Board Composition, Audit Committee Structure, ‘Grey Directors’ and the Incidences of Corporate Failure in the UK

Abstract:     
This study contributes to the debate by examining the characteristics of board and audit committee structures prior to failure and their relationships with the incidences of corporate failure. Specifically, this research splits board of directors into inside directors, grey directors and independent outside directors in the analyses since grey directors are not independent of management or company, but according to the UK governance codes, they are generally expected to play a monitoring role as independent outside directors. It is found that greater grey directors on the board and audit committee, the lower probability of corporate failure. However, more outside directors on board and audit committee could not effectively contribute to decrease the likelihood of corporate failure. Higher percentage of outside directors on audit committee is even unfavorable to firm survival. The findings also suggest that more inside directors on board would increase the likelihood of corporate failure. Additionally, failed firms are more likely to employ key directors on the audit committee. These findings suggest that inside, grey and outside directors may play distinguishable governance roles. The results also imply that grey directors are more informative and knowledgeable than independent directors to oversee management. Therefore, over-emphasizing on the independence of board and audit committee is not favorable to firm survival.

Number of Pages in PDF File: 26

Keywords: Corporate Governance, Board Composition, Audit Committee, Grey Director, Corporate Failure

JEL Classification: G30, G33, G34, G38

working papers series