Insight on boards' ability and non-executive directors' incentives : evidence from the UK
Abstract
This thesis investigates two main prerequisites for diligent executions of boards’
roles i.e. board’s ability and directors’ incentives. The first part of this thesis offers
some insights into boards’ characteristics of most concern to both regulators and scholars. Specifically, it provides a timely review, over the last fifteen years (2000-14), of
different board’s diversity attributes (i.e. statutory, competitive, and demographic),
board’s competitive capital, and board’s busyness in the UK public listed companies. In
addition, it investigates whether differences exist in those characteristics across various
FTSE Indices and also before and after the financial crisis.
Firstly, it is found that statutory diversity is commonly shared among the boards
compared to other diversity attributes, i.e. competitive and demographic. This reflects the regulators’ focus on statutory diversity over the years. Nonetheless, the data
shows that the UK public listed companies were increasingly diversifying their boards,
competitively and demographically, over the last fifteen years. During the post-crisis
period, UK boards witnessed a significant increase in diversity level, especially BOFIs’
boards. This is consistent with many commentators’ calls for more diversified boards
after the crisis. Secondly, with regard to board’s competitive capital, there is a general increase in different board’s competencies. In line with the recommendations of
post-crisis regulations, the analysis shows a significant increase in the level of board
competitive capital of UK boards over post-crisis period. Thirdly, although the literature used different measures of board busyness, the findings suggest that the incidence of
board’s busyness seems to be decreasing over the last fifteen years in the UK regardless
of the measurement used. Furthermore, the data suggests that the post-crisis attempts
to limit the occurrence of board busyness are successful as UK public listed companies
witnessed a significant decrease in the percentage of busy boards. Fourthly, correlation
analysis indicates a significant positive relationship between all diversity indices and
board’s competitive capital, and market-based measures of firm financial performance.
The analysis also shows no correlation between general measures of board’s busyness
and firm performance.
The second part of this thesis involves two empirical chapters dedicated to exploring the extent of efficiency of the UK directors’ employment market, both internally
and externally, in potentially creating incentives for NEDs to behave in the shareholders’ interests. Chapter Four specifically investigates to what extent NEDs in the UK
‘external’ employment market is rewarded (penalised) through gaining (losing) an external board seat for their perceived satisfactory (unsatisfactory) performance. On the
other hand, Chapter Five investigates to what extent NEDs’ probability of turnover
(i.e. internal employment market) is associated with their perceived (un)satisfactory performance. The focus on these two chapters is on NEDs serving on banks and other
financial institutions (BOFIs). NEDs’ perceived performance is expected to be based
on the performance of NEDs’ affiliated firm(s) and their individual set of qualifications
and skills (i.e. reputational capital).
The findings in Chapter 4 provide evidence that the number of board seats held
by NEDs in the BOFIs is mainly associated with their reputational capital rather than
the performance of their affiliated firm(s). However, both the affiliated BOFIs’ market
performance and reputational capital are significantly associated with NEDs’ number
of board seats in the post-crisis period. The results may be attributed to the changes
in the corporate governance environment after the crisis whereby NEDs were held more
accountable for their BOFIs’ poor market performance.
Finally, the results in Chapter 5 show a significant correlation between NEDs’
turnover and their affiliated firm’s financial performance, and reputational capital relative to the board. It also indicates that, following the crisis, only the turnover-performance association is statistically significant. This suggests the existence of ex-post
settling-up mechanism in the UK BOFIs whereby NEDs can lose their board seats in
the wake of a period of poor financial performance.