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Board Composition and Regulatory Change: Evidence from the Enactment of New Companies Legislation in New Zealand
Abstract
We examine whether New Zealand firms changed the composition of their boards of directors due to the 1994 enactment of the new Companies Act. We explore two possible effects. First, outside directors may have been more attractive, and firms may have used more outside directors after the new Companies Act. Alternatively, the new duties and associated penalties could have made outside directorships less attractive and harder to fill, and firms may have used less outside directors. Our results show that the proportion of outside directors increased by about 5% after the new Companies Act. This supports the view that the value of outside directors increased after the Act and suggests that the political process can change corporate governance mechanisms.
... Then, large boards may push powerful CEOs to accept performance-based compensation (Van Essen, Otten & Carberry, 2015) and may limit the CEOs' push to receive backdated stock options (Frankforter, et al., 2012). Finally, board size is associated with other metrics of board oversight that may be beneficial in case of powerful CEOs: larger boards tend to have greater outside (Reeb & Upadhyay, 2010;Tian & Twite, 2011) and blockholder equity representation (Cahan & Wilkinson, 1999), place greater emphasis on equity pay for the CEO (Tian & Twite, 2011), and are correlated with a composite indicator of good governance (Garcia-Osma & Guillamon-Saorin, 2011). ...
Manuscript type
Empirical
Research Question/Issue
We depart from studies that separately explore CEOs’ and boards’ effects on firm performance. Instead, we examine the direct relationship between CEO power and firm performance, and how board monitoring, and most importantly, a change in the regulatory environment alter the relationship. As such, our study jointly examines the role of both internal and external corporate governance mechanisms on the relationship between CEO power and firm performance.
Research Findings/Insights
Our findings indicate that the negative main effect of a powerful CEO on firm performance is reduced by board monitoring, and that the Sarbanes Oxley (SOX) legislation amplifies board monitoring and reduces the negative effects of CEO power.
Theoretical/Academic Implications
Our study shows that agency relationships are grounded in social and institutional contexts. More precisely, our results suggest that CEO power is a function of the CEO's relationship with the board, as CEO power and board monitoring interactions affect firm performance. Furthermore, they indicate that the CEO‐board relationship is constructed within the legal institutional context, as the shock of SOX alters the effects that different combinations of CEO power and board monitoring have on firm performance.
Practitioner/Policy Implications
Our results highlight to investors and directors that corporate boards should be designed in relation to the power of CEOs. In addition, they provide valuable guidance for policy‐makers, suggesting that tight regulations may represent effective deterrents for some CEOs’ misbehaviors and favor the alignment of interests with those of company owners.
... The Companies Act was revised for New Zealand companies in 1993. Some of its provisions provided for an average increase of approximately 5% in outsider representation on a board after the introduction of legislation reforms, as reported by Cahan and Wilkinson (1999). As discussed and evidenced by previous research that an increase in outsiders on a board enhances the firm's performance, one would imagine a legislation change would result in an improved firm's value. ...
... Others examine the relationship between board characteristics and (i) executive compensation (e.g., Andjelkovic et al., 2002;Hurst and Vos, 2009;Jiang et al., 2009) or (ii) firm derivatives usage (Marsden and Prevost, 2005) or (iii) financial reporting quality (Rainsbury et al., 2009). 2 A much smaller body of work investigates the determinants of the board characteristics themselves. For example, Cahan and Wilkinson (1999) examine the impact of the 1993 Companies Act on outside director representation, while Roush (2000) use 1980s IPO data to identify systematic variation in board size, outside director representation, and the prevalence of CEOs who also act as board chairs. Similarly, Rainsbury et al. (2008) document the relationship between voluntary adoption of an audit committee and other board characteristics. ...
We document changes in New Zealand corporate board characteristics between 1995 and 2010, a period centred around the 2003 introduction of the NZX Corporate Governance Best Practice Code. Unsurprisingly, the representation of non-executive, independent and female directors on NZ boards rose during the period, as did real chair and director fees and the importance of board committees, while average board size fell. Perhaps more surprisingly, much of this movement occurred before 2003. Moreover, there are some intriguing dfferences between New Zealand and other, mainly larger, countries. We use this information to identify a number of unanswered questions about New Zealand corporate boards.
