Boards : Independent and committed directors?

Abstract

Regulators, proxy advisors and shareholders are regularly calling for independent directors. However, at the same time, independent directors commonly engage in numerous outside activities potentially reducing their time and commitment with the particular firm. Using Tobin's Q as an approximation of market valuation and controlling for endogeneity, our empirical analysis reveals that neither is independence positively related to firm performance nor are outside activities negatively related to it. Nevertheless, we find that — non-independent — executive directors, former executives and family representatives have a positive relationship with Tobin's Q. Conversely, — independent — outside executives are negatively related with firm valuation. Moreover, the study indicates that the frequency and duration of meetings are negatively affected by the fraction of executive directors on the board. Insiders potentially reduce the need for meetings because of their specialist competence. The results therefore invalidate rules advocating independent directors and oppose the engagement of directors with significant outside activities.