We survey the evidence on the relationship between board composition and firm performance. Boards of directors of American public companies that have a majority of independent directors behave differently, in a number of ways, than boards without such a majority. Some of these differences appear to increase firm value; others may decrease firm value. Overall, within the range of board compositions present today in large public companies, there is no convincing evidence that greater board independence correlates with greater firm profitability or faster growth. In particular, there is no empirical support for current proposals that firms should have "supermajority-independent boards " with only one or two inside directors. To the contrary, there is some evidence that firms with supermajority-independent boards are less profitable than other firms. This suggests that it may be useful for firms to have a moderate number of inside directors (say three to five on an average-sized eleven member board). We offer some possible explanations for these results, based on board dynamics, the informational advantages possessed by inside (and, often, affiliated) directors, and the value of interaction between different types of directors who bring different strengths to the board. published in

We report evidence on chief executive officer ~CEO! turnover during the 1971 to 1994 period. We find that the nature of CEO turnover activity has changed over time. The frequencies of forced CEO turnover and outside succession both increased. However, the relation between the likelihood of forced CEO turnover and firm performance did not change significantly from the beginning to the end of the period we examine, despite substantial changes in internal governance mechanisms. The evidence also indicates that changes in the intensity of the takeover market are not associated with changes in the sensitivity of CEO turnover to firm performance. STOCKHOLDERS RELY ON INTERNAL AND EXTERNAL monitoring mechanisms to help resolve agency problems that arise from the separation of ownership and control in modern corporations. Boards of directors and blockholders are important internal control mechanisms whereas the takeover market is a major source of external control. Both academicians and practitioners have

Pension funds have pursued an active role in corporate governance, although some question their effectiveness and motivations. We examine the impact and motivation of pension fund activism by studying the shareholder proposals of the largest, most active funds from 1987 through 1993. We find significant heterogeneity across funds in activism objectives, tactics, and impact on target firms, consistent with differing investment strategies. We find the funds are more successful at monitoring and promoting change in target firms than previously recognized. We also find no evidence to support motivations other than

This paper explains why some firms prefer to pay dividends rather than repurchase shares. When institutional investors are relatively less taxed than individual investors, dividends induce "ownership clientele" effects. Firms paying dividends attract relatively more institutions, which have a relative advantage in detecting high firm quality and in ensuring firms are well managed. The theory is consistent with some documented regularities, specifically both the presence and stickiness of dividends, and offers novel empirical implications, e.g., a prediction that it is the tax difference between institutions and retail investors that determines dividend payments, not the absolute tax payments.

In this paper, we investigate how corporate governance impacts firm value by examining both the value and the use of cash holdings in poorly and well governed firms. Cash represents a large and growing fraction of corporate assets and generally is at the discretion of management. We use several measures of corporate governance and show that governance has a substantial impact on firm value through its impact on cash: $1.00 of cash in a poorly governed firm is valued by the market at only $0.42 to $0.88, depending on the measure of governance. Good governance approximately doubles this value of cash. Furthermore, governance has a significant impact on how firms use cash. We show that firms with poor corporate governance dissipate cash quickly and in ways that significantly reduce operating performance. This negative impact of large cash holdings on future operating performance is cancelled out if the firm is well governed. All of our results hold after controlling for the level of acquisitions undertaken by cash rich firms, indicating that acquisitions are not solely responsible for the value destruction in poorly governed, cash rich firms. The findings presented in this paper provide direct evidence of how governance can improve or destroy firm value and insight into the importance of

This paper uses clinical evidence to show how the German system of corporate control and governance is both more active and more hostile than has previously been suggested. It provides a complete breakdown of ownership and takeover defence patterns in German listed companies and finds highly fragmented (but not dispersed) ownership in non-majority controlled firms. We document how the accumulation of hostile stakes can be used to gain control of target companies given these ownership patterns. The paper also suggests an important role for banks in helping predators accumulate, and avoid the disclosure of, large stakes.

This paper examines the valuation effects associated with the incentive structures of different types of institutional investors using the ownership levels of public and private pension funds in a firm. The results suggest that institutional monitoring is associated with valuation effects when both observable and unobservable aspects of the relationship between institutions and firms are taken into account. Moreover, the valuation effects vary according to the objective functions of institutions' administrators. Thus, other shareholders do not necessarily benefit from relationships between institutions and managers, and they could be hurt when the institutional agents watching firm agents have conflicts of interest with other shareholders.

We provide an argument and present evidence that industry factors play an important role in corporate governance. In particular, an industry’s investment opportunities, product uniqueness, competitive environment, information environment, and leverage help explain its corporate governance structures. These factors can have quite different associations (in strength and direction) with the monitoring capabilities of the board of directors versus the shareholder orientation of corporate charter provisions. This suggests systematic differences in the relative costs and benefits of alternative monitoring mechanisms. A focus on firm influences within industries suggests that firm and industry factors contribute equally to the observed variation in governance structures. We also find evidence that firms ’ broad governance structures revert over time toward industry norms. The separation of ownership and control in corporations can result in costly agency conflicts between owners and managers. Impediments to monitoring and the existence of transactions costs imply that contracts alone cannot resolve such conflicts, giving rise to the need for governance structures (Hart (1995)). These corporate

Management Association annual meeting and an anonymous referee for comments that have helped us greatly improve the paper. Variation in the Monitoring Incentives of Outside Blockholders We examine abnormal returns around the announcement of antitakeover amendment proposals for evidence on variation in the effectiveness of monitoring by outside blockholders. The evidence suggests that the market views outside blockholders who have potential business ties to a firm as less effective monitors than other outside blockholders. Abnormal returns tend to be lower at firms where holdings by blockholders with potential business ties exceed holdings of other outside blockholders than at firms where the reverse is true. The difference in the stock ownership of these two classes of blockholders explains more of the variation in abnormal returns than factors such as management stock ownership and board composition. Variation in the Monitoring Incentives of Outside Blockholders The decline in disciplinary takeover activity in the late 1980s placed a greater burden on internal means of controlling agency conflicts between managers and stockholders (Mikkelson and Partch, 1997; Murphy, 1999; and Huson, Parrino, and Starks, 2001). Because of this, the potential influence of internal monitoring mechanisms, such as the board of directors and large stockholders, has

Conference in Cagliari, and the LUISS/Tilburg University Conference in Rome for their comments. We also would like to thank all respondents to the survey. All errors are our own. Comments are very welcome. Behind the Scenes: The Corporate Governance Preferences of Institutional Investors Institutional investors are the dominant force in financial markets today, yet their preferences about corporate governance are generally undisclosed and their activities in this area tend to be performed privately. We conduct a survey to elicit their views on investor protection and corporate governance mechanisms. We find that among the institutions who responded to our survey corporate governance is of importance to their investment decisions and a number of them are willing to engage in shareholder activism. Further, an examination of the institutional investors ’ portfolio holdings shows that their investment decisions appear to be related to their preferences. 2