The Effects of Board Independence in Controlled Firms: Evidence from Turkey

Abstract

A large number of empirical studies in the U.S. report that there is no cross-sectional relationship between board composition and firm performance. On the other hand, a relatively small but growing literature on boards in emerging market corporations shows that a higher level of board independence is associated with both firm actions which are consistent with the interests of shareholders and with superior firm performance. This important difference between developed and emerging markets suggests that boards matter more in weak governance systems. We analyze the relationship between board structure and firm performance for a sample of listed companies in Turkey - a country that features relatively weak protection for investors, firms associated with family controlled business groups and pyramidal structures. We do so by using a hand-collected data set on directors’ personal characteristics and their roles. We document that Turkish boards are populated besides members of the controlling shareholder and their affiliated parties, by employees of the apex firm in the business group, by ex-politicians, ex-bureaucrats and ex-military officers. Classifying the board members as independent and affiliated directors, we report three main results: (i) Board independence is unrelated to equity issues, (ii) Independent directors are unlikely to curb the extent of related party transactions, and (iii) Depending on the statistical methods we use, the presence of independent board members and firm performance are negatively related or uncorrelated. These results are robust under different specifications and estimation methods which try to deal with the endogeneity problems inherent in board research. Especially the findings (ii) and (iii) challenge the usefulness of independent directors as an internal governance device in Turkish companies.

Keywords: Turkey, independent directors, corporate governance, board of directors, emerging markets

JEL Classification: G32, G34