... Clarke (1993) believes that there is no single solution to corporate governance and felt that undue reliance was being placed on NEDs. The limited research in New Zealand on outside directors conducted by Cahan and Wilkinson (1999) studies the effect on board composition after the enactment of the new 1993 Companies Act. Their study of 69 listed New Zealand companies find that outside directors have increased by five percent since the change in legislation confirming the view that 'political processes can change corporate governance' (p. ...
ABSTRACT This paper reviews the literature on agricultural co-operatives and corporate governance,to highlight some ofthe,unique accountability problems ,faced by the ,governing ,boards of directors of producer-controlled agricultural co-operatives. Agricultural co-operative objectives and the problems ,of heterogeneity of ,co- operative membership ,highlighting the issues concerning to whom ,the co-operative board of directors is accountable and for what emerge. This literature illustrates various accountability mechanisms, to allow monitoring, evaluation and control made between the “normal” investor-owned firm with freely tradable shares and those of the ,producer-controlled agricultural co-operative. The relevant corporate governance and co-operative literature thus articulates the need for co-operatives and some ,of the ,reasons for co- operation among ,agricultural producers. The special nature of the ,co-operative enterprise and the new generation co-operative features in the literature, and their relationship with accountability issues is evaluated. 3
... Additionally, 13 percent of directors are inside directors and another 17 percent are grey directors. Conversely, 70 percent of directors can be classified as independent outside directors which is much higher than the 51.1 percent for a sample of New Zealand private sector firms reported by Cahan and Wilkinson (1999). Table 2 provides the Pearson pairwise coefficients among the explanatory variables excluding the industry control variables. ...
We provide evidence on the relation between board structure and CEO compensation in public sector corporations in New Zealand. Using a sample of 80 New Zealand public sector companies, we find that similar to private sector studies, CEO compensation is related to board size, whether the CEO sits on the board, and director quality. We also find that a composite measure of board structure is significant. We conclude that, similar to the private sector, board structure is important in constraining CEO pay. Moreover, our results suggest that private sector-style board can be effective in a public sector context.
... Prior research reveals that companies often adopt governance mechanisms not necessarily required by the law, but that adhere to the spirit and purpose of the law. In a study examining whether the board composition of firms in New Zealand changed due to the enactment of the Companies Act of 1993, Cahan and Wilkinson (1999) found that the proportion of outsiders increased after the Act was passed. The Act was intended to clarify the duties and liability of directors and impose more severe penalties for breach of fiduciary responsibility. ...
A vast and often confusing economics literature relates competition to investment in innovation. Following Joseph Schumpeter, one view is that monopoly and large scale promote investment in research and development by allowing a firm to capture a larger fraction of its benefits and by providing a more stable platform for a firm to invest in R&D. Others argue that competition promotes innovation by increasing the cost to a firm that fails to innovate. This lecture surveys the literature at a level that is appropriate for an advanced undergraduate or graduate class and attempts to identify primary determinants of investment in R&D. Key issues are the extent of competition in product markets and in R&D, the degree of protection from imitators, and the dynamics of R&D competition. Competition in the product market using existing technologies increases the incentive to invest in R&D for inventions that are protected from imitators (e.g., by strong patent rights). Competition in R&D can speed the arrival of innovations. Without exclusive rights to an innovation, competition in the product market can reduce incentives to invest in R&D by reducing each innovator's payoff. There are many complications. Under some circumstances, a firm with market power has an incentive and ability to preempt rivals, and the dynamics of innovation competition can make it unprofitable for others to catch up to a firm that is ahead in an innovation race.
... Demsetz (1983) argues against the need of regulating board composition, maintaining that executive compensation contracts are sufficient to guide top management in serving the interests of shareholders. Cahen and Wilkinson (1999) find that the proportion of outside directors in a sample of New Zealand companies increased by about 5% after the 1993 Companies Act. Their study suggests that the value of outside directors actually increases as a result of the political process. ...
We use a sample of large bank holding companies to empirically examine the association between financial performance and organizational structure. We regress firm accounting performance on measures of board independence, CEO pay-performance sensitivity, the product of board independence and CEO pay-performance sensitivity, and other organizational features and control variables. We find that both CEO pay-performance sensitivity and the relative tenure of independent outside directors have a positive effect on accounting performance. Their interactive effect tends to be negative. Thus, the marginal value of each mechanism for accounting performance declines as the use of the other mechanism increases. These results are robust in a simultaneous equations framework that accounts for endogeneity issues. We also find a positive relation between the percentage of independent outside directors and CEO pay-performance sensitivity.
