Monitoring to Reduce Agency Costs: Examining the Behavior of Independent and Non-Independent Boards

53 Pages Posted: 20 Feb 2010

See all articles by Anita Anand

Anita Anand

University of Toronto - Faculty of Law

Frank Milne

Queen's University - Department of Economics

Lynnette D. Purda

Queen's University - Smith School of Business

Date Written: February 18, 2010

Abstract

Berle and Means’ analysis of the corporation, and in particular their view that those in control are not the owners of the corporation, raises questions about actions that corporations take to counter concerns regarding management’s influence. What mechanisms, if any, do corporations implement to balance the distribution of power in the corporation? To address this question, we analyze the board of directors’ propensity to voluntarily adopt recommended corporate governance practices that are designed to enhance their oversight capabilities. Since board independence has been advocated as a way to enhance shareholders’ ability to monitor management, we ask whether firms with an independent board of directors are more likely than firms without an independent board to adopt these practices. Using hand-collected data from Canadian firms listed on both US and Canadian stock exchanges, we find that firms with both types of boards voluntarily adopt governance practices designed to enhance their monitoring capabilities and that independent boards are no more likely to adopt these practices than their non-independent counterparts. One exception to this statement is the formation of board committees. When boards are independent, the audit and compensation committees are far more likely to be staffed exclusively with independent directors. For other voluntary governance practices, the board's propensity to adopt recommended practices is sensitive to the presence of a controlling shareholder.

Suggested Citation

Anand, Anita and Milne, Frank and Purda, Lynnette D., Monitoring to Reduce Agency Costs: Examining the Behavior of Independent and Non-Independent Boards (February 18, 2010). Available at SSRN: https://ssrn.com/abstract=1555043 or http://dx.doi.org/10.2139/ssrn.1555043

Anita Anand (Contact Author)

University of Toronto - Faculty of Law ( email )

78 Queen's Park
Toronto, Ontario M5S 2C5
Canada
4169464002 (Phone)

Frank Milne

Queen's University - Department of Economics ( email )

Lynnette D. Purda

Queen's University - Smith School of Business ( email )

Smith School of Business - Queen's University
143 Union Street
Kingston, Ontario K7L 3N6
Canada
613-533-6980 (Phone)

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