Factors Affecting the Characteristics of Boards of Directors: An Empirical Study of New Zealand Initial Public Offering Firms

This study examines the associations between the characteristics of boards ship) (e.g., Jensen, 1993), have been argued by researchers to be better able to monitor management. of directors of initial public offering (IPO) firms and the availability of growth opportunities and level of inside share ownership of these firms. Regulatory agencies in different countries view certain characteristics of boards of directors as being important determiThree characteristics of boards of directors are examined: board size, proportion of outside directors, and the separation of the CEO and chairnants of their effectiveness. For example, in the United States (U.S.), the New York Stock Exchange (NYSE) requires that person’s roles (dual leadership). The impact of firm size on board characteristics is controlled for in the empirical tests. Based on a sample of 110 listed companies have audit committees made up only of outside directors. In addition, the Securities and Exchange New Zealand firms that made initial public offerings of equity securities over the period 1983 to 1987, this study finds that firms that have lower Commission (SEC) recommended that nominating and compensation committees should be dominated by outside direcinside share ownership tend to employ larger boards. In addition, the proportion of outside directors is positively related to the extent of growth tors (Wolfson, 1984). Brickley, Coles, and Jarrell (1994) also discuss calls in the U.S. by the United Shareholders’ Associaopportunities available to a firm and negatively related to inside share ownership. Finally, firms with relatively more growth opportunities are tion, large public pension funds, legislators and regulators, and the financial press for dual leadership. likely to have dual leadership. Although some contrary results are found, the findings from this study provide some support for arguments that Initial empirical research on board composition has tended to examine the association between board characteristics and firms with greater agency problems, attributable to low inside share ownership and significant growth opportunities, are likely to choose boards firm performance (e.g., Baysinger and Butler, 1985; Rechner and Dalton, 1991), and results from these studies are mixed. of directors that are more effective at mitigating these problems. J BUSN RES 2000. 47.147–159.  1999 Elsevier Science Inc. These studies assume that boards with certain characteristics (such as dual leadership or more outside directors) are better able to carry out their functions, regardless of the characteristics of the firms employing these boards, and therefore, that firms adopting these board characteristics will outperform those that The corporate governance role of the board of directors do not. In contrast, several recent studies have examined the has become an issue of great interest to both researchers associations between firm characteristics and board characterand regulatory agencies. The board of directors is often istics, based on the assumption that there is no board structure seen as serving a monitoring function, protecting the interests that is optimal for all firms and that firms will choose a of various stakeholders against management’s self-interests board structure that is appropriate to its circumstances (e.g., (Fama, 1980; Fama and Jensen, 1983). Larger boards (e.g., Finkelstein and D’Averi, 1994; Rediker and Seth, 1995). Zahra and Pearce, 1989), boards with more independent, The present study adopts the more recent perspective in outside directors (e.g., Fama and Jensen), and those with the examining the determinants of board characteristics of New CEO’s and chairperson’s roles being separated (dual leaderZealand (N.Z.) firms making initial public offerings (IPOs) of equity securities (IPO firms). It tests hypotheses that firms Address correspondence to Dr. Y. T. Mak, Department of Finance and Acassociated with greater agency problems are likely to choose counting, National University of Singapore, 10 Kent Ridge Crescent, Singapore 119260, Singapore. E-mail: [email protected] board characteristics that enhance a board’s monitoring ability.