The subprime mortgage crisis has been blamed on many: the Bush Administration, Bernie Madoff, the financial industry, overzealous housing developers. Yet little scrutiny has been placed on the American legal system as a whole, even though parts of that system, such as the laws that regulate high-risk lending, have been dissected to bits and pieces. In this innovative and exhaustive study, Steven A. Ramirez posits that the subprime mortgage crisis, as well as the global macroeconomic catastrophe it spawned, is traceable to a gross failure of law. The rule of law must appropriately channel and constrain the exercise of economic and political power. Used effectively, it ensures that economic opportunity isn't limited to a small group of elites that enjoy growth at the expense of many, particularly those in vulnerable economic situations. In Lawless Capitalism, Ramirez calls for the rule of law to displace crony capitalism. Only through the rule of law, he argues, can capitalism be reconstructed.
Government regulation in an industry is an intermediary in the principal-agent relationship that acts as a substitute for internal governance mechanisms. We propose a model for studying how different forms of deregulation (frame-breaking, metamorphic, piecemeal, and plodding) impact variations in the speed of adaptation of internal governance mechanisms to the theoretical predictions of agency theory and resulting performance implications. We develop illustrative propositions for a set of contingencies that moderate the above relationship. How government and firms manage the deregulatory process has important economic and social consequences.
Purpose
– The purpose of this paper is to uncover the stylised facts about NZ corporate boards and identify unanswered questions about their composition, activity and incentives during the 16-year period between 1995 and 2010.
Design/methodology/approach
– The paper uses annual report data to document the evolution of 22 NZ board characteristics. The paper also informally compares these trends with those occurring in other countries.
Findings
– Unsurprisingly, the representation of non-executive, independent and female directors on NZ boards rose during the period, as did real chair and director fees and the importance of board committees, while average board size fell. Perhaps more surprisingly, much of this movement occurred before NZX governance reforms in 2003. Moreover, there are some intriguing differences between New Zealand and other, mainly larger, countries.
Research limitations/implications
– The analysis is largely descriptive and focuses on identifying questions rather than answering them.
Originality/value
– The paper fills an obvious gap in the governance literature, which largely ignores small, open economies, and hence provides little clue as to the overall state and evolution of NZ boards. The paper also identifies a number of questions for further research.
It's time to focus on the corporate board for those interest in corporate governance in China. That the board play an effective role is crucial to improve corporate governance. This article discusses such issues about the functions of the board as different opinions, different types and patterns of the functions, and different factors which have impact on the functions. Finally the author suggests that, there is a lot research in the current literature on the structure and composition of the board, and the relationship between those and corporate performance, but it is taken as a black box how to interact between those two. The research on the characteristics of the functions and the non- structural factors are still quite weak, especially on the empirical research.
This dissertation abstract and the reflection commentary present the work of Dr. Johanne Grosvold. The dissertation addresses the influence of institutional context on the prevalence of women on corporate boards of directors. The dissertation abstract explains the research questions, setting, and methods.The reflection commentary discusses the author’s views of research process as a junior scholar.
This paper examines whether compensation committee composition affects CEO compensation practices. We find that CEOs receive preferential treatment (at shareholders' expense) when insiders are members of the compensation committee. We do not find that CEO compensation is greater in firms that have insiders on the compensation committee than it is in firms that do not. However, we show that the relation between CEO compensation and performance is more favorable toward the CEO (i.e., biased in the CEO's favor at shareholder expense) among the firms that have insiders on the compensation committee.
This paper examines if board composition has any systematic bearing on derivatives usage by New Zealand listed companies. We also test if derivative usage changed following the introduction of the new 1993 Companies Act. The Act raised expectations of directors' fiduciary responsibilities and the perceived risk of liability on outside directors for poor investment decisions. Using a dataset of listed New Zealand companies in 1994 and 1997, we find companies with higher growth opportunities and a greater proportion of outside directors were less likely to use financial derivatives following the introduction of the new Act. Our results supplement the US-based literature on derivatives usage by illustrating that internal governance mechanisms can play a role in corporate derivatives policy, and that the legislative and regulatory environment may affect this role. Copyright Blackwell Publishers Ltd, 2005.
