Understanding the Board of Directors after the Financial Crisis: Some Lessons for Europe

Date01 March 2014
AuthorJoseph A. McCahery,Erik P.M. Vermeulen
DOIhttp://doi.org/10.1111/j.1467-6478.2014.00659.x
Published date01 March 2014
JOURNAL OF LAW AND SOCIETY
VOLUME 41, NUMBER 1, MARCH 2014
ISSN: 0263-323X, pp. 121±51
Understanding the Board of Directors after the Financial
Crisis: Some Lessons for Europe
Joseph A. McCahery* and Erik P.M. Vermeulen*
There are numerous studies on the effectiveness of boards that
primarily focus on legal formalities, including gender diversity, board
size, remuneration, board evaluation, and the role of the chairman of
the board. While attempting to design a one-size-fits-all framework,
scholars approaching board independence from an agency-cost per-
spective have been less concerned with analysing board structures that
contribute to strategic decision making and corporate performance.
We examine the factors and board strategies that are associated with
value creation and innovation by analysing the composition of high-
performance and high-growth companies. The article shows that
venture capitalists, with their specific expertise and experience,
continue to play an important role as independent board members in
the post-IPO period. We specifically investigate the importance of
diversity, showing that there are significant differences between the
companies in terms of age, gender diversity, and business expertise
(which is dependent on the stage in the company life cycle).
INTRODUCTION
There is a general feeling that we need better corporate governance.
1
This is
not surprising if we realize that the corporate governance frameworks that
were developed by policymakers, regulators, academics, and practitioners in
the 2000s had little or no significant impact on the performance of listed
121
*Department of Business Law, Tilburg Law School, Tilburg University,
Warandelaan 2, Tilburg, The Netherlands
j.a.mccahery@tilburguniversity.edu
e.p.m.vermeulen@tilburguniversity.edu
1 See, for instance, M. Barnier, `Making Europe an Attractive Place To Do Business'
(2010), at .
ß2014 The Author. Journal of Law and Society ß2014 Cardiff University Law School
companies during the crisis.
2
The last decade has seen attempts to answer
some key questions including: what is the role of the board of directors?
What is the most effective mix of directors? What are their responsibilities in
terms of good governance?
The existing literature has mainly focused on the principal agent
relationships between the shareholders, board of directors, and senior and
executive management in listed companies.
3
Scholars have emphasized that
the monitoring and oversight role of the independent outside directors is
crucial to prevent managerial misbehaviour and misconduct and maximize
shareholder wealth.
4
In countries with controlling shareholders, a common
structural arrangement in Europe, a second element has been added to the
debate about the role of the board of directors: board members should protect
the interests of minority investors and other stakeholders in the company.
5
This is necessary because controlling shareholders may employ several
strategies to extract resources and assets from companies they control.
6
The
heterogeneity of large shareholders across firms and board structures may
imply differences in the level of oversight and monitoring.
Following the financial crisis, however, recent studies have suggested that
a predominantly independent board is essential to serve as the necessary and
dynamic wedge between the company and its insiders, on the one hand, and
the capital market and the short-term investors on the other,
7
thereby
reducing the three-way agency problems between the executive managers
and the varying types of investors and stakeholders.
8
There is a general
122
2 See K. Gupta, C. Krishnamurti, and A. Tourani-Rad, `Is Corporate Governance
relevant During the Financial Crisis?' (2013) 23 J. of International Financial Markets,
Institutions & Money 85; M. Humphery-Jenner, F. Lopez de Silanes, and J.A.
McCahery, `Managerial Entrenchment, Credit Ratings, Covenants and Fees' (2012).
3 See J. Dahya, O. Dimitrov, and J. McConnell, `Dominant shareholders, corporate
boards and corporate value: A cross-country analysis' (2008) 87 J. of Financial
Economics 73.
4 See J.N. Gordon, `The Rise of Independent Directors in the United States, 1950±
2005: Of Shareholder Value and Stock Market Prices' (2007) 59 Stanford Law Rev.
1465. See L. Bebchuk and J. Fried, `Executive Compensation as an Agency Problem'
(2003) 17(3) J. of Economic Perspectives 71; R.W. Masulis and S. Mobbs, `Are All
Inside Directors the Same? Do They Entrench CEOs or Enhance Board Decision-
Making?' (2011) 66 J. of Finance 812.
5 See W.-G. Ringe, `Independent Directors: After the Crisis' (2013) 14 European
Business Organization Law Rev. 401.
6 See M. GutieÂrrez Urtiaga and M. Saez, `Deconstructing Independent Directors'
(2013) 13 J. of Corporate Legal Studies 63. See, also, C. Malberti and E. Sironi, `The
Mandatory Representation of Minority Shareholders on the Board of Directors of
Italian Listed Corporations: An Empirical Analysis', Bocconi Legal Studies Research
Paper No. 18 (2007), at .
7 See, for example, Gordon, op. cit., n. 4.
8 See W.W. Bratton and M.L. Wachter, `The Case Against Shareholder Empowerment'
(2010) 158 University of Pennsylvania Law Rev. 653.
ß2014 The Author. Journal of Law and Society ß2014 Cardiff University Law School

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