Essays on corporate boards

Abstract

My thesis aims to better understand the factors affecting the formation and operation of corporate boards that are crucial to a firm’s success. Shareholders own modern corporations, but managers oversee day-to-day operations. Where this separation of ownership and management exists, shareholders elect a board of directors to appoint and remunerate senior management, approve important business decisions, and oversee the overall operation of companies. Directors, therefore, owe fiduciary duties (including the duty of loyalty and duty of care) to shareholders, and shareholders have a legal right to sue directors when directors breach their fiduciary duties. The first chapter of my thesis investigates how director liability affects a company’s director recruitment and retention, and hence the quality of a board. State-level adoptions of Universal Demand (UD) statutes create significant barriers to shareholders derivative suits and lower director litigation risk. Using difference-in-differences analysis, I find director quality (measured by experience and reputation) improves after UD adoption. Results are stronger for firms facing higher litigation risk or having smaller local director candidate pools. UD statutes help attract high-quality directors from states without such statutes. UD statutes, however, have little impact on directors’ educational, financial, legal, or industry background or on the retention of high-quality outside directors. Improvements in director quality appear to increase firm value in firms with strong shareholder oversight. The second chapter examines how shareholders respond to an enlarged fiduciary duty of directors to non-owner stakeholders (e.g., creditors, employees, suppliers, customers, and communities). The adoption of U.S. state-level Constituency Statues (CS laws) authorizes directors and officers to consider non-owner stakeholder interests in business decisions. Based on a difference-in-differences analysis, I find that firms have a significantly lower cost of equity after their incorporation state adopts a CS law, but the effect is only concentrated in firms that have less managerial agency problems. CS law adoption reduces the cost of equity via improving financial reporting quality, reducing downside tail risks relating to environmental, social and governance (ESG) issues, and increasing firms’ ability to weather negative industry-wide shocks. My findings show that the interests of shareholders and other stakeholders do not necessarily conflict.