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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

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 (CCBE 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.

Suggested Citation

  • Lorne N. Switzer & Yu Cao, 2011. "Shareholder interests vs board of director members' interests and company performance: A new look," Review of Accounting and Finance, Emerald Group Publishing, vol. 10(3), pages 228-245, August.
  • Handle: RePEc:eme:rafpps:v:10:y:2011:i:3:p:228-245
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    References listed on IDEAS

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    1. Hwang, Byoung-Hyoun & Kim, Seoyoung, 2009. "It pays to have friends," Journal of Financial Economics, Elsevier, vol. 93(1), pages 138-158, July.
    2. 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.
    3. 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.
    4. 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 301-325, June.
    5. 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.
    6. 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.
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