Recent accounting and auditing failures have heightened interest in issues of corporate governance. In an effort to restore investor confidence, the SEC required CEOs to file sworn statements verifying the accuracy of the firm’s most recent financial statements and compliance with GAAP by August 14, 2002. The value of this confidence-restoring mechanism is contingent on whether shareholders perceived these reports as being credible. In this study, we examine the market reaction to early filing of CEO certifications. We find no reaction to early filing for the market as a whole suggesting that early filing alone was not necessarily a positive event. Further analysis reveals a positive relation between abnormal returns at the time of early filing and several corporate governance related measures, including dividend payments, board size and institutional ownership. Thus, we conclude that the market reaction to early filing was influenced by the existence of pre-existing corporate governance mechanisms.
Recent corporate events have brought a heightened public awareness to corporate governance issues. Much work has been accomplished to date, but it is clear that much more remains to be done. This paper provides a review of empirical research in four relevant areas of corporate governance. Specifically, the paper provides an overview of (a) the role that outside directors play in monitoring managers, (b) the emerging literature on the impact of board diversity, (c) the existence of and incentives for corporate executives to manage firm earnings, and (d) managerial incentives to bear risk. Copyright 2003 Eastern Finance Association.
This article synthesizes empirical researchfindings on the impact of boards of directors on corporate financial performance. An integrative model of board attributes and roles is presented, and research support on their links is discussed. The review identifies critical short-comings of past studies and concludes by offering an agenda for future studies in this promising area of empirical research.
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We examine whether board and ownership structure variables explain the level of chief executive officer (CEO) compensation. After controlling for standard economic determinants (i.e., the firm's demand for a high-quality CEO, firm performance, and risk), we find that board and ownership structure variables explain a significant amount of cross-sectional variation in CEO compensation. We also find that the predicted component of compensation arising from these board and ownership structure characteristics has a significant negative relation with subsequent firm accounting performance. Overall, our analysis indicates that unusually large CEO compensation levels reflect managerial entrenchment or poor governance mechanisms, and that firms with more entrenched managers or poorer governance systems perform worse.
The article examines corporate ownership and diversification in light of both agency and stewardship theory. Studying several large New Zealand companies, the authors examine why firms diversify and what, if any, influence corporate governance has on these decisions. The article discusses the two views of diversification. One view (agency theory) holds that diffused ownership chooses diversification as a way of minimizing risk on any one line of products, with the result many times being a reduced rate of return on capital. Another view is that companies diversify in order to enhance company profits or growth (stewardship theory). The article looks at New Zealand corporations to determine the impetus for their diversification decisions.
We examine explanations for corporate financing-, dividend-, and compensation-policy choices. We document robust empirical relations among corporate policy decisions and various firm characteristics. Our evidence suggests contracting theories are more important in explaining cross-sectional variation in observed financial, dividend, and compensation policies than either tax-based or signaling theories.
Several studies hypothesize a relation between board size and financial performance. Empirical tests of the relation exist in only a few studies of large U.S. firms. We find a significant negative correlation between board size and profitability in a sample of small and midsize Finnish firms. Finding a board-size effect for a new and different class of firms affects the range of explanations for the board-size effect.
Research on the determinants and effects of various governance mechanisms typically assumes that these mechanisms operate independently. However, since a variety of mechanisms are used to achieve alignment of the interests of shareholders and managers, we propose that the level of a particular mechanism should be influenced by the levels of other mechanisms which simultaneously operate in the firm. We examine the substitution effects between alternative internal governance mechanisms for a sample of 81 bank holding companies in the postderegulation period. Specifically, we consider the relationship between monitoring by outside directors and the following mechanisms: monitoring by large outside shareholders, mutual monitoring by inside directors, and incentive effects of shareholdings by managers. Our results provide evidence consistent with the substitution hypothesis. We examine the implications of our findings for future research in the area of corporate governance.
This study examines the interrelation between board composition and variables that capture various agency and financial dimensions of the firm. The agency literature suggests that outside directors on the board provide important monitoring functions in an attempt to resolve, or at least mitigate, agency conflicts between management and shareholders. The agency literature indicates that other mechanisms such as managerial equity ownership, dividend payments, and debt leverage also serve as important devices in reducing agency conflicts in firms. This study argues and documents that an inverse relationship exists between the proportion of external members on the board and managerial stock ownership, dividend payout, and debt leverage. This is consistent with the hypothesis that individual firms choose an optimal board composition depending upon alternative mechanisms employed by the firm to control agency conflicts. Board composition is also found to be systematically related to a number of other variables including institutional holdings, growth, volatility, and CEO tenure.
