Does Board Independence Matter in Companies with a Controlling Shareholder?

14 Pages Posted: 19 May 2009

See all articles by Jay Dahya

Jay Dahya

Zicklin School of Business, Baruch College - The City University of New York

John J. McConnell

Purdue University

Abstract

What is likely to cause controlling shareholders to appoint more independent directors - a change that, after all, effectively limits the controlling shareholders' power and “degrees of freedom”? The answer provided by the authors is that board independence is most likely to be pursued by companies with controlling shareholders that also have major growth opportunities that must be funded mainly with outside equity.This article investigates the possibility that such discounts can be reduced by appointing boards of directors made up of individuals who are independent of the controlling shareholders. Based on the systematic analysis of some 800 companies representing 22 countries, the authors' recent study reports that corporate values are consistently higher when boards are more independent of controlling shareholders - and that this relationship is especially strong in those countries that afford fewer rights to minority shareholders.A number of studies have reported value discounts for listed companies in countries that provide weak legal protection to minority shareholders. Such studies typically attribute these discounts to the ability, and the well-documented tendency, of controlling shareholders to extract a disproportionate share of corporate resources for “private benefits.” This tendency and the resulting discounts create a dilemma for those controlling shareholders intent on maximizing value for not just themselves, but all shareholders: How can such controlling shareholders assure their minority shareholders that they will not exploit their power to expropriate resources and so eliminate the discount from their companies' shares?

This article investigates the possibility that such discounts can be reduced by appointing boards of directors made up of individuals who are independent of the controlling shareholders. Based on the systematic analysis of some 800 companies representing 22 countries, the authors' recent study reports that corporate values are consistently higher when boards are more independent of controlling shareholders - and that this relationship is especially strong in those countries that afford fewer rights to minority shareholders.

What is likely to cause controlling shareholders to appoint more independent directors - a change that, after all, effectively limits the controlling shareholders' power and “degrees of freedom”? The answer provided by the authors is that board independence is most likely to be pursued by companies with controlling shareholders that also have major growth opportunities that must be funded mainly with outside equity.

Suggested Citation

Dahya, Jay and McConnell, John J., Does Board Independence Matter in Companies with a Controlling Shareholder?. Journal of Applied Corporate Finance, Vol. 21, Issue 1, pp. 67-78, Winter 2009. Available at SSRN: https://ssrn.com/abstract=1394690 or http://dx.doi.org/10.1111/j.1745-6622.2009.00217.x

Jay Dahya (Contact Author)

Zicklin School of Business, Baruch College - The City University of New York ( email )

55 Lexington Ave., Box B13-260
New York, NY 10010
United States

John J. McConnell

Purdue University ( email )

MGMT, KRAN
403 West State St.
West Lafayette, IN 47907-2056
United States
765-494-5910 (Phone)
765-494-7863 (Fax)

Register to save articles to
your library

Register

Paper statistics

Downloads
7
Abstract Views
1,218
PlumX Metrics