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Shareholder interests vs board of director members' interests and company performance: A new look

Lorne Switzer () and Yu Cao

Review of Accounting and Finance, 2011, vol. 10, issue 3, 228-245

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.

Keywords: Board quality; Agency costs; Company performance; Boards of directors; Shareholders; Canada (search for similar items in EconPapers)
Date: 2011
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