4.4.1 Studies from 1994 and earlier

Cochran et al. (1985) investigated the relationship between board composition and the adoption of golden parachute contracts for managers. In a sample of 408 Fortune 500 companies from 1982, they found – measured by a logit analysis – that boards with higher percentages of inside directors are more likely to award managers golden parachute contracts (Cochran et al. 1985: 670). This implies that boards with more independent board members are less likely to offer managers golden parachute options, which is in line with the general opinion that more board independence leads to a lower consumption of perquisites. Besides the focus on the board task of offering golden parachutes, Cochran et al. conducted research on the relationship between board independence and performance by measuring correlations. They found that higher percentages of inside directors are significantly associated with higher levels of ROA and the ratio between operating income and sales and insignificantly positively related to ROE (Cochran et al. 1985: 667-669). As the percentage of inside directors and board independence are inversely related – higher independence means less insiders and vice versa – more board independence is negatively correlated with performance, measured by ROA, ROE and the ratio between operating income and sales.

Fosberg (1989) took a different approach by applying a paired sample test. Fosberg gathered an initial random sample of 200 companies from Moody’s Industrial Manual of 1979, of which information is available in CRSP over 1983. These companies were matched with companies with the same four digit SIC and comparable levels of totals assets and capital structure. Fosberg intended to compare companies with percentages of outsiders1 below fifty (non-majority companies) with companies above 50 (majority companies), which resulted in a sample of ninety paired companies. So each of these ninety pairs consisted of one non-majority company and one majority company. In addition, Fosberg wanted to compare majority companies (i.e. more than fifty per cent outsiders on the board) with super-majority companies (i.e. more than two thirds of the board consists of outsiders) as well. This second group consisted of 37 paired companies of which one company was a majority company and one company a super-majority company. The differences with respect to ROE per year (from 1979 to 1983) and the average ROE over the full period of five years were tested (Fosberg 1989: 27-31). The results show no significant differences between majority and non-majority companies; neither do they show significant differences in levels of ROE between majority and super-majority companies. Despite the lack of significant results, in the total sample of all the 127 paired companies there is an indication that higher percentages of outsiders on the board are associated with lower levels of ROE. However, these results do not appear to be statistically significant.

Abrahamson and Park (1994) investigated the concealment of negative organisational outcomes by the company on a sample of 1,118 listed United States companies with information from 1989. They concluded that boards with a higher percentage of outside directors2 are more inclined to limit the concealment of negative news of the company (Abrahamson and Park 1994: 1325). This can be interpreted as a positive relationship between board independence and transparency, even in situations with negative outcomes. Besides that, a correlation analysis showed a slightly negative impact of the percentage of outside directors on the performance of the organisation, measured by ROA (Abrahamson and Park 1994: 1318). This finding is not significant.

Hempel and Fay (1994) explored the relationship between compensation of the board and contemporaneous and future company performance. They found that the compensation package for the total board of directors, the decision to reward outside directors with share-based remuneration and the level of the compensation of outside directors all do not have a significant impact on the financial performance of companies (Hempel and Fay 1994: 129-131). The authors therefore dispute the relevance of performance-based pay, because their ordinary least squares study does not find any evidence for a positive relationship between remuneration and performance. They conducted their research on a selection of 235 Fortune 500 companies and used financial and corporate governance data from the years 1985 and 1989. In their exploratory part, they also reported the correlations between the variables of interest. The percentage of inside directors on the board shows a positive correlation with the two measures of performance: earnings per share and profits. However, the exhibited correlation values are not significant (Hempel and Fay 1994: 120). This means that board independence is negatively related to performance, according to this study on Fortune 500 data from 1985 and 1989.

Hoskisson et al. (1994) focused solely on companies involved in restructurings. They scrutinised 203 United States companies that underwent major restructurings. In the given time frame these companies divested two or more of their businesses that accounted for at least ten per cent of their total sales. The authors’ hypothesis was that companies with relatively high percentages of outside directors3 are more diversified with unrelated businesses, but they found no significant evidence that this is indeed the case (Hoskisson et al. 1994: 1212-1213, 1227-1229). Furthermore, they reported the relationship between the percentages of outsiders and six performance measures. ROA, ROE and return on sales – all adjusted for industry return – were the accounting performance measures; Sharpe measure,4 Treynor measure5 and Jensen’s alpha6 were the market performance measures. A correlation report showed only negative relationships, except for ROE (Hoskisson et al. 1994: 1224). However, none of the reported correlations are significant.