Hostname: page-component-7dd5485656-c8zdz Total loading time: 0 Render date: 2025-10-30T15:38:00.334Z Has data issue: false hasContentIssue false
  • English
  • Français

Board Composition, Corporate Performance, and the Cadbury Committee Recommendation

Published online by Cambridge University Press:  06 April 2009

Jay Dahya  and
John J. McConnell
Jay Dahya
Affiliation:
jay_dahya@baruch.cuny.edu, Baruch College, CUNY, Department of Economics and Finance, 1 Bernard Baruch Way, New York, NY 10010
John J. McConnell
Affiliation:
mcconnell@mgmt.purdue.edu, Krannert School of Management, Purdue University, 403 West State Street, West Lafayette, IN 47907.
Get access Rights & Permissions [Opens in a new window]

Abstract

During the 1990s and beyond, countries around the world witnessed calls and/or mandates for more outside directors on publicly traded companies' boards even though extant studies find no significant correlation between outside directors and corporate performance. We examine the connection between changes in board composition and corporate performance in the U.K. over the interval 1989–1996, a period that surrounds publication of the Cadbury Report, which calls for at least three outside directors for publicly traded corporations. We find that companies that add directors to conform with this standard exhibit a significant improvement in operating performance both in absolute terms and relative to various peer group benchmarks. We also find a statistically significant increase in stock prices around announcements that outside directors were added in conformance with this recommendation. We do not endorse mandated board structures, but the evidence appears to be that such a mandate is associated with an improvement in performance in U.K. companies.

Information

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 42 , Issue 3 , September 2007 , pp. 535 - 564
Copyright
Copyright © School of Business Administration, University of Washington 2007

