This research examined the relationships between board composition, stock ownership, and the existence of director liability protection in a sample of industrial manufacturing firms. Results indicate that the impact of board leadership on liability protection depends on the proportion of independent directors on the board. Findings suggest that high levels of independent directors compromise the governing effectiveness of independent board leadership. Results demonstrate that stock ownership patterns affect liability protection as well. High levels of institutional ownership are associated with liability protection. While the theoretical paradigm of organizational economics predicts that the decision to provide protection is based on economic advantage, this study shows that liability protection for directors involves social dimensions as well as economic ones.
Get full access to this article
View all access options for this article.
References
1.
Alderfer, C.P. (1986). The invisible director on corporate boards. Harvard Business Review, 64(6): 38-50.
2.
Baum, L. & Byrne, J.A. (1986). The job nobody wants. Business Week, (September 8): 56-61.
3.
Baysinger, B.D. & Butler, H.D. (1985). Corporate governance and the board of directors: Performance effects of changes in board composition. Journal of Law, Economics, and Organizations, 1: 101-124.
4.
Baysinger, B.D. & Hoskisson, R.E. (1990). The composition of boards of directors and strategic control: Effects on corporate strategy. Academy of Management Review, 15: 72-87.
5.
Bradley, M. & Schipani, C. (1991). Economic importance of the business judgment rule: An empirical analysis of the Trans Union decision and subsequent Delaware legislation. Pp. 105-129 in A. Sametx (Ed.), The battle for corporate control. Homewood, IL: Business One Irwin.
6.
Bradley, M. & Schipani, C. (1989). Relevance of the duty of care standard in corporate governance. Iowa Law Review, 75: 1-74.
7.
Bratton, W. (1989a). The new economic theory of the firm: Critical perspectives from history. Stanford Law Review, 41: 1471-1527.
8.
Bratton, W. (1989b). The “nexus of contracts” corporation: A critical appraisal. Cornell Law Review, 74: 407-465.
9.
Buchanan, B. (1974). Building organizational commitment: The socialization of managers in work organizations. Administrative Science Quarterly, 19: 533-546.
10.
Chaganti, R.S., Mahajan, V & Sharma, S. (1985). Corporate board size, composition, and corporate failures in retailing industry. Journal of Management Studies, 22: 400-416.
11.
Cohen, J. & Cohen, P. (1983). Applied multiple regression/correlation analysis for the behavioral sciences, 2nd ed.Hillsdale, NJ: Erlbaum.
12.
Daily, CM. & Dalton, D.R. (1992). Officer and director stock ownership and firm performance in the publicly traded small company. Journal of Business Strategies, 9: 101-113.
13.
Dayton, K.N. (1984). Corporate governance: The other side of the coin. Harvard Business Review, (January-February): 34-37.
14.
Demsetz, H. & Lehn, K. (1985). The structure of corporate ownership: Causes and consequences. Journal of Political Economy, 93: 1155-1184.
15.
Dobrzynski, J.H. (1991). How America can get the ‘patient’ capital it needs. Business Week, (October 21): 112.
16.
Dobrzynski, J.H. (1993). Relationship investing: A new shareholder pattern is emerging-patient and involved. Business Week, (March 15): 68-75.
17.
Dobrzynski, J.H., Schroeder, M., Miles, G.L. & Wever, J. (1989). Taking charge: Corporate directors start to flex their muscle. Business Week, (July 3): 66-70.
18.
Donaldson, L. (1990). The ethereal hand: Organizational economics and management theory. Academy of Management Review, 15: 369-381.
19.
Fama, E.F. (1980). Agency problems and the theory of the firm. Journal of Political Economy, 88: 288-307.
20.
Fama, E.F. & Jensen, M.C. (1983). Separation of ownership and control. Journal of Law and Economics, 26: 301-325.
21.
Farrell, C. (1986). If directors are doing their job, they don’t need insurance. Business Week, (September 8): 56-61.
22.
