Does mandated independence improve firm performance? Evidence from New Zealand

Purpose - This paper aims to examine the relationship between board independence and firm performance for publicly listed New Zealand (NZ) firms over the period 2004-2016. Design/methodology/approach - To address endogeneity concerns, the relationship between firm performance and board independence is modelled using three different approaches: firm fixed-effect estimation, difference-in-difference estimation and two-stage least squares estimation, while controlling for firm and governance characteristics. Findings - The main finding is that the mandated board independence introduced by the Best Practice Code does not improve operating or market performance for listed NZ firms. Research limitations/implications - The fact that NZ firms choose greater board independence than required is puzzling. Research examining director characteristics and connectedness, not captured by the NZX Code, may be a fruitful area for future research when disclosure allows. Practical implications - Regulators may need to review reasons for mandating changes in factors affecting firm governance before implementing further regulations concerning board structure. Social implications - The findings cast doubt on the benefit of mandated board independence for NZ firms. The results imply that “good” governance practices proposed by regulators are not universal. Originality/value - This paper tests the impact of mandated board independence following the adoption of the Best Practice Code in 2004 using methodologies that account for endogeneity using 13 years of data.