Marrying Diversity and Independence in the Boardroom: Just How Far Have You Come, Baby?

Abstract

Y ears after the Sarbanes-Oxley ("SOX")' corporate governance reform was supposed to solve the problems of director dereliction that resulted in the Enron/WorldCom string of scandals, spectacles of corporate greed continue. Corporate directors-the supposed guardians of shareholders' interests-supinely have approved untoward levels of executive 2 3 4 pay, sky-high severance payments, 3 stock option backdating, * Professor of Law, Wayne State University Law School. Many thanks go to the participants at the Law & Society Association and Southeast Association of Law School Conferences and to Bethany Berger, Derek Bambauer, Steven Davidoff, and to participants at the Wayne State faculty forum for their comments on earlier drafts of this Article, as well as to my research assistant, Mila Cobanov.

Mandatory Gender Balance and Board Independence

“…This result also suggests that, unlike what has been argued, the widespread independence found among female directors in countries with no GBL does not reflect merely a simple way to comply with the code (Beecher‐Monas, ). Because we show that female directors are as often independent in firms not exposed to the code as they are in firms exposed to it, it seems the pool of dependent female candidates is so small that one cannot select both many females and many dependent females simultaneously.…”

“…This finding can be rationalised by the argument that monitoring has less value when the interests of directors and stockholders are aligned (Raheja, 2005). We measure inside ownership by the aggregate equity fraction held by the firm's officers 4 Gender may matter for board behavior through other channels than independence (Fields and Keys, 2003;Beecher-Monas, 2007). Females may use less earnings management (Gul et al, 2007), adopt more democratic and trust-building leadership styles (Cohen et al, 2001;Klenke, 2003;Trinidad and Normore, 2005), have higher ethical standard (Betz et al, 1989;Mason and Mudrack, 1996;Clikeman et al, 2001), and take less risk (Riley and Chow, 1992;Powell and Ansic, 1997;Sundén and Surette, 1998).…”

“…Gender may matter for board behavior through other channels than independence (Fields and Keys, ; Beecher‐Monas, ). Females may use less earnings management (Gul et al ., ), adopt more democratic and trust‐building leadership styles (Cohen et al ., ; Klenke, ; Trinidad and Normore, ), have higher ethical standard (Betz et al ., ; Mason and Mudrack, ; Clikeman et al ., ), and take less risk (Riley and Chow, ; Powell and Ansic, ; Sundén and Surette, ).…”

The Relationship between Board Diversity, Board Independence and Corporate Fraud

“…Heterogeneity of board education performs better monitoring and controlling functions in a corporation or an organization to bridge the information gap between the board of directors and the senior management. The directors with diverse perspectives and backgrounds enhance the scope of discussion and provide varied approaches to assessing information, which lead to better decision making (Beecher-Monas, 2007); and hence, increase the monitoring and controlling functions over the activities of the senior management. This is in line with the essence of the agency theory in the separation of ownership and control (Fama & Jensen, 1983).…”

The Demythification of the Board of Directors

“…Not always susceptible to public scrutiny, these relationships typically have been analyzed through the use of imperfect proxies that likely understate their presence . Data show, however, that the existence of social connections can “undermine active monitoring of the firm” and is associated with negative performance, reduced reliability of reported earnings, greater risks of fraud, and higher levels of CEO compensation . Such boards are less likely to dismiss the CEO…”