How Do Public Companies Adjust Their Board Structures?

Abstract

We show that public companies frequently changed their board structures before implementation of the Sarbanes-Oxley Act, with two-thirds of firms changing board size or independence during an average two-year period. Board changes were associated with changes in firm-specific fundamentals, but the rate of change toward predicted structures was negatively associated with the level of CEO influence. Companies changed board structures in either direction as underlying firm fundamentals changed, consistent with the pursuit of economically efficient board structures. However, board changes have become less frequent since the Sarbanes-Oxley Act was enacted. We provide some evidence that companies became less likely to decrease board independence when changes in fundamentals suggested they should, which may reflect a loss of economic efficiency.

Keywords: board independence, board size, board structure, board reform, corporate governance, regulation, endogeneity, dynamic adjustment

JEL Classification: D23, G34, G38, K22, M14