This paper is a survey of the literature on boards of directors, with an emphasis on research done subsequent to the Benjamin E. Hermalin and Michael S. Weisbach (2003) survey. The two questions most asked about boards are what determines their makeup and what determines their actions? These questions are fundamentally intertwined, which complicates the study of boards because makeup and actions are jointly endogenous. A focus of this survey is how the literature, theoretical as well as empirical, deals—or on occasions fails to deal—with this complication. We suggest that many studies of boards can best be interpreted as joint statements about both the director-selection process and the effect of board composition on board actions and firm performance. ( JEL G34, L25)

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The Role of Boards of Directors in Corporate Governance: A Conceptual Framework and Survey

http://pbfea2005.rutgers.edu/20thFEA/AccountingPapers/Session6/Erkens,%20Hung,%20and%20Matos.pdf

Corporate governance in the 2007–2008 financial crisis: Evidence from financial institutions worldwide

We use a sample of large international commercial banks to test hypotheses on the dual role of boards of directors. We use a suitable econometric model (two step system estimator) to solve the well-known endogeneity problem in corporate governance literature, and demonstrate the empirical and theoretical superiority of system estimator over OLS and within estimators. We find an inverted U-shaped relation between bank performance and board size, and between the proportion of non-executive directors and performance. Our results show that bank board composition and size are related to directors’ ability to monitor and advise management, and that larger and not excessively independent boards might prove more efficient in monitoring and advising functions, and create more value. All of these relations hold after we control for the measure of performance, the weight of the banking industry in each country, bank ownership, and regulatory and institutional differences.

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Corporate governance in banking: The role of the board of directors

This study examines the relevance of bank board structure on bank risk-taking. Using a sample of 212 large US bank holding companies over 1997-2004 (1,534 observations), this study finds that strong bank boards (boards reflecting more of bank shareholders interest) particularly small and less restrictive boards positively affect bank risk-taking. In contrast, CEO power (CEO's ability to control board decision) negatively affects bank risk-taking. These results are consistent with the bank contracting environment and robust to several proxies for bank risk-takings and different estimation techniques.

Strong Boards, CEO Power and Bank Risk-Taking

We examine the impact of board size on firm performance for a large sample of 2746 UK listed firms over 1981–2002. The UK provides an interesting institutional setting, because UK boards play a weak monitoring role and therefore any negative effect of large board size is likely to reflect the malfunction of the board's advisory rather than monitoring role. We find that board size has a strong negative impact on profitability, Tobin's Q and share returns. This result is robust across econometric models that control for different types of endogeneity. We find no evidence that firm characteristics that determine board size in the UK lead to a more positive board size–firm performance relation. In contrast, we find that the negative relation is strongest for large firms, which tend to have larger boards. Overall, our evidence supports the argument that problems of poor communication and decision-making undermine the effectiveness of large boards.

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The impact of board size on firm performance: evidence from the UK

We examine the relation between board structure (size and composition) and firm performance using a sample of banking firms during 1959-1999. Contrary to the evidence for non-financial firms, we find that banking firms with larger boards do not underperform their peers in terms of Tobin's Q. We argue that M&A activity and features of the bank holding company organizational form may make a larger board more desirable for these firms and document that board size is significantly related to characteristics of our sample firms' structures. Even after accounting for these potential sources of endogeneity, we do not find a negative relationship between board size and Tobin's Q. Our findings suggest that constraints on board size in the banking industry may be counter-productive.

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Corporate Performance, Board Structure and its Determinants in the Banking Industry

We examine cross-sectional variations on the committee structure of boards of directors for S&P firms during 1997 and 1998. We document that there is a significant amount of variation in the sample on the number of committees and the presence of each committee. Number of committees is positively related to the number of directors. Number of committees is also positively related to firm size. Firms that pay dividends have more committees. Firms with a higher CEO ownership have fewer committee functions performed by the board. On the other hand, firms with larger boards, more assets, and more board meetings have more committee functions. As well, dividend-paying firms have more committee functions. Firms with a higher CEO ownership assign fewer tasks to each committee. Firm performance, measured by market to book ratio, is negatively related to the percentage shares held by outside directors on the acquisition committee, ethics committee, succession committee, and technology committee, but is positively related to the percentage of shares held by the outside directors serving on the finance & investment committee as well as on the strategy committee. Consistent with other a number of studies, firm performance is positively related to the percentage of the shares held by the CEOs. Finally, firms with older boards have lower market to book ratios. We do not find that performance is related to the presence of committee or to the fraction of outside directors serving on each committee.

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Board Committee Structures, Ownership, and Firm Performance 1

This special volume of the Economic Policy Review is designed to foster a better understanding of corporate governance - particularly as it applies to banking firms - among regulators, investors, researchers, and the interested public. The contributors to the volume, specialists in governance, analyze the topic from many perspectives, including law, financial accounting, and financial economics. As they summarize and synthesize a vast literature on vital governance issues, the authors present a framework for understanding corporate governance and identify key areas of future research.

