Board Structures Around the World: An Experimental Investigation

Abstract

We model and experimentally examine the board structure-performance relationship. We examine single-tiered boards, two-tiered boards, insider-controlled boards, and outsider-controlled boards. We find that even insider-controlled boards frequently adopt institutionally preferred rather than self-interested policies. Two-tiered boards adopt institutionally preferred policies more frequently, but tend to destroy value by being too conservative, frequently rejecting good projects. Outsidercontrolled single-tiered boards, both when they have multiple insiders and only a single insider, adopt institutionally preferred policies most frequently. In those board designs where the efficient Nash equilibrium produces strictly higher payoffs to all agents than the coalition-proof equilibria, agents tend to select the efficient Nash equilibria.

How outside directors facilitate corporate R&D investment? Evidence from large Korean firms

“…However, as discussed above, the disciplining role of outside directors might foster underinvestment. While they will increase efficient outcomes regardless of whether they are majority on the board or not, outside directors on two-tiered boards might be overly conservative in deciding investment policies (Gillette et al, 2008). Thus, we bifurcate the monitoring functions of outside directors according to a specific condition and contrast them: when a firm's growth opportunity is high vs. low.…”

“…For these reasons, outside directors on the board, defined as nonmanagement members of the board (Johnson, Daily, & Ellstrand, 1996), have substantially increased through corporate governance reform in a number of countries, such as Germany and Japan (Yoshikawa, Tsui-Auch, & McGuire, 2007). Even though some studies on the effects of outside directors on performance are not conclusive (Dalton, Daily, Ellstrand, & Johnson, 1998;Rhoades, Rechner, & Sundaramurthy, 2000), a body of literature has suggested that outside directors critically affect a firm's decision making and performance, such as investment decisions and Tobin's Q (for instance, Barnhart, Marr, & Rosenstein, 1994;Daily & Dalton, 1994;Gillette, Noe, & Rebello, 2008;Hillman & Dalziel, 2003;Hillman, Nicholson, & Shropshire, 2008;Jensen & Meckling, 1976). Outside directors reconcile conflicts between managers, evaluate corporate agendas independent of corporate routines, and reduce potential agency problems.…”

“…While the stance of outside directors is overly conservative when they are working on two-tiered boards (Gillette et al, 2008), the separation of CEO and board chairman is relatively a new concept, for instance in Japan (Buchanan, 2007). The large 100 Korean firms, the case of this study, have also relied on CEO duality, "the practice of one person serving as both the CEO and chairperson of the board of directors" (Kim, AlShammari, Kim, & Lee, 2009), instead of the two-tiered boards.…”

The murky waters of IT governance

“…Two distinct groups often form within a governing body [53]. This is true of organisations following both a unitary and two-tier board structure [54].…”

“…These directors should have no immediate ties to management and may not hold office in the organisation [53]. In contrast, the second group includes the executive directors forming the management board [54].…”