Do Financial Experts on the Board Matter? An Empirical Test From the United Kingdom’s Non-Life Insurance Industry

Abstract

We examine the relation between board-level financial expertise and six measures of performance using panel data drawn from the United Kingdom’s non-life insurance industry. We find that collectively, financial experts have a beneficial influence on the performance outcomes of insurers. We also observe that board-level qualified accountants and actuaries are linked with superior performance in all six of our selected financial outcome measures. Professional insurance underwriters are associated with sound solvency levels (low leverage) and underwriting results, but not positive earnings-based measures. This suggests that underwriters may not be as adept at group-level earnings enhancement as accountants and actuaries. In addition, we find that the introduction of IFRS 4 in 2004/2005 did not have a significant impact on board composition and financial outcomes. Finally, we consider that our results could have commercial and/or policy implications.

Keywords

financial experts insurance governance performance UK

Get full access to this article

View all access options for this article.

References

Abdul Kader

Adams

Mouratidis

(2010). Testing for trade-offs in the reinsurance decision of U.K. life insurance firms. Journal of Accounting, Auditing & Finance, 25, 491-522.

Adams

M. B.

Jiang

(2016). Do outside directors influence the financial performance of risk-trading firms? Evidence from the United Kingdom (UK) insurance industry. Journal of Banking and Finance, 64, 36-51.

Adams

M. B.

Jiang

(2017). Do chief executives’ traits affect the financial performance of risk-trading firms? Evidence from the UK insurance industry. British Journal of Management. Advance online publication. doi:10.1111/1467-8551.12222

Adams

R. B.

Ferreira

(2007). A theory of friendly boards. Journal of Finance, 62, 217-250.

Adiel

(1996). Reinsurance and the management of regulatory ratios and taxes in the property-casualty insurance industry. Journal of Accounting and Economics, 22, 207-240.

Agrawal

Chadha

(2005). Corporate governance and accounting scandals. Journal of Law & Economics, 48, 371-406.

Anderson

R. D.

Reeb

Upadhyay

Zhao

(2011). The economics of director heterogeneity. Financial Management, 40, 5-38.

Anthony

J. H.

Petroni

K. R.

(1997). Accounting estimation disclosures and firm valuation in the property-casualty insurance industry. Journal of Accounting, Auditing & Finance, 12, 257-281.

Boubakri

Dionne

Triki

(2008). Consolidation and value creation in the insurance industry: The role of governance. Journal of Banking & Finance, 32(1), 56-88.

10.

Browne

M. J.

Kamiya

(2012). A theory of the demand for underwriting. Journal of Risk and Insurance, 79, 335-349.

11.

Bryan

Liu

M. H. C.

Tiras

S. L.

Zhuang

(2013). Optimal versus suboptimal choices of accounting expertise on audit committees and earnings quality. Review of Accounting Studies, 18(1), 1123-1158.

12.

Cadbury

(1992). Report of the Committee on the financial aspects of corporate governance. London, England: Gee Publishing.

13.

Cornelli

Kominek

Ljunqvist

(2014). Monitoring managers: Does it matter? Journal of Finance, 68, 431-481.

14.

Custódio

Metzger

(2014). Financial expert CEOs: CEO’s work experience and firm’s financial policies. Journal of Financial Economics, 114, 125-154.

15.

Dahya

McConnell

J. J.

(2007). Board composition, corporate performance, and the Cadbury Committee recommendation. Journal of Financial and Quantitative Analysis, 42, 535-564.

16.

Defond

M. L.

Hann

R. N.

(2005). Does the market value financial expertise on audit committees of boards of directors?Journal of Accounting Research, 43, 153-193.

17.

Dewing

I. P.

Russell

P. O.

(2004). Regulation of UK corporate governance: Lessons from accounting, audit and financial services. Corporate Governance: An International Review, 12, 107-115.

18.

Dewing

I. P.

Russell

P. O.

(2008). The individualization of corporate governance: The approved persons’ regime for UK financial services firms. Accounting, Auditing & Accountability Journal, 21, 978-1000.

19.

Duchin

Matsusaka

J. G.

Ozbas

(2010). When are outside directors effective? Journal of Financial Economics, 96, 195-214.

20.

Eckles

D. L.

Hoyt

R. E.

Miller

S. M.

(2014). The impact of enterprise risk management on the marginal cost of reducing risk: Evidence from the insurance industry. Journal of Banking & Finance, 43(1), 247-261.

21.

Edwards

J. R.

Anderson

Chandler

R. A.

(2007). Claiming a jurisdiction for the “Public Accountant” in England prior to organisational fusion. Accounting, Organizations and Society, 32, 61-100.

22.

Faleye

Hoitash

(2011). The cost of intense board monitoring. Journal of Financial Economics, 101, 160-181.

23.

Fama

E. F.

Jensen

M. C.

(1983). Separation of ownership and control. Journal of Law & Economics, 26, 301-325.

24.

Financial Services Authority. (2004). Integrated Prudential Sourcebook for insurers (Policy Statement 04/16). London, England: Author.

25.

