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Shareholder interests vs board of director members' interests and company performance: A new look

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  • Lorne N. Switzer
  • Yu Cao
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    Abstract

    Purpose – The purpose of this paper is to examine the relationship between board alignment with shareholder interests using a new measure of perceived board effectiveness, which is designed to capture the alignment of the directors with the interests of shareholders. Design/methodology/approach – Specifically, the paper looks at the Rotman/Clarkson (CCBE2) Canadian Board Shareholder Confidence Index as the measure of shareholder's perceptions of the board's efficiency as it relates to company performance. The index is ostensibly designed to capture the essential factors affecting shareholders' confidence in the boards' abilities to fulfill their duties. The CCBE2 Board Shareholder Confidence Index assigns scores to companies based on the consideration of the following three perspectives: potential of individual board members; potential of the board as a group and past practices of the board. The measure of performance is the firm's Economic Value Added™ (ER), which is a metric for a company's ability to generate economic profits that enhance the wealth for shareholders. Findings – Based on regression analysis, it is found that high shareholder confidence index values are generally associated with higher ER, although the relationship is not monotonic for higher graded boards. This suggests that while highly graded boards are generally beneficial, there may be diminishing returns to efforts to design “optimal” boards in the sense of their alignment with shareholder interests. The performance gap between firms with high vs low expected agency costs as reflected in terms of higher differentials between board members' interests alignments with those of shareholders amounts to almost 30 percent. Originality/value – This paper is the first study to appear that looks at how a new, comprehensive measure of board alignment with shareholder interests relates to company performance. The findings should be of considerable interest to investors, policy makers, and firms looking at the incentive structures for directors, and how aligning directors interests with those of shareholders can create economic value for firms.

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    File URL: http://www.emeraldinsight.com/journals.htm?issn=1475-7702&volume=10&issue=3&articleid=1944186&show=abstract
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    Bibliographic Info

    Article provided by Emerald Group Publishing in its journal Review of Accounting and Finance.

    Volume (Year): 10 (2011)
    Issue (Month): 3 (August)
    Pages: 228-245

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    Handle: RePEc:eme:rafpps:v:10:y:2011:i:3:p:228-245

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    Web page: http://www.emeraldinsight.com

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    Postal: Emerald Group Publishing, Howard House, Wagon Lane, Bingley, BD16 1WA, UK
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    Related research

    Keywords: Agency costs; Board quality; Boards of directors; Canada; Company performance; Shareholders;

    References

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    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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    1. Duchin, Ran & Matsusaka, John G. & Ozbas, Oguzhan, 2010. "When are outside directors effective?," Journal of Financial Economics, Elsevier, vol. 96(2), pages 195-214, May.
    2. Oliver E. Williamson, 2008. "Corporate Boards of Directors: In Principle and in Practice," Journal of Law, Economics and Organization, Oxford University Press, vol. 24(2), pages 247-272, October.
    3. Paul A. Gompers & Joy L. Ishii & Andrew Metrick, 2002. "Corporate Governance and Equity Prices," Center for Financial Institutions Working Papers 02-32, Wharton School Center for Financial Institutions, University of Pennsylvania.
    4. Lucian Bebchuk & Alma Cohen & Allen Ferrell, 2009. "What Matters in Corporate Governance?," Review of Financial Studies, Society for Financial Studies, vol. 22(2), pages 783-827, February.
    5. Stuart, Toby E. & Yim, Soojin, 2010. "Board interlocks and the propensity to be targeted in private equity transactions," Journal of Financial Economics, Elsevier, vol. 97(1), pages 174-189, July.
    6. Fama, Eugene F & Jensen, Michael C, 1983. "Separation of Ownership and Control," Journal of Law and Economics, University of Chicago Press, vol. 26(2), pages 301-25, June.
    7. Hwang, Byoung-Hyoun & Kim, Seoyoung, 2009. "It pays to have friends," Journal of Financial Economics, Elsevier, vol. 93(1), pages 138-158, July.
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