This paper examines four non-mutually-exclusive hypotheses behind the inclusion of different types of directors and the impact they have on firm performance. Strong associations are found between the specific economic needs of companies and the incidence of directors most likely to fulfill these needs. In particular, theoretical and empirical evidence is presented that most affiliated directors are not puppets of management, but are placed on boards to serve specific, strategic needs of firms. In addition, no systematic relation is found between various measures of performance and director type. In total, it appears that, on average, boards of directors are constructed in a rational manner.
We investigate whether inside managers are added to corporate boards for efficiency or entrenchment purposes. Our examination of inside director appointments finds that the stock-market reaction to the announcement is significantly negative when inside directors own less than 5% of the firm's common stock, significantly positive when their ownership level is between 5% and 25%, and insignificantly different from zero when ownership exceeds 25%. These results suggest that the expected benefits of an inside director's expert knowledge clearly out weigh the expected costs of managerial entrenchment only when managerial and outside shareholder interests are closely aligned.
An important issue in the regulation of corporate behavior is its impact on the monitoring configuration selected by top management. In this article, we provide evidence consistent with the notion that the recent trend toward audit committee formation, and the movement toward Big-Eight auditors, are responses to increased legal exposure of the board of directors, notably stemming from the passage of the Foreign Corrupt Practices Act of 1977. The costs associated with changes in monitoring configurations are also considered. In particular, it is argued that auditor assistance can substantially reduce the cost of audit committee formation. Because external auditors may have differential incentives to support audit committee formation, a hypothesis linking auditor identity and audit committee formation is offered. Recent auditor changes and audit committee formations of American Stock Exchange companies are examined to provide positive evidence for the theory. The data reveal a clear trend to form audit committees, and a movement to Big-Eight auditors. Underscoring the importance of auditor involvement, it is shown that audit committees were more likely to be formed given recent selection of a new Big-Eight auditor.
This paper examines the takeover charter amendments made by 128 firms listed on the New Zealand Stock Exchange. By December 31, 1995, firms were to have adopted one of three charter amendments that varied the timing and content of information required to be provided in takeover bids. The results show that after controlling for the probability of takeover and firm size, unaffiliated directors, representing blockholders, are associated with a less restrictive takeover amendment. We also find evidence that equity owned and controlled by executive and affiliated directors is related to the choice of takeover amendment. We find no relation between the choice of takeover amendment and the level of institutional shareholding, the proportion of public directors or the joint role of CEO and board chairman.
This paper presents additional evidence on the relation between the investment opportunity set and financing, dividend, and compensation policies. Our results are based on a sample of 237 growth firms and 237 nongrowth firms. We find that growth firms have significantly lower debt/equity ratios and exhibit significantly lower dividend yields than nongrowth firms. We also find that growth firms pay significantly higher levels of cash compensation to their executives and have a significantly higher incidence of stock option plans than nongrowth firms. However, controlling for firm size, the incidence of bonus plans, performance plans, and restricted stock plans does not differ between growth and nongrowth samples.
This paper integrates elements from the theory of agency, the theory of property rights and the theory of finance to develop a theory of the ownership structure of the firm. We define the concept of agency costs, show its relationship to the ‘separation and control’ issue, investigate the nature of the agency costs generated by the existence of debt and outside equity, demonstrate who bears these costs and why, and investigate the Pareto optimality of their existence. We also provide a new definition of the firm, and show how our analysis of the factors influencing the creation and issuance of debt and equity claims is a special case of the supply side of the completeness of markets problem.The directors of such [joint-stock] companies, however, being the managers rather of other people's money than of their own, it cannot well be expected, that they should watch over it with the same anxious vigilance with which the partners in a private copartnery frequently watch over their own. Like the stewards of a rich man, they are apt to consider attention to small matters as not for their master's honour, and very easily give themselves a dispensation from having it. Negligence and profusion, therefore, must always prevail, more or less, in the management of the affairs of such a company.Adam Smith, The Wealth of Nations, 1776, Cannan Edition(Modern Library, New York, 1937) p. 700.
