Do Independent Boards Effectively Monitor Management? Evidence from Japan During the Financial Crisis
CORPORATE GOVERNANCE AND THE GOLOBAL FINANCIAL CRISIS, Xiuping Sun, Jim Stewart, and David Pollard, eds., Cambridge University Press, Forthcoming
Posted: 1 Sep 2010 Last revised: 12 Sep 2010
Date Written: September 1, 2010
To examine whether outside (or independent) directors monitor management in the shareholder interest, the authors collect Japanese companies that experience 33 per cent or more performance declines during the financial crisis (for the 2008 accounting year) and investigate how board independence affects management turnover and corporate dividend policy. The authors find that the fraction of outside (or independent) directors over total board members is positively related to the frequency of management turnover, whereas managerial and bank ownership are negatively related to the likelihood of turnover. This suggests that independent boards critically monitor management and make turnovers more sensitive to poor firm performance. In addition, the proportion of outside (or independent) directors to total board members is negatively related to the likelihood that a firm will decrease dividend payments. Such results suggest that independent boards discipline management and protect shareholder wealth. From a viewpoint of shareholder wealth maximization, we argue that the recent regulatory movement is in the right direction.
Keywords: Corporate Governance, Board Independence, Management Turnover, Dividend Policy, Financial Crisis
JEL Classification: G30, G31, G35
Suggested Citation: Suggested Citation