Introduction: Special issue: corporate governance: what do we know and what is different about banks?

* As the labor market tightened in 1999, the growth rate of compensation per hour (CPH) unexpectedly slowed * The decline in CPH may be attributed to the rapid increase in new employee stock option grants relative to the realization of options awarded before 1999 * Employee stock options are captured in the CPH measure on the exercise date, not on the date granted, and the options' value can change considerably over the several years that can elapse between these dates * A recalculation of CPH that reflects the value of options on the grant date suggests no downturn in compensation growth in 1999 From an economic standpoint, the 1990s were a remarkable period On the one hand, the decade produced the longest-running US expansion On the other hand, a by-product of this continued economic growth was a sharp tightening of the US labor market This growing scarcity of available workers raised the concern that accelerating wage demands would develop, possibly leading to renewed inflation The 1990s were also noteworthy for the emergence of two "wage puzzles" The first puzzle is associated with the 1992-95 period, when nominal compensation per hour (CPH) growth declined and the unemployment rate fell rapidly (Chart 1) (1) One explanation for this occurrence is that "worker insecurity" early in the expansion accounted for the tepid pay demands during this period (2) From 1995 to 1998, the puzzle ceased to exist, as compensation growth accelerated and the unemployment rate fell below the 4 percent barrier However, the second wage puzzle appeared in 1999, when compensation growth fell back below the 5 percent level despite continued labor market tightness during the year [GRAPHIC 1 OMITTED] In this article, we examine the wage-puzzle phenomenon of the 1990s Specifically, we explore whether changes in pay structure can account for the behavior of CPH during the decade Labor markets have changed considerably over the past twenty years: workers today receive a higher portion of total compensation in such nontraditional forms as profit sharing and stock options (3) CPH captures profit-sharing payments and stock option realizations However, employee stock options are reflected in total compensation on the date they are exercised--not on the date granted--and several years can elapse between these dates Accordingly, the growing use of these stock options could be affecting the time that tight labor markets are reflected in CPH growth By analyzing the existing data, we determine how CPH growth is affected by the use of employee stock options However, given the limitations of these data, we focus primarily on the second wage puzzle, that of the late 1990s We find evidence that employee stock options may have had an appreciable impact on CPH during this period In particular, when we recalculate compensation to reflect current stock option grants--rather than current realizations--we conclude that there was likely no downturn in CPH growth in 1999 (4) The article is organized as follows We begin by describing the essential institutional details of employee stock options necessary for our empirical work We then discuss empirical models of stock option grant and realization decisions Next, we use these estimates to assess the effect of stock options on compensation per hour We conclude by addressing some general labor market implications of stock options EMPLOYEE STOCK OPTIONS Employee stock options are the right to purchase a given number of shares of company stock at the "strike" price between the vesting date and the expiration date of the options (5) The vesting period is the interval between when a company grants the option and when the employee can first exercise the option If the current market price for a vested option exceeds the strike price, the option is "in-the-money" If in-the-money options are exercised (that is, if the employee decides to purchase the underlying shares), the gain to the employee is the difference between the current market price and the strike price multiplied by the number of shares exercised …

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The Impact of Employee Stock Options on the Evolution of Compensation in the 1990s

This study analyzes differences by gender in the ownership of privately held U.S. firms and examines the role of gender in the availability of credit. Using data from the nationally representative Surveys of Small Business Finances, which span a period of sixteen years, we document a series of empirical regularities in male- and female-owned firms. Looking at the differences by gender, we find that female-owned firms are 1) significantly smaller, as measured by sales, assets, and employment; 2) younger, as measured by age of the firm; 3) more likely to be organized as proprietorships and less as corporations; 4) more likely to be in retail trade and business services and less likely to be in construction, secondary manufacturing, and wholesale trade; and 5) inclined to have fewer and shorter banking relationships. Moreover, female owners are significantly younger, less experienced, and not as well educated. We also find strong univariate evidence of differences in the availability of credit to male- and female-owned firms. More specifically, female-owned firms are significantly more likely to be credit-constrained because they are more likely to be discouraged from applying for credit, though not more likely to be denied credit when they do apply. However, these differences are rendered insignificant in a multivariate setting, where we control for other firm and owner characteristics.

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Hamid Mehran

Papers

Corporate Performance, Board Structure and its Determinants in the Banking Industry

Board Committee Structures, Ownership, and Firm Performance 1

Introduction: Special issue: corporate governance: what do we know and what is different about banks?

The Impact of Employee Stock Options on the Evolution of Compensation in the 1990s

Gender and the availability of credit to privately held firms: evidence from the surveys of small business finances