Corporate Boards: facts and myths Professor Daniel Ferreira - - PowerPoint PPT Presentation

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Corporate Boards: facts and myths Professor Daniel Ferreira - - PowerPoint PPT Presentation

Sep 30, 2022 631 likes •1.09k views

LSE Works : Financial Markets Group public lecture Corporate Boards: facts and myths Professor Daniel Ferreira Professor of Finance, Co-organiser of the Corporate Governance programme at LSE Professor David Webb Chair, LSE Suggested hashtag

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Suggested hashtag for Twitter users: #LSEworks

Corporate Boards: facts and myths

LSE Works: Financial Markets Group public lecture

Professor Daniel Ferreira

Professor of Finance, Co-organiser of the Corporate Governance programme at LSE

Professor David Webb

Chair, LSE

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Corporate Boards: Myths and Facts

Professor Daniel Ferreira (LSE)

Department of Finance & Financial Markets Group

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  • Interdisciplinary group
  • Housed at the Financial Markets Group (FMG)
  • Dedicated to the rigorous analysis of Corporate

Governance issues

  • Runs a series of regular events
  • Check out CG Research Debates schedule

▫ Brings practitioners and academics together ▫ Free!

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Corporate Boards: Myths and Facts

  • Myth: What I think is false.
  • Fact: What I think is true.
  • Myths are mostly backed by no evidence, or by

highly-selective, academically-suspicious evidence.

  • Facts are backed by evidence that most would

consider credible.

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Five Corporate Governance myths

  • 1. Unconstrained managers, helpless owners.
  • 2. Boards don’t matter.
  • 3. The lapdog board.
  • 4. The watchdog board.
  • 5. One size fits all.

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Facts

  • Most companies around the world are closely
  • wned and run by the same individuals, families,

and governments.

  • No meaningful distinction between managers

and owners in such cases

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In countries where large firms are owned by dispersed shareholders (UK and US, mostly), there exists a number of governance mechanisms: ▫ Boards ▫ Shareholder activism ▫ Proxy contests ▫ Takeovers ▫ Laws and regulations ▫ Media ▫ Reputation ▫ Stakeholder governance (creditors, customers, employees) ▫ Competition

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Facts

  • Sudden deaths of some directors affect stock

prices.

  • Directors of firms that experience proxy contests

find it difficult to obtain additional board appointments.

  • In China, the hiring of directors with foreign

experience improves their firms’ performance.

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Explaining the myth

  • Directors rarely vote against management.
  • Disagreement inside the board is hard to

document.

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Facts

  • About half of directors that publicly announce

their resignations leave while criticising the firm.

  • Even in China (where votes have to be disclosed)

independent directors disagree with management!

  • CEO turnover is more sensitive to performance

if the board is more independent.

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Explaining the myth

  • Boards only have one role: To monitor the CEO

and other top executives

  • Some boards may be lapdogs, but they should be

watchdogs instead.

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Problems with the watchdog view

  • It doesn’t recognize that boards perform multiple

functions:

▫ They monitor management. ▫ They advise management. ▫ They provide connections with the external environment.

  • It doesn’t recognize that tough monitoring is not

always good.

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Costs and benefits of Friendly Boards

Adams and Ferreira (2007) argue that friendly boards are sometimes optimal, especially when the advisory role of boards is very valuable.

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Facts

  • Survey evidence that CEO-director friendship

ties improve communication.

  • Evidence that director independence worsens

performance in some firms.

  • CEOs are fired too often for reasons outside

their control.

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The typical answer:

  • A list of attributes:

▫ Independence ▫ Experience ▫ Industry/financial/legal expertise ▫ Education ▫ Diversity ▫ Political connections ▫ Etc.

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Board Characteristics (“Structure”) Firm Performance

The typical approach: Perform ance follows structure

Examples:

  • Does board independence improve firm performance?
  • Do small boards improve firm performance?
  • Does board gender diversity improve firm performance?

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What has the literature found?