Froot

K. A.

O’Connell

P. G. J.

(2008). On the pricing of intermediated risks: Theory and application to catastrophe reinsurance. Journal of Banking & Finance, 32, 69-85.

26.

Gaver

J. J.

Paterson

J. S.

(2001). The association between external monitoring and earnings management in the property-casualty insurance industry. Journal of Accounting Research, 39, 269-282.

27.

Giroud

Mueller

H. M.

(2010). Does corporate governance matter in competitive industries?Journal of Financial Economics, 95, 312-331.

28.

Grossman

Hart

(1980). Takeover bids, the free-rider problem, and the theory of the corporation. Bell Journal of Economics, 11, 42-64.

29.

Güner

A. B.

Malmendier

Tate

(2008). Financial expertise of directors. Journal of Financial Economics, 88, 323-354.

30.

Hardwick

Adams

Zou

(2011). Board characteristics and profit efficiency in the United Kingdom life insurance industry. Journal of Business Finance & Accounting, 38, 987-1015.

31.

Higgs

(2003). Review of the role and effectiveness of non-executive directors. London, England: Department of Trade and Industry.

32.

Hoitash

Bedard

J. C.

(2009). Corporate governance and internal control over financial reporting: A comparison of regulatory regimes. Accounting Review, 84, 839-867.

33.

International Accounting Standards Board. (2004). IFRS 4: Insurance contracts. London, England: Author.

34.

International Underwriting Association. (2013). London company market statistics report 2013. London, England: Author.

35.

Jiang

Adams

Jia-Upreti

(2012). Does managerial entrenchment motivate the insurance decision?International Review of Financial Analysis, 24, 117-128.

36.

Kaplan

S. N.

Minton

B. A.

(2012). Has CEO turnover changed?Review of Finance, 12, 57-87.

37.

Kennedy

(2003). A guide to econometrics. Oxford, UK: Blackwell.

38.

Kim

Mauldin

Patro

(2014). Outside directors and board advising and monitoring performance. Journal of Accounting and Economics, 57, 110-131.

39.

Kroszner

R. S.

Strahan

P. E.

(2001). Bankers on boards: Monitoring, conflicts of interest, and lender liability. Journal of Financial Economics, 62, 415-452.

40.

Kunreuther

(1989). The role of actuaries and underwriters in insuring ambiguous risks. Risk Analysis: An International Journal, 9, 319-328.

41.

Liu

Wei

Xie

(2014). Do women directors improve firm performance in China? Journal of Corporate Finance, 28, 169-184.

42.

Lloyd’s of London. (2014). Lloyd’s 2014 annual report. London, England: Author.

43.

Malafronte

Poizio

Starita

M. G.

(2016). The nature and determinants of disclosure practices in the insurance industry: Evidence from European insurers. International Review of Financial Analysis, 45, 367-382.

44.

Masulis

R. W.

Wang

Xie

(2012). Globalizing the boardroom—The effects of foreign directors on corporate governance and firm performance. Journal of Accounting and Economics, 53, 527-554.

45.

Mayers

Smith

C. W.

(1981). Contractual provisions, organizational structure, and conflict control in insurance markets. Journal of Business, 54, 407-434.

46.

Miller

S. M.

(2011). Managerial discretion and corporate governance in publicly traded firms: Evidence from the property-liability insurance industry. Journal of Risk and Insurance, 87, 731-760.

47.

Nissim

(2013). Relative valuation of U.S. insurance companies. Review of Accounting Studies, 18, 324-359.

48.

Timme

S. G.

(1993). Corporate control and bank efficiency. Journal of Banking and Finance, 17, 515-530.

49.

Plantin

(2006). Does reinsurance need reinsurers?Journal of Risk and Insurance, 3, 153-168.

50.

Raheja

C. G.

(2005). Determinants of board size and composition: A theory of corporate boards. Journal of Financial and Quantitative Analysis, 40, 283-306.

51.

Saunders

Strock

Travlos

N. G.

(1990). Ownership structure, deregulation, and bank risk taking. Journal of Finance, 45, 643-654.

52.

Scordis

N. A.

(2011). The morality of risk modelling. Journal of Business Ethics, 103, 7-16.

53.

Serafeim

(2011). Consequences and institutional determinants of unregulated corporate financial statements: Evidence from embedded value reporting. Journal of Accounting Research, 49, 529-571.

54.

Sherris

(1987). The role of the actuary and the theory of contracting. Transactions of the Institute of Actuaries in Australia, 2, 1117-1142.

55.

Swiss Re. (2010). Insurance investment in a challenging global environment (Sigma No. 5/2010). Zurich, Switzerland: Author.

56.

U.K. Financial Services and Markets Act. (2000). London, England: Her Majesty’s Stationery Office.

57.

U.S. Sarbanes-Oxley Act. (2002). Washington, DC: U.S. Federal Government.

58.

Watts

R. L.

Zimmerman

J. L.

(1986). Positive accounting theory. Englewood Cliffs, NJ: Prentice Hall.

59.

Yermack

(1996). Higher market valuation of companies with a small board of directors. Journal of Financial Economics, 35, 451-469.