4.3.3 Studies from 2005 and later

Rose (2005) used data from 116 Danish companies. Danish companies have a management board and a separate supervisory board, but the latter also staffs members of the management board. On the one hand, the two separate bodies resemble a pure dual board structure, and on the other hand, the fact that executive directors and NEDs cooperate in the supervisory board resembles a unitary board structure. Therefore, the author refers to it as a semi-two-tier structure. He hypothesised that an increased proportion of executive directors – i.e. lower levels of board independence – in the supervisory board is associated with a negative impact on financial performance. To test the hypothesis, an ordinary least squares approach was applied to variables that are four-year averages over the period from 1998 until 2001. The results show a negative relationship between the percentage of executive directors in the supervisory board and performance, measured by Tobin’s Q (Rose 2005: 697-698). The relationship between supervisory board independence and performance is thus positive in a semi-two-tier structure, according to this study. A correlation analysis confirms these findings. However, the results do not appear to be significant.

Krivogorsky (2006) used company data from nine European countries.1 The 81 companies in his sample traded on the New York Stock Exchange in the years 2000 and 2001. The hypothesis is that the proportion of independent directors2 and scholars on the board have a strong effect on company performance, whereas the proportion of inside directors does not have such a strong impact (Krivogorsky 2006: 183-184). The research applies three different types of performance measures: ROE, ROA and market-to-book ratio. A correlation analysis shows positive values for the relationship and the regression analysis reports for all three measures of performance a positive impact of board independence (Krivogorsky 2006: 188-191). The relationships with ROA and ROE are significant, but the results for market-to-book ratio are not.

Faleye (2007) conducted research on the performance effects of a staggered board. On normal boards directors are elected each year for a period of one year, but on staggered boards directors are elected for multiyear periods. In order to accomplish this, the board is divided into classes, usually three, and each year one class of directors is elected. In the case of three classes, one third of the board is elected every year. Faleye used a sample of 2,012 companies, which generated 11,646 company year observations over the period from 1996 until 2002. He found in an ordinary least squares study that a staggered board has a strong significant negative impact on company value, measured by Tobin’s Q (Faleye 2007: 506-509). In the same ordinary least squares regression the level of board independence3 appeared to have a significant positive impact on Tobin’s Q.

Li and Harrison (2008) investigated whether national culture influences the composition of the board. They used the four major cultural dimensions of Hofstede (1981) – uncertainty avoidance, individualism/collectivism, masculinity/femininity, power distance4 – to explain the differences in board composition between countries. In addition, they performed a Pearson correlation analysis on the relationship between lagged board independence and profit margin. The results show a very small (0.01) insignificant positive relation between these two variables (2008: 379-380). The dataset is very dispersed with respect to countries: 399 multinational companies are included from fifteen different countries. North-America (193), Europe (121) and Japan (59) are the most important contributors of companies in the dataset.

Cornett et al. (2008) investigated the relationship between corporate governance and performance and corrected this performance for earnings management. In a sample of S&P 100 companies over the period from 1994 until 2003, they corrected performance – measured by ROA – by subtracting the discretionary accruals relative to total assets. These discretionary accruals equal the difference between the reported accruals and the accruals that are derived from the Jones model (Cornett et al. 2008: 361). The results section shows that the impact of board independence5 on ROA is significantly positive and this is also the case for ROA corrected for earnings management (Cornett et al. 2008: 368-370). However, the coefficient of the variable board independence is significantly higher in the regressions in which the corrected performance is the dependent variable. Thus, the impact of board independence is higher when the true performance is used and not the performance that is polluted by discretionary accruals, which are indications for earnings management.

Setia-Atmaja (2009) researched the influence of board independence on company performance in Australia and uses two moderators: ownership concentration and dividend pay-out ratio. Setia-Atmaja formulated the hypotheses that board independence6 is positively related to company performance in closely held7 companies, and that the impact of board independence on company performance is stronger in closely held companies than in widely held companies. Board independence is less present in companies with a dominant shareholder, because shareholder monitoring is seen as a substitute for monitoring by independent directors. However, shareholder monitoring is considered to be less effective. Therefore, board independence is expected to influence performance positively in closely held companies (Setia-Atmaja 2009: 697-698). Furthermore, the hypothesis was formulated that board independence is positively related to company performance in companies with low dividend pay-out8 ratios. In companies with low dividend payouts, there are larger amounts of free cash flows which can be expropriated by management; board independence can prevent this abuse (Setia-Atmaja 2009: 698). The two hypotheses were combined as well: the impact of board independence on company performance in companies is stronger in closely held companies with low dividend pay-out ratios than in other companies. All the hypotheses mentioned above were repeated for audit committee independence. These hypotheses were tested on the data of 316 Australian companies and 1,530 company year observations over the period 2000 until 2005. A Pearson correlation test showed that board independence is significantly positively related to company performance, measured in this study by Tobin’s Q. This finding was also confirmed by a three-stage least squares regression, which reported significant positive numbers for the relationship between board independence and Tobin’s Q (Setia-Atmaja 2009: 702-704). The moderator effect of ownership concentration shows that there is support for the hypothesis that board independence has more impact on performance in closely held than in widely held companies (Setia-Atmaja 2009: 703-705). It also shows that the overall positive result is based on closely held companies in the sample (i.e. 54 per cent) and not on widely held companies, which show an insignificant negative relationship. Significant positive results were found for the hypotheses that board independence has a positive effect on companies with low dividend pay-out ratios and closely held companies with low dividend pay-out ratios (Setia-Atmaja 2009: 703-706). Results for audit committee independence were positive as well, but less pronounced than for board independence and not significant in all cases.

Bell et al. (2010) tested, on a sample of 202 foreign IPO companies that went public between 2002 and 2007 in either the United States (103) or United Kingdom (99), the relationship between board independence9 and their post IPO performance. The performance measure is a composite measure, which combines the ‘net proceeds of the IPO offering, pre-money market valuation, the 90-day post-IPO market valuation, and the 180-day post-IPO valuation’ (Bell et al. 2010: 10). One hypothesis in this article expected a positive relationship between board independence and performance. Board independence is regarded as a sign that foreign companies are willing to pursue transparency and good monitoring and comply with corporate governance practices. Investors are prepared to pay a premium for these companies. In addition, the authors formulated the hypothesis that the relationship between board independence and performance is negative in the United States in comparison to the United Kingdom. Corporate governance regulation in the United States is more rule-based with stringent supervisors, whereas in the United Kingdom it is more principle-based with a comply or explain approach. Therefore, investors have more confidence in the good governance practices of companies that go public in the United States, because these American companies are better screened than in the United Kingdom (Bell et al. 2010: 6-8). And, therefore, the premium investors are prepared to pay for companies with high levels of board independence is higher in the United Kingdom than in the United States, because corporate governance in the United States is already considered to be good. The regression analyses in this article provide significant evidence for the hypotheses formulated above: board independence has a positive influence on performance and this relationship is stronger in the United Kingdom than in the United States (Bell et al. 2010: 11-14).