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Determinants of Board Size, Composition and Leadership

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Corporate Board of Directors

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Abstract

Using a 14-year panel data set on the Standard and Poor’s 1500 firms, this chapter examines the trends and determinants of corporate board structure (Board size, independence and CEO duality). Our hypotheses lead to predictions that firm complexity and advising requirements, the costs of monitoring and advising, ownership structure and CEO characteristics are important determinants of board structure. Our findings provide strong empirical evidence in support of these hypotheses. We also find some evidence that the Sarbanes–Oxley Act has had an impact on board structure and its determinants.

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Notes

  1. 1.

    To set up the entrenchment index , Bebchuk et al. (2009) emphasize on the following 6 provisions (dummy variables): staggered board, poison pills, golden parachutes, limits to shareholders by-law amendments, supermajority requirements for mergers and charter amendments.

  2. 2.

    The R&D dummy is a binary variable that equals one if the R&D divided by total assets of a firm is greater than the top quartile value and zero otherwise.

  3. 3.

    Market to book ratio and research and development expenditures are usually used in the literature to capture growth opportunities. The standard deviation of stock returns is used to measure information asymmetry (see, e.g., Fama and Jensen 1983; Linck et al. 2008).

  4. 4.

    According to Hermalin and Weisbach (1998), the CEO’s bargaining power arises generally from the CEO’s perceived ability.

  5. 5.

    The sample size varies depending on the variables used for each regression.

  6. 6.

    According to RiskMetrics, inside directors are the firm’s executives and officers, “gray directors include former employees, family members of current employees, owners of majority voting control, and individuals with disclosed conflicts of interest such as outside business dealings with the company, receipt of charitable contribution from the company, and interlocking director relationship with the CEO” (Masulis et al. 2012).

  7. 7.

    The Entrench index is computed as the sum of five dummy variables: staggered board dummy (which equals one when directors are elected to staggered terms and zero otherwise), limits to amend bylaws (equal to one if there is a provision limiting shareholders’ ability through majority vote to amend the corporate bylaws), limits to amend the charter (which takes the value of one when there is a provision limiting shareholders’ ability through majority vote to amend the corporate charter), supermajority dummy (that is equal to one if the approval of more than the majority of shareholders is required for mergers) and poison pill dummy (which equals one if there is a shareholder right that is triggered in the event of an unauthorized change in control that typically renders the target company financially unattractive or dilutes the voting power of the acquirer) (see Bebchuk et al. 2009).

  8. 8.

    The FCF and Entrench index variables are not included in all regressions because the number of observations available for these variables is much lower than that of the other explanatory variables.

  9. 9.

    Appendix A provides detailed definitions and sources of all variables.

  10. 10.

    To double check for any multicollinearity issue, we also perform the Variance Inflation Factor (VIF) analyses for all tests. We find that the highest VIF is 1.61 which is considerably less than the 10 threshold above which multicollinearity could be an issue (Gujarati 2003).

  11. 11.

    This finding corroborates Linck et al.’s (2009) observation.

  12. 12.

    The observed increase in 2008 is preceded by a significant decrease in the percentage of firms where the CEO is also the COB. This percentage decreases from 58% in 2006 to 43% in 2007, representing a decrease of about 26%.

  13. 13.

    Because of the rather small number of observations available for the FCF and Entrench Index variables, the results of these variables are included only in Table 2.6.

  14. 14.

    Results should however be interpreted with caution because potential endogeneity issues may still exist.

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  1. University of Burgundy, Auxerre, France

    Ismail Lahlou

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Lahlou, I. (2018). Determinants of Board Size, Composition and Leadership. In: Corporate Board of Directors. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-05017-7_2

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  • DOI: https://doi.org/10.1007/978-3-030-05017-7_2

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