About | HeinOnline Law Journal Library | HeinOnline Law Journal Library | HeinOnline
LOG IN
LOG IN

27 J. Corp. L. 231 (2001-2002)
The Non-Correlation between Board Independence and Long-Term Firm Performance

handle is hein.journals/jcorl27 and id is 241 raw text is: The Non-Correlation Between Board Independence and Long-Term Firm Performance Sanjai Bhagat* and Bernard Black** ABSTRACT The boards of directors of American public companies are dominated by independent directors. Many commentators and institutional investors believe that a monitoring board, composed almost entirely of independent directors, is an important component of good corporate governance. The empirical evidence reported in this Article challenges that conventional wisdom. We conduct the first large-sample, long-horizon study of whether the degree of board independence (proxied by the fraction of independent directors minus the fraction of inside directors on a company's board) correlates with various measures of the long- term performance of large American firms. We find evidence that low-profitability firms increase the independence of their boards of directors. But there is no evidence that this strategy works. Firms with more independent boards do not perform better than other firms. Our results support efforts by firms to experiment with board structures that depart from the conventional monitoring board. I. INTRODUCTION ........................................................................................................ 232 II. PRIOR RESEARCH ON BOARD COMPOSITION ........................................................... 234 A. Does Board Composition Affect Firm Performance? ........................................ 234 B. Does Firm Performance Affect Board Composition? ........................................ 237 C. The Unsolved Puzzle: Why Has Board Composition Changed So R adically ? .......................................................................................................... 238 III. RESEARCH DESIGN AND SAMPLE CHARACTERISTICS ............................................... 239 A. Procedure for Data Collection and Analysis .................................................... 240 B. Tests for Entry and Exit Bias ............................................................................. 241 * Professor of Finance, Graduate School of Business, University of Colorado at Boulder. ** Professor of Law, Stanford Law School. Research support was provided by the Q Group and the Institutional Investor Project at Columbia Law School. We thank Institutional Shareholder Services for making its director database available to us. We also thank George Benston, James Brickley, Gerald Davis, John Donohue, Jeff Gordon, Milton Handler, David Ikenberry, Sherry Jarrell, Ehud Kamar, Stacey Kole, April Klein, Bevis Longstreth, Anil Shivdasani, Randall Thomas, David Yermack, Marc Zenner, anonymous referees, and participants in workshops at the Atlanta Finance Forum, American Finance Association, Columbia Law School, Georgetown Law School, NYU Center for Law and Business, Rice University, University of Rochester (Simon School of Business), and Stanford Law School, for their comments. We thank Renee Johnson, Robert King, Ann Le, Karen Lutz, Michelle Ontiveros, Michael Reyes, Mark Rysman, Sapna Sanagavarapu, Yan Yang, and Helen Yu for research assistance.

What Is HeinOnline?

HeinOnline is a subscription-based resource containing thousands of academic and legal journals from inception; complete coverage of government documents such as U.S. Statutes at Large, U.S. Code, Federal Register, Code of Federal Regulations, U.S. Reports, and much more. Documents are image-based, fully searchable PDFs with the authority of print combined with the accessibility of a user-friendly and powerful database. For more information, request a quote or trial for your organization below.



Short-term subscription options include 24 hours, 48 hours, or 1 week to HeinOnline.

Purchase Access

Contact us for annual subscription options:

Contact Us

Already a HeinOnline Subscriber?

Log In

profiles profiles most