We investigate the relationship between management ownership and market valuation of the firm, as measured by Tobin's Q. In a 1980 cross-section of 371 Fortune 500 firms, we find evidence of a significant nonmonotonic relationship. Tobin's Q first increases, then declines, and finally rises slightly as ownership by the board of directors rises. For older firms, there is evidence that Q is lower when the firm is run by a member of the founding family than when it is run by an officer unrelated to the founder.
A vast and often confusing economics literature relates competition to investment in innovation. Following Joseph Schumpeter, one view is that monopoly and large scale promote investment in research and development by allowing a firm to capture a larger fraction of its benefits and by providing a more stable platform for a firm to invest in R&D. Others argue that competition promotes innovation by increasing the cost to a firm that fails to innovate. This lecture surveys the literature at a level that is appropriate for an advanced undergraduate or graduate class and attempts to identify primary determinants of investment in R&D. Key issues are the extent of competition in product markets and in R&D, the degree of protection from imitators, and the dynamics of R&D competition. Competition in the product market using existing technologies increases the incentive to invest in R&D for inventions that are protected from imitators (e.g., by strong patent rights). Competition in R&D can speed the arrival of innovations. Without exclusive rights to an innovation, competition in the product market can reduce incentives to invest in R&D by reducing each innovator's payoff. There are many complications. Under some circumstances, a firm with market power has an incentive and ability to preempt rivals, and the dynamics of innovation competition can make it unprofitable for others to catch up to a firm that is ahead in an innovation race.
In a corporation with many small owners, it may not pay any one of them to monitor the performance of the management. We explore a model in which the presence of a large minority shareholder provides a partial solution to this free-rider problem. The model sheds light on the following questions: Under what circumstances will we observe a tender offer as opposed to a proxy fight or an internal management shake-up? How strong are the forces pushing toward increasing concentration of ownership of a diffusely held firm? Why do corporate and personal investors commonly hold stock in the same firm, despite their disparate tax preferences?
We identify factors that lead to changes among corporate directors. We hypothesize that the CEO succession process and firm performance will affect board composition. Our findings are consistent with both hypotheses. When their CEO nears retirement, firms tend to add inside directors (who may be possible candidates to be the next CEO) Just after a CEO change, inside directors with short tenures appear more likely to leave the board (they, perhaps, being the losing candidates). We also find that inside directors are more likely to leave the board and outside directors more likely to join after a firm performs poorly and when a firm leaves a product market.
We examine the relation among the stock returns of successful bidders in bank acquisitions, the composition of the boards of directors, and directors' stock ownership. We find that abnormal returns are negatively related to the proportion of outside directors, but positively related to the number of other outside directorships held by independent outsiders. Abnormal returns are positively related to the proportion of ownership by outside directors, but are associated only with high levels of inside ownership. These results support the notions that the governance structure of banking firms is significantly different from that of nonfinancial firms, and that empirical findings on internal control mechanisms cannot be generalized from nonfinancial firms to banks.
There is an inherent conflict of interest between managers and shareholders when all or part of a public corporation is taken private and managers become major shareholders in the newly privatized firm. The role of outside directors who are independent of management is investigated to determine whether they ensure that shareholder interests are well-served. Our empirical investigation indicates that when the entire firm is taken private, abnormal returns for sellers are substantially higher for firms with boards that are dominated by independent outside directors than for firms that are not. In these transactions, the level of inside director ownership of shares is also significant in promoting shareholder wealth. For unit management buyouts, where the unit managers are seldom board members, board composition and inside director ownership appear to have no systematic effect on abnormal returns.
This paper examines the relationship between top management compensation and corporate performance in public utilities. Previous researchers have argued that incentives for profitability are not needed in public utilities, since regulation provides assured profits. Earlier empirical work supports this claim. We reexamine this issue and provide several methodological improvements over prior studies. Our findings are consistent with the hypothesis that compensation packages for senior managers in public utilities are constructed to provide them with incentives to maximize stockholders' wealth.
This article surveys research on corporate governance, with special attention to the importance of legal protection of investors and of ownership concentration in corporate governance systems around the world. Copyright 1997 by American Finance Association.
This paper surveys capital structure theories based on agency costs, asymmetric information, product/input market interactions, and corporate control considerations (but excluding tax-based theories). For each type of model, a brief overview of the papers surveyed and their relation to each other is provided. The central papers are described in some detail, and their results are summarized and followed by a discussion of related extensions. Each section concludes with a summary of the main implications of the models surveyed in the section. Finally, these results are collected and compared to the available evidence. Suggestions for future research are provided. Copyright 1991 by American Finance Association.
