monitoring and control will be more effective in firms where 20 Beasley et al (2008). 21 Gupta and Fields (2009). 22 Beasley et al (2005).…”