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• W3121239055 abstract "ABSTRACT The boards of directors of American public companies are dominated by independent directors. Many commentators and institutional investors believe that a board, composed almost entirely of independent directors, is an important component of good corporate governance. The empirical evidence reported in this Article challenges that conventional wisdom. We conduct the first large-sample, long-horizon study of whether the degree of board independence (proxied by the fraction of independent directors minus the fraction of inside directors on a company's board) correlates with various measures of the longterm performance of large American firms. We find evidence that low-profitability firms increase the independence of their boards of directors. But there is no evidence that this strategy works. Firms with more independent boards do not perform better than other firms. Our results support efforts by firms to experiment with board structures that depart from the conventional monitoring board. I. INTRODUCTION Over the last thirty years, American corporate boards have undergone a gradual but dramatic change. In the 1960s, most had a of inside directors. Today, almost all have a (usually a large majority) of outside directors, most have a (often a large majority) of independent directors, and an increasing number have only one or two inside directors. This pattern reflects the conventional wisdom that the board's principal task is to monitor management, and only independent directors can be effective monitors. In contrast, an insider-dominated board is seen as a device for management entrenchment.1 For example, guidelines adopted by the Council of Institutional Investors call for at least 2/3 of a company's directors to be independent; guidelines adopted by the California Public Employees Retirement System and by the National Association of Corporate Directors call for boards to have a substantial majority of independent directors.2 American corporate governance experts and institutional investors are now exporting this conventional wisdom around the world. It has only an occasional dissenting voice.3 Even the Business Roundtable (an organization of large-firm CEOs), which once opposed proposals for more independent boards, now recommends that boards have a substantial majority of independent directors.4 Yet there are numerous anecdotes where a highly independent board hasn't prevented large-scale wealth destruction. Enron (with eleven independent directors on its fourteen-member board) is only the most recent example. When we turn from anecdote to quantitative evidence, the conventional wisdom favoring highly independent boards lacks a solid empirical foundation, in this or other studies. We study in this Article three related questions. First, does greater board independence produce better corporate performance, as conventional wisdom predicts? Second, and conversely, does board composition respond to firm performance? Third, does board size predict firm performance? Prior quantitative research on the first two questions has been inconclusive; for the third, two studies report that firms with large boards perform worse than firms with smaller boards. We report here evidence from the first large-scale, long-time-horizon study of the relationship among board independence, board size, and the long-term performance of large American firms. We study measures of financial performance and growth from 1985-1995 for 934 of the largest United States firms, using data on these firms' boards of directors in early 1991 and board data for a random subsample of 205 firms from early 1988. Our principal findings: We find evidence that low-profitability firms respond to their business troubles by following conventional wisdom and increasing the proportion of independent directors on their boards. There is no evidence, however, that this strategy works. …" @default.
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• W3121239055 title "The Non-Correlation Between Board Independence and Long-Term Firm Performance" @default.
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