Does-the-independence-of-independent-directors-mat

Doestheindependenceofindependentdirectorsmatter?RafelCrespí-Cladera1,BartoloméPascual-Fuster⁎Departamentd'Economiadel'Empresa,UniversitatdelesIllesBalears,Cra.deValldemossakm7.5,07122Palma(IllesBalears),SpainarticleinfoabstractArticlehistory:Received26September2013Receivedinrevisedform26November2013Accepted9December2013AvailableonlinexxxxThispaperanalyzesthecharacteristicsoffirmsthatdeclareboarddirectorsasindependents,althoughthedirectorsarenotstrictlyindependent,andexaminestheconsequencesintermsofperformanceandcorporategovernanceoutcomes.Basedonpubliclyavailableinformation,eightcriteriaof“independence”usedtoexamineapanelofSpanishlistedfirmsclassify14.2%ofthedirectorsasstrictlyindependent,whereasthefirmsclassify32.5%oftheboardasindependentdirectors.Firmswithdispersedownershipstructuresmisclassifydirectorsmorefrequentlythandofirmswithlargecontrollingowners.Intermsofconsequences,wefindweakevidenceofanegativerelationbetweenmisclassificationandafirm'sfutureoperatingperformance.However,norelationisfoundbetweenindependents'misclassificationandseveralrelevantoutcomesoftheprimarydelegatedcommitteeswithmonitoringroles:theauditcommitteeandthenominationandremunerationcommittee.Thereisnosignificancewithregardtothenon-strictlyindependentmeasuresexplainingexecutivedirectors'compensation,CEOturnover,auditqualificationsorearningmanagementbehavior.©2013ElsevierB.V.Allrightsreserved.JELclassification:G30G34K22Keywords:BoardstrictindependenceCorporategovernanceExecutivecompensationCEOturnoverAuditqualificationsEarningsmanagement1.IntroductionIndependentdirectorsareperceivedasminimizingthepotentialopportunismofmanagers,orlargecontrollingowners,inaprincipalagentsetting.InthecontextofAnglo-Americandispersedownership,independentsarekeymembersoftheboardinavoidingmanagerialmisappropriation.IntheconcentratedownershipsettingofcontinentalEurope,theroleassignedtoindependentdirectorsistolimittheextractionofprivatebenefitsbythecontrollinglargeshareholders,whousuallyappointtheremainingmembersoftheboardofdirectors.Theunderlyingfundamentalconceptisthatthemonitoringactivityoftheboardroomdependsontheeffectivenessoftheindependentmembers.Thisview,whichiswidelyacceptedintheacademicworld(AdamsandFerreira,2007;Adamsetal.,2008;BhagatandBlack,2002;DyckandZingales,2004;HermalinandWeisbach,2003),isinthespiritofregulationssuchastheOECDPrinciplesofCorporateGovernanceof2004,theCommissionoftheEuropeanCommunitiesRecommendation,2thefinalcorporategovernancerulesoftheNewYorkStockExchangeof2009,andnearlyallexistingcorporategovernancecodesorguidelines.Effectively,theEuropeanCommissionRecommendationof2005assertsthatindependentdirectorsplayaroleinbothdispersedownershipcompanies,inwhichtheconcernishowtomakemanagersaccountabletoshareholders,andincompanieswithlargecontrollingshareholdersthatmustaccountfortheinterestsofminorityshareholders.JournalofCorporateFinancexxx(2013)xxx–xxx⁎Correspondingauthor.Tel.:[phone].E-mailaddresses:[e-mail](R.Crespí-Cladera),[e-mail](B.Pascual-Fuster).1Tel.:[phone]TheCommissionoftheEuropeanCommunitiesRecommendationof15February2005ontheroleofnon-executiveorsupervisorydirectorsoflistedcompaniesandonthecommitteesofthesupervisoryboard.CORFIN-00757;NoofPages190929-1199/$–seefrontmatter©2013ElsevierB.V.Allrightsreserved.fin.2013.12.009ContentslistsavailableatScienceDirectJournalofCorporateFinancejournalhomepage::Crespí-Cladera,R.,Pascual-Fuster,B.,Doestheindependenceofindependentdirectorsmatter?,J.Corp.Finance(2013),fin.2013.12.009Inlinewithbestpracticescodesandguidelines,themajorityofcompaniesreportincreasingproportionsofindependentsamongtheirboardmembers(Gordon,2007;Lincketal.,2009).Ratingagenciesalsoaccountforthepresenceofaqualifiednumberofindependentdirectorsasanelementinagencyratingoutputs,asSantellaetal.(2006)indicate.Onelong-termperspectiveregardingthechangingtrendofexecutivesandindependentsinUSboardroomscomesfromGordon(2007),whoindicatesthatfrom1950to2005,theaveragepercentageofindependentdirectorshasrisenfrom20%tolevelsabove70%.Usingpubliclyavailableinformation,ourpapercomparesfirms'declarationsregardingindependentdirectorswithanunbiasedmeasureofstrictlyindependentboardmembersforapanelofSpanishlistedfirms.Inadditiontothecontributionofthedescriptiveinformationregardingthefirms'deviationbetweendeclaredandstrictlyindependentdirectors,thepaperalsoaddressesthefollowingtwomainquestions:Question1:Whatarethecharacteristicsoffirmsthatmisclassifyindependentdirectorsmorefrequently?Question2:Whataretheconsequencesoffirmsdeclaringdirectorsasindependentswhenthesedirectorsarenotstrictlyindependent?Thispaperwillexaminefirms'futureoperatingperformanceandtheoutcomesofthemainboardcommitteesintermsofmonitoring:theauditcommitteeandthenominationandremunerationcommittee.Anynegativeimpactonfirms'performanceoronthecorporategovernanceoutcomeswouldmeanthatthereisanagencyproblemthatshouldbecorrectedwithlawenfor