Role of Board of Directors
The Role of Boards of Directors in Corporate Governance: A Conceptual Framework & Survey∗
Ren´e B. Adams,† Benjamin E. Hermalin,‡ and Michael S. Weisbach§ e April ,
Abstract This paper is a survey of the literature on boards of directors, with an emphasis on research done subsequent to the Hermalin and 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 empirically, 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.
∗ The authors wish to thank Ji-Woong Chung, R¨ diger Fahlenbach, Eliezer Fich, John u McConnell, Ren´ Stulz, and Shan Zhao for helpful comments on earlier drafts. The authors e are especially appreciative of the comments received from three anonymous referees and the editor, Roger Gordon. † University of Queensland and ecgi (r.adams@business.uq.edu.au). ‡ University of California, Berkeley (hermalin@berkeley.edu). § Ohio State University (weisbach 2@fisher.osu.edu)
1
Introduction
People often question whether corporate boards matter because their day-today impact is difficult to observe. But when things go wrong, they can become the center of attention. Certainly this was true of the Enron, Worldcom, and Parmalat scandals. The directors of Enron and Worldcom, in particular, were held liable for the fraud that occurred: Enron directors had to pay $168 million to investor plaintiffs, of which $13 million was out of pocket (not covered by insurance); and Worldcom directors had to pay $36 million, of which $18 million was out of pocket.1 As a consequence
Ren´e B. Adams,† Benjamin E. Hermalin,‡ and Michael S. Weisbach§ e April ,
Abstract This paper is a survey of the literature on boards of directors, with an emphasis on research done subsequent to the Hermalin and 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 empirically, 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.
∗ The authors wish to thank Ji-Woong Chung, R¨ diger Fahlenbach, Eliezer Fich, John u McConnell, Ren´ Stulz, and Shan Zhao for helpful comments on earlier drafts. The authors e are especially appreciative of the comments received from three anonymous referees and the editor, Roger Gordon. † University of Queensland and ecgi (r.adams@business.uq.edu.au). ‡ University of California, Berkeley (hermalin@berkeley.edu). § Ohio State University (weisbach 2@fisher.osu.edu)
1
Introduction
People often question whether corporate boards matter because their day-today impact is difficult to observe. But when things go wrong, they can become the center of attention. Certainly this was true of the Enron, Worldcom, and Parmalat scandals. The directors of Enron and Worldcom, in particular, were held liable for the fraud that occurred: Enron directors had to pay $168 million to investor plaintiffs, of which $13 million was out of pocket (not covered by insurance); and Worldcom directors had to pay $36 million, of which $18 million was out of pocket.1 As a consequence
References: 51 Becht, Marco, Patrick Bolton, and Ailsa R¨ell, “Corporate Governance o and Control,” in George Constantinides, Milton Harris, and Ren´ Stulz, eds., e The Handbook of the Economics of Finance, Amsterdam: North-Holland, 2003 54 Fich, Eliezer M., “Are Some Outside Directors Better than Others? Evidence from Director Appointments by Fortune 1000 Firms,” Journal of Business, 2005, 78 (5), 1943–1971