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Article purchase

Temporarily unavailable

References

Agrawal, A., and Knoeber, C. R.. “Firm Performance and Mechanisms to Control Agency Problems between Managers and Shareholders.” Journal of Financial and Quantitative Analysis, 31 (1996), 377–397.CrossRefGoogle Scholar
Agrawal, A., and Knoeber, C. R.. “Do Some Outside Directors Play a Political Role?” Journal of Law and Economics, 44 (2001), 179–198.CrossRefGoogle Scholar
Barber, B. M., and Lyon, J. D.. “Detecting Abnormal Operating Performance: The Empirical Power and Specification of Test-Statistics.” Journal of Financial Economics, 41 (1996), 359–399.CrossRefGoogle Scholar
Bhagat, S., and Black, B. S.. “The Uncertain Relationship between Board Composition and Firm Performance.”Business Lawyer, 54 (1999), 921–961.Google Scholar
Bhagat, S., and Black, B. S.. “The Non-Correlation between Board Independence and Long-Term Firm Performance.” Journal of Corporation Law, 27 (2002), 232–273.Google Scholar
Boone, A. L.; Field, L. C.; Karpoff, J. M.; and Raheja, C. G.. “The Determinants of Corporate Board Size and Composition: An Empirical Analysis.” Journal of Financial Economics, forthcoming (2007).CrossRefGoogle Scholar
Brickley, J. A.; Coles, J. L.; and Terry, R. L.. “Outside Directors and the Adoption of Poison Pills.” Journal of Financial Economics, 35 (1994), 371–390.CrossRefGoogle Scholar
Brickley, J. A.; Coles, J. L.; and Jarrell, G.. “Leadership Structure: Separating the CEO and Chairman of the Board.” Journal of Corporate Finance, 3 (1997), 189–220.CrossRefGoogle Scholar
Brickley, J. A., and James, C.. “The Takeover Market, Corporate Board Composition, and Ownership Structure: The Case of Banking.” Journal of Law and Economics, 30 (1987), 161–180.CrossRefGoogle Scholar
Brook, Y.; Hendershott, R.; and Lee, D.. “The Gains from Takeover Deregulation: Evidence on the End of Interstate Banking Restrictions.” Journal of Finance, 53 (1998), 2185–2204.CrossRefGoogle Scholar
Byrd, J. W., and Hickman, K. A.. “Do Outside Directors Monitor Managers? Evidence for Tender Offer Bids.” Journal of Financial Economics, 32 (1992), 195–221.CrossRefGoogle Scholar
Coles, J. L.; Daniel, N. D.; and Naveen, L.. “Board: Does One Size Fit All?” Journal of Financial Economics, forthcoming (2007).CrossRefGoogle Scholar
Coles, J. L., and Hoi, C. K.. “New Evidence on the Market for Directors: Board Membership and Pennsylvania Senate Bill 1310.” Journal of Finance, 58 (2003), 197–230.CrossRefGoogle Scholar
Core, J. E.; Holthausen, R. W.; and Larcker, D. F.. “Corporate Governance, Chief Executive Officer Compensation and Firm Performance.” Journal of Financial Economics, 51 (1999), 373–406.CrossRefGoogle Scholar
Cotter, J. F.; Shivdasani, A.; and Zenner, M.. “Do Independent Directors Enhance Target Shareholder Wealth during Tender Offers?” Journal of Financial Economics, 43 (1997), 195–218.CrossRefGoogle Scholar
Dahya, J.; McConnell, J. J.; and Travlos, N. G.. “The Cadbury Committee, Corporate Performance, and Top Management Turnover.” Journal of Finance, 57 (2002), 461–483.CrossRefGoogle Scholar
Demsetz, H., and Lehn, K.. “The Structure of Corporate Ownership: Causes and Consequences.” Journal of Political Economy, 93 (1985), 1155–1177.CrossRefGoogle Scholar
Denis, D. J., and Sarin, A.. “Ownership and Board Structures in Publicly Traded Firms.” Journal of Financial Economics, 52 (1999), 187–223.CrossRefGoogle Scholar
Hermalin, B. E., and Weisbach, M. S.. “The Effects of Board Composition and Direct Incentives on Firm Performance.” Financial Management, 20 (1991), 101–112.CrossRefGoogle Scholar
Hermalin, B. E., and Weisbach, M. S.. “Boards of Directors as an Endogenously Determined Institution: A Survey of the Economic Literature.” Economic Policy Review, 04 (2003), 7–26.Google Scholar
Jensen, M. J. “The Modern Industrial Revolution, Exit and the Failure of Internal Control Systems.” Journal of Finance, 48 (1993), 831–880.CrossRefGoogle Scholar
Kini, O.; Kracaw, W. A.; and Mian, S.. “Corporate Takeovers, Firm Performance, and Board Composition.” Journal of Corporate Finance, 1 (1995), 383–412.CrossRefGoogle Scholar
Kole, S. R., and Lehn, K. M.. “Deregulation, the Evolution of Corporate Governance Structure, and Survival.” American Economic Review, 87 (1997), 421–425.Google Scholar
Kole, S. R., and Lehn, K. M.. “Deregulation and the Adaptation of Governance Structure: The Case of the U.S. Airline Industry.” Journal of Financial Economics, 52 (1999), 79–117.CrossRefGoogle Scholar
Lehn, K. M.; Patro, S.; and Zhao, M.. “Determinants of the Size and Structure of Corporate Boards: 1935–2000.” Journal of Corporate Finance, forthcoming (2007).Google Scholar
Linck, J. S.; Netter, J. M.; and Yang, T.. “The Determinants of Board Structure.” Journal of Financial Economics, forthcoming (2007).Google Scholar
Lipton, M., and Lorsch, J. W.. “A Modest Proposal for Improved Corporate Governance.” Business Lawyer, 48 (1992), 59–77.Google Scholar
Mehran, H. “Executive Compensation Structure, Ownership and Firm Performance.” Journal of Financial Economics, 38 (1995), 163–184.CrossRefGoogle Scholar
Peasnell, K.; Pope, P.; and Young, S.. “Board Monitoring and Earnings Management: Do Outside Directors Influence Abnormal Accruals?” Journal of Business Finance and Accounting, 32 (2005), 1311–1346.CrossRefGoogle Scholar
Rechner, I. F., and Dalton, D. R.. “CEO Duality and Organizational Performance: A Longitudinal Analysis.” Strategic Management Journal, 12 (1991), 155–160.CrossRefGoogle Scholar
Rosenstein, S., and Wyatt, J. G.. “Outside Directors, Board Independence, and Shareholder Wealth.” Journal of Financial Economics, 26 (1990), 175–191.CrossRefGoogle Scholar
Rosenstein, S., and Wyatt, J. G.. “Inside Directors, Board Effectiveness, and Shareholder Wealth.” Journal of Financial Economics, 44 (1997), 229–250.CrossRefGoogle Scholar
Schwert, W. G. “Using Financial Data to Measure Effects of Regulation.” Journal of Law and Economics, 24 (1981), 121–158.CrossRefGoogle Scholar
Shivdasani, A. “Board Composition, Ownership Structure, and Hostile Takeovers.” Journal of Accounting and Economics, 16 (1993), 167–198.CrossRefGoogle Scholar
Szewczyk, S. H., and Tsetsekos, G. P.. “State Intervention in the Market for Corporate Control: The Case of Pennsylvania Senate Bill 1310.” Journal of Financial Economics, 31 (1992), 3–23.CrossRefGoogle Scholar
Weisbach, M. S. “Outside Directors and CEO Turnover.” Journal of Financial Economics, 20 (1988), 431–460.CrossRefGoogle Scholar