Elective corporate governance: Does board choice matter?

Recent literature discusses how “menu laws” allow corporations to opt into one of multiple competing statutory regimes. This paper contributes to this literature by presenting original empirical research on the choice between corporate board models. Today, many countries not only allow modifications of a particular board structure, but they provide separate legal templates, giving firms a choice between a one-tier and a two-tier board model (and sometimes a third hybrid model). However, how companies actually use these rules is largely underexplored. Based on data from 14 European countries that permit a choice between two models, this paper examines the use of this form of “elective corporate governance” at the firm level: what types of firms make use of which model and whether this choice can be associated with specific financial measures such as operating revenue, cash ratio and leverage. The descriptive statistics show that introducing board choice has led to a gradual decline of the two-tier model. Yet, despite this decline, we did not find that the regression results unambiguously speak against the two-tier model, nor did we find that companies that have changed their board model with the introduction of choice performed better than companies that have retained the original model.