The structure of corporate boards and private benefits of control: Evidence from the Russian stock exchange

Abstract

This paper revisits the role of board size and composition in corporate governance using a measure of private benefits of control (PBC) as indicator of governance problems in firms. We calculate PBC using the voting premium approach for a sample of dual class stock companies traded on the Russian stock exchange between 1998 and 2009. Using fixedeffects regressions, we find a quadratic relationship between PBC and board size, implying the optimality of medium-sized (about 11 directors) supervisory boards. This result is substantially stronger for PBC than for traditional measures of corporate performance. There is also some evidence that director ownership helps mitigate governance problems. Most remarkably, we find that non-executive/independent directors are associated with larger PBC and thus do not seem to help improve corporate governance. In contrast, regressions with accounting performance measures as dependent variables tend to suggest a positive role of these directors in corporate governance. IntroductionAgency theory views the conflict of interest between managers on the one hand, and providers of finance, most notably shareholders, on the other, as a key feature of the public corporation (Shleifer and Vishny 1997). Among various corporate governance mechanisms, which aim to realign these interests, a crucial role is assigned to the board of directors (Tricker 2012). The issues of board structure and processes, defined in terms of board size, presence of non-executive independent directors, separation of the posts of the chairman and the CEO, and establishment of various committees have been central to recent corporate governance debates and reforms (Nordberg 2011). In particular, reforms aimed at increasing the number of non-executive and independent directors in corporate boards have widely been adopted. 1The empirical evidence concerning the effect of different board structures on corporate performance remains inconclusive regardless of whether it comes from the US, other developed economies or emerging markets. With respect to board size, a number of influential papers suggest that large boards are bad for company performance (e.g., Lipton and Lorsch 1992, Yermack 1996, Conyon and Peck 1998. However, some recent studies find no robust relationship (e.g., Lehn, Patro, and Zhao 2009, Wintoki, Linck, andNetter 2012), report a non-linear relationship (Andres and Vallelado 2008), or suggest a more nuanced picture (e.g., Coles, Daniel, and Naveen 2008 according to which Tobin's Q increases in board size for complex firms, but decreases for simple ones).Similarly, there is a lack of agreement regarding the role of independent and non-executive directors. Most studies based on US data find no statistically significant effect of board independence on corporate performance (Hermalin and Weisbach 1991, Bhagat and Black 2002, and Wintoki et al. 2012. Agrawal and Knoeber (1996) is among a few papers reporting a negative effect. Some studies suggest a positive role of independent directors (e.g. Rose...

Boards of directors in Russian publicly traded companies in 1998–2014: Structure, dynamics and performance effects

“…There is substantial evidence of non-linearities in the association of board size and firm performance, including in Russia (e.g. Coles, 2008;Muravyev et al, 2014). We have examined several alternatives in an attempt to find the functional form that best fits the data.…”

“…The data are mostly cross-sectional: only eight studies feature panel data. The two panel data analyses that rely on a reasonably large number of observations (approaching 1,000) are Muravyev et al (2014), which is a study of dual-class stock firms traded on the stock market, and Dulyak 2015, which samples large firms, both traded and non-traded. The number of periods in the panel data studies is typically small, with the largest being 12 years in Muravyev et al (2014).…”

“…More precisely, the board of directors (supervisory council) is not mandatory for companies with fewer than 50 shareholders (article 64 of the Federal Law "On joint-stock companies"). This rule has no implications for our analysis because we study publicly traded firms, which have hundreds and thousands of shareholders.4 The term "board of directors" is understood as the supervisory board inIwasaki (2008),Muravyev et al (2014) and most studies published in national journals. However, the cross-country study byFerreira and Kirchmaier (2013), which includes Russia, defines this term as a combination of both tiers, the supervisory and management boards.…”

Corporate Governance System and Regional Heterogeneity: Evidence from East and West Russia

“…From the same viewpoint, some notable research articles also published in the 2000s include those by Bevan et al (2001), Judge et al (2003), and Peng et al (2003). The latest studies on listed companies are represented by Muravyev et al (2014) and the aforementioned Muravyev (2017). 8 In addition to these extant studies, findings produced by a joint research project undertaken by the Institute of Industrial and Market Research of Higher School of Economics (HSE) and the Institute of Economic Research of Hitotsubashi University (HU) also contributed to improving our understanding of the Russian system of corporate governance (Dolgopyatova et al, 2009).…”

“…(2) Expert auditors account for only 16.5% of all committee members, and the majority of companies employ no expert auditors at all. (3) Local small-and mediumsized audit firms account for 68.5% of all external auditors elected by surveyed companies, and 9 According to Muravyev et al (2014) and Muravyev (2017), the board of directors of Russian listed companies consists of 8.8 members on average, with 57% elected from outside the company and 10% independent directors. Furthermore, the polarization in board composition in terms of the proportion of outside directors observed by Iwasaki (2008) was not so marked in listed companies investigated by these authors.…”