  • Characteristics of effective boards:

▫ Independent ▫ Industry Expertise ▫ Small ▫ Connected ▫ Reputable ▫ Comprised only of CEOs ▫ With at least three women ▫ With no “busy” directors ▫ No foreigners allowed!

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An alternative answer

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What makes an effective board?

  • A list of forces or conditions:

▫ Financial incentives ▫ Reputational incentives ▫ Ethical motives ▫ Laws and regulations ▫ Media ▫ Behavioural biases ▫ Markets and Competition ▫ Etc.

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Board Characteristics (“Structure”) Firm Performance Board Behaviour (“Dynamics”) Board Decisions Firm Decisions

The longer road: “Channels of influence”

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Board Characteristics (“Structure”) Firm Performance Board Behaviour (“Dynamics”) Board Decisions Firm Decisions Determinants of Board Appointments

But board structure is also a choice

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Board Characteristics (“Structure”) Firm Performance Board Behaviour (“Dynamics”) Board Decisions Firm Decisions Determinants of Board Appointments Environmental Factors

Complications: “confounding effects”

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Board Characteristics (“Structure”) Firm Performance Board Behaviour (“Dynamics”) Board Decisions Firm Decisions Determinants of Board Appointments Environmental Factors

Short arrows: (I) Behaviour follows Structure

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Example: Attendance Behaviour

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Fact

Average board meeting fee in S&P 1500 firms from 1996 to 2003 (in 2003 US dollars):

$1,014

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But…

Meeting fees ↑ by $1000 → Attendance problems ↓ by ~10% (most conservative estimate)

From Adams and Ferreira, “Do Directors Perform for Pay?” (2008)

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What else affects attendance?

  • Adding one more female director reduces m ale

director attendance problems by 10%

▫ From Adams and Ferreira (2009), Women in the boardroom and their impact on governance and performance.

  • Conclusion: board directors’ attendance

behaviour is affected by both financial and social incentives (“peer pressure”)

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Board Characteristics (“Structure”) Firm Performance Board Behaviour (“Dynamics”) Board Decisions Firm Decisions Determinants of Board Appointments Environmental Factors

Short arrows: (II) Who controls appointm ents?

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The role of creditors in governance

Example: (From Reuters, 2011) Struggling Irish telecoms firm Eircom has appointed several independent directors as part of a deal with lenders to waive conditions

  • f its debt pile of 3.75 billion euros.

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Creditors want board independence

  • The number of independent directors increases

by roughly 30% in the first two years following a loan renegotiation with banks.

▫ From Ferreira, Ferreira and Mariano (2014), “Unfriendly Creditors: Debt Covenants and Board Independence.”

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Implications (a bit speculative)

  • Creditors “prefer” a more independent board.
  • Independent directors are likely to favour safer

and conservative projects.

  • Growing, innovative firms should then have

fewer independent directors.

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Board Characteristics (“Structure”) Firm Performance Board Behaviour (“Dynamics”) Board Decisions Firm Decisions Determinants of Board Appointments Environmental Factors

Long arrows

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What if boards are insulated from shareholder pressure?

  • Firms’ charter and by-law provisions (together

with state corporate law) may restrict the ability

  • f shareholders to replace board members.
  • “Insulation provisions” are difficult to remove

and can thus last for a long time.

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Banks with more insulated boards in 2003 were:

  • Less likely to take risks.
  • 18 percentage points less likely to be bailed out

in 2008/09.

 From Ferreira, Kershaw, Kirchmaier, Schuster (2013), “Shareholder Empowerment and Bank Bailouts.”

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Takeaways

  • Academic research reveals that boards matter.
  • But they matter in subtle and often surprising

ways.

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Takeaways

  • Directors perform multiple roles.
  • Friendly boards are not always bad.
  • Regulation that pushes for more independence

and shareholder empowerment can have unintended consequences, as the financial crisis revealed.

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Thank you

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Suggested hashtag for Twitter users: #LSEworks

Corporate Boards: facts and myths

LSE Works: Financial Markets Group public lecture

Professor Daniel Ferreira

Professor of Finance, Co-organiser of the Corporate Governance programme at LSE

Professor David Webb

Chair, LSE