Revisiting board independence mandates: Evidence from director reclassifications

Donald E Bowen and Jérôme P Taillard

Review of Finance, 2025, vol. 29, issue 3, 747-777

Abstract: We provide causal evidence on the effects of mandated board independence. We compare firms that replace existing non-independent directors to firms that retain these directors by reclassifying them as independent. Reclassification eligibility, being largely predetermined, offers quasi-exogenous variation in compliance strategies. We show that firms required to replace insiders perform worse post-mandate, driven by increased operational costs and reduced labor efficiency. Boards of non-reclassifying firms retain fewer former employees and replace them with directors more likely to join monitoring-focused committees, emphasizing the shift from advising to monitoring. Overall, these findings suggest that firm-specific director expertise contributes materially to performance and is consistent with pre-mandate board compositions optimized to balance benefits of enhanced monitoring against costs of reduced advisory capacity. We rule out alternative explanations, including adjustment costs due to director turnover and co-option. Our study underscores the importance of allowing firms’ flexibility in governance structures and cautions against uniform mandates.

Keywords: corporate governance; board of directors; independent boards; independence mandates (search for similar items in EconPapers)
JEL-codes: G30 G34 G38 K20 (search for similar items in EconPapers)
Date: 2025
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