The impact of governance practices on firm outcomes: a machine-learning exploration

Andrew Shipilov (), Yeonsin Ahn, Henrich Greve and Tim Rowley
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Andrew Shipilov: INSEAD
Yeonsin Ahn: HEC
Henrich Greve: INSEAD
Tim Rowley: University of Toronto

Journal of Organization Design, 2024, vol. 13, issue 2, 45-64

Abstract: Abstract What are the implications of adopting the various board governance practices that have been proposed as solutions to the conflict of interest between managers and shareholders? Agency theory suggests that board independence and incentive alignment will improve firm outcomes. Yet, the evidence so far has led to both disputes on their effectiveness and proposals that board member motivations and capabilities are important additional factors. As a result, the list of proposed governance practices is now so long that it is difficult to assess which practice does what. To address this question, a fruitful approach is to use data to describe how governance practices are associated with beneficial outcomes for the firm and its shareholders, and thus lay a foundation for theory building and causal research. Using algorithm supported induction, we examine the role of board reform governance practices for the performance of Canadian firms between 2001 and 2010. We find that only a small subset of practices is associated with firm value creation and distribution. Using interviews with board members, we gain further insight into the mechanisms driving these effects and propose theory for additional testing. Our work demonstrates that independence of directors and the alignment of their interests with those of the shareholders need to be complemented with practices that result in motivated and capable board members.

Keywords: Governance; Machine learning; Board of directors; Agency theory (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s41469-024-00165-1

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