This article, which is based on the author's Presidential address to the American Finance Association in 1993, argues that squeezing out excess capital and capacity is one of the most formidable ongoing challenges facing not only the U.S. economy, but the economies of all industrialized nations. In making this argument, the article draws striking parallels between the 19th-century industrial revolution and worldwide economic developments in the last three decades. In both periods, technological advances led to not only sharp increases in productivity and dramatic reductions in prices, but also massive obsolescence and overcapacity. And much as the great M&A wave of the 1890s reduced capacity by consolidating some 1,800 companies into roughly 150, the leveraged takeovers, LBOs, and other leveraged recapitalizations of the 1980s provided “healthy adjustments” to overcapacity that was building in many sectors of the U.S. economy.
To help public companies make the necessary adjustments to overcapacity, the author urges them to consider adopting some of the features of private equity, including significant equity stakes for managers, high leverage or payouts, and the recruiting of active investors as “partners in the business.”
The interests and incentives of managers and shareholders conflict over such issues as the optimal size of the firm and the payment of cash to shareholders. These conflicts are especially severe in firms with large free cash flows--more cash than profitable investment opportunities. The theory developed here explains 1) the benefits of debt in reducing agency costs of free cash flows, 2) how debt can substitute for dividends, 3) why diversification programs are more likely to generate losses than takeovers or expansion in the same line of business or liquidation-motivated takeovers, 4) why the factors generating takeover activity in such diverse activities as broadcasting and tobacco are similar to those in oil, and 5) why bidders and some targets tend to perform abnormally well prior to takeover.
This paper analyzes the survival of organizations in which decision agents do not bear a major share of the wealth effects of their decisions. This is what the literature on large corporations calls separation of "ownership" and "control." Such separation of decision and risk bearing functions is also common to organizations like large professional partnerships, financial mutuals and nonprofits. We contend that separation of decision and risk bearing functions survives in these organizations in part because of the benefits of specialization of management and risk bearing but also because of an effective common approach to controlling the implied agency problems. In particular, the contract structures of all these organizations separate the ratification and monitoring of decisions from the initiation and implementation of the decisions. Journal of Law and Economics, Vol. XXVI, June 1983. Separation of Ownership and Control * Eugene F. Fama and Michael C. Jensen Journal of...
The Uncertain Relationship Between Board Composition and Firm Performance Duties and Responsibilities of Directors and Company Secretaries in New Zealand
- S Bhagat
- B Black
Bhagat, S. and B. Black, 1997, "The Uncertain Relationship Between Board Composition and Firm Performance," Columbia Law School Working Paper. Borrowdale, A., 1995, Duties and Responsibilities of Directors and Company Secretaries in New Zealand. Auckland, New Zealand, CCH New Zealand.
The Bill Returns -Directors and Liquidations Institute of Directors in New Zealand Matters Directors Should Consider Prior to Signing Financial Statements
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Hodder, J., 1993, "The Bill Returns -Directors and Liquidations," Accountants' Journal (March), 38-40. Institute of Directors in New Zealand, 1994, Matters Directors Should Consider Prior to Signing Financial Statements.
Wanted-Qualified, Focused Directors
- G Kennedy
Kennedy, G., 1997, "Wanted-Qualified, Focused Directors," National Business Review (July 4), 35.
Directors' Liability and Company Solvency: The New Companies Act
- M Ross
Ross, M., 1994, Directors' Liability and Company Solvency: The New Companies Act, Auckland, New Zealand, CCH New Zealand.
Directing the Directors: The Duties of Directors Under the Companies Act 1993
- D Tompkins
Tompkins, D., 1994, "Directing the Directors: The Duties of Directors Under the Companies Act 1993," Waikato Law Review, 76-103.
Board Games: How CEOs Adapt to Increases in Structural Board Independence from ManagementBoard Composition and Control of Shareholder Voting Rights in the Banking Industry
- J Westphal
Westphal, J., 1998, "Board Games: How CEOs Adapt to Increases in Structural Board Independence from Management," Administrative Science Quarterly, forthcoming. Whidbee, D.A., 1997, "Board Composition and Control of Shareholder Voting Rights in the Banking Industry," Financial Management (Winter), 27-41.