Finkelstein, S. & Hambrick, D.C. (1989). Chief executive compensation: A study of the intersection of markets and political process. Strategic Management Journal, 10: 121-134.
23.
Foust, D. & Schine, E. (1990). Who’s in charge here?Business Week, (March 19): 38-39.
24.
Fredrickson, J.W., Hambrick, D.C. & Baumrin, S. (1988). A model of CEO dismissal. Academy of Management Review, 13: 255-270.
25.
French, J., Jr. & Raven, B. (1959). The bases of social power. Pp. 607-623 in D. Cartwright (Ed.), Studies in social power. Ann Arbor: Institute for Social Research, University of Michigan.
26.
Geneen, H. (1984). Managing. New York: Doubleday.
27.
Harris, M. & Raviv, A. (1979). Optimal incentive contracts with imperfect information. Journal of Economic Theory, 20: 671-682.
28.
Harrison, J.R., Torres, D.L. & Kukalis, S. (1988). The changing of the guard: Turnover and structural change in the top-management positions. Administrative Science Quarterly, 33: 211-232.
29.
Hermalin, B.E. & Weisbach, MS. (1988). The determinants of board composition. The Rand Journal of Economics, 19: 589-606.
30.
Herman, E.S. (1981). Corporate power, corporate control. New York: Cambridge University Press.
31.
Hesterly. W., Liebeskind. J. & Zenger. T. (1990). Organizational economics: An impending revolution in organization theory?Academy of Management Review, 15: 402-420.
32.
Hill, C. W.L. & Phan, P. (1991). CEO tenure as a determinant of CEO pay. Academy of Management Journal, 34: 707-717.
33.
Hill, C.W.L. & Snell, S.A. (1989). Effects of ownership structure and control on corporate productivity. Academy of Management Journal, 32: 25-46.
34.
Hopt, K.J. (1985). Self-dealing and use of corporate opportunity and information: Regulating directors’ conflicts of interest. Pp. 285-326 in K.J. Hopt & G. Teubner (Eds.), Corporate governance and directors’ liabilities. New! York: Walter de Gruyter.
35.
Hoskisson, R.E. & Turk, T.A. (1990). Corporate restructuring: Governance and control limits of the internal capital market. Academy of Management Review, 15: 459-477.
36.
Jensen, M.C. (1986). The takeover controversy: analysis and evidence. Midland Corporate Finance Journal, 4: 6-32.
37.
Jensen, M.C. & Meckling, W.H. (1976). Theory of the firm: Managerial, behavioral, agency costs, and ownership structure. Journal of Financial Economics, 3: 305-360.
38.
Jensen, M.C. & Warner, J.B. (1988). The distribution of power among corporate managers. Journal of Financial Economics, 20: 3-24.
39.
Jones, T.M. & Goldberg, L.D. (1982). Governing the large corporation: More arguments for public directors. Academy of Management Review, 7: 603-611.
40.
Kaufman, D.W. (1989). Corporate directorships: Liability risks and protective techniques. Employee Relations Law Journal, 15: 21-33.
41.
Kerr, J.L. & Bettis, R.A. (1987). Boards of directors, top management compensation, and shareholder returns. Academy of Management Journal, 30: 645-664.
42.
Kesner, I.F. (1987). Directors’ stock ownership and organizational performance: An investigation of Fortune 500 companies. Journal of Management, 13: 499-507.
43.
Kesner, I.F. & Johnson, R.B. (1990). An investigation of the relationship between board composition and stockholder suits. Strategic Management Journal, 11: 327-336.
44.
Kesner, I.F., Victor, B. & Lamont, B.T. (1986). Board composition and the commission of illegal acts: An investigation of Fortune 500 companies. Academy of Management Journal, 29: 789-799.
45.
Kosnik, R.D. (1990). Effects of board demography and directors’ incentives on corporate greenmail decisions. Academy of Management Journal, 33: 129-150.
46.
Kosnik, R.D. (1987). Greenmail: A study of board performance in corporate governance. Administrative Science Quarterly, 32: 163-185.
47.
