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.