Labate, J. (1993). What activist investors want. Fortune, (March 8): 59-63.
48.
Lorsch, J.W. (1989). Pawns or potentates: The reality of America’s corporate boards. Boston: Harvard Business School Press.
49.
Mace, M.L. (1971). Directors: Myth and reality. Boston: Harvard University Press.
50.
Magnet, M. (1992). Directors, wake up!Fortune, (June 15): 85-92.
51.
Mallette, P. & Fowler, K.L. (1992). Effects of board composition and stock ownership on the adoption of “poison pills.”Academy of Management Journal, 35: 1010-1035.
52.
Manne, H. (1965). Mergers and the market for corporate control. Journal of Political Economy, 73: 110-134.
53.
Marcil, S. & O’Hara, P. (1987). Voting by institutional investors on corporate governance issues in the 1987 proxy season. Washington, DC: Investor Responsibility Research Center.
54.
Michel, J.F. & Hambrick, D.C. (1992). Diversification posture and top management team characteristics. Academy of Management Journal, 35: 9-37.
Norton, R. (1991). Who owns this company, anyhow?Fortune, (July 29): 131-142.
58.
Pamepinto, S. & Naylor, B. (1990). Corporate governance background report: Director and officer liability and indemnification. Washington, DC: Corporate Governance Service, Investor Responsibility Research Center.
59.
Perkins, R.B. (1986). Avoiding director liability. Harvard Business Review, 64(3): 8-14.
60.
Pfeffer, J. (1981). Power in organizations. Marshfield, MA: Pitman.
61.
Pfeffer, J. (1982). Organizations and organization theory. Boston: Pitman.
Rechner, P.L. & Dalton, D.R. (1989). The impact of CEO as board chairperson on corporate performance: Evidence vs. rhetoric. The Academy of Management Executive, 3: 141-143.
64.
Salancik, G.R. (1977). Commitment and control of organizational behavior and belief. Pp. 1-54 in B.M. Staw & G.R. Salancik (Eds.). New directions in organizational behavior. Chicago: St. Clair Press.
65.
Schmitt, R. (1993). Courts hold directors to higher standard. The Wall Street Journal, (November 1): B4.
66.
Shleifer, A. & Vishny, R. (1986). Greenmail, white knights, and shareholders’ interests. Rand Journal of Economics, 17: 293-309.
67.
Singh, H. & Harianto, F. (1989a). Management-board relationships, takeover risk, and the adoption of golden parachutes. Academy of Management Journal, 32: 7-24.
68.
Singh, H. & Harianto, F.. (1989b). Top management tenure, corporate ownership structure and the magnitude of golden parachutes. Strategic Management Journal, 10: 143-156.
69.
Stewart, T.A. (1993). The king is dead. Fortune, (January 11): 34-43.
70.
Vance, S.C. (1983). Corporate leadership: Boards, directors, und strategy. New York: McGraw-Hill
71.
Waldo, C.N. (1985). Boards of directors. Westport, CT: Quorum Books.
72.
Walking, R.A. & Long, M.S. (1984). Agency theory, managerial welfare and takeover bid resistance. Rand Journal of Economics, 15: 54-68.
73.
Walsh, J.P. & Seward, J.K. (1990). On the efficiency of internal and external corporate control mechanisms. Academy of Management Review, 15: 421-458.
74.
Weidenbaum, M.L. (1986). Updating the corporate board. The Journal of Business Strategy, 7(l): 77-83.
75.
Wiersema, M.F. & Bantel, K.A. (1992). Top management team demography and corporate strategic change. Academy of Management Journal, 35: 91-121.
76.
Williamson, O. (1985). Economic institutions of capitalism. New York: Free Press.
77.
Zahra, S.A. & Pearce, J.A. (1989). Boards of directors and corporate financial performance: A review and integrative model. Journal of Management, 15: 291-334.
78.
Zald, M.N. (1969). The power and functions of boards of directors: A theoretical synthesis. American Journal of Sociology, 75: 97-111.
