Board meeting frequency and firm performance

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Abstract

For 307 firms over the 1990–1994 period, I find that board meeting frequency is related to corporate governance and ownership characteristics in a manner that is consistent with contracting and agency theory. The annual number of board meetings is inversely related to firm value. This result is driven by increases in board activity following share price declines. I further find that operating performance improves following years of abnormal board activity. These improvements are most pronounced for firms with poor prior performance and firms not engaged in corporate control transactions. Overall, my results suggest that board activity, measured by board meeting frequency, is an important dimension of board operations.

Introduction

The monitoring role of corporate boards in public corporations has become a central issue in both the financial and the academic press. Most prior research focuses on board composition and underlines the important role of outside directors in protecting shareholders’ interests in settings requiring good decision control (e.g., Weisbach, 1988; Cotter et al., 1997). Extending this notion, other studies have explicitly recognized that, in addition to a director's affiliation, a director's reputation capital (e.g., Shivdasani, 1993) and incentive compensation (Perry, 1996) may guide the director's decisions. Moreover, Jensen (1993) suggests that a value-relevant attribute of corporate boards is their size, and Yermack (1996) documents that the market values firms with smaller boards more highly.

My study adds to this line of research by suggesting the intensity of board activity as an alternative, value-relevant board attribute and by examining the association between board activity, measured by the frequency of board meetings, and corporate performance. A priori, the nature of this association seems complex and its direction unclear. One view is that board meetings are beneficial to shareholders. Lipton and Lorsch (1992) suggest that the most widely shared problem directors face is lack of time to carry out their duties. Similarly, Conger et al. (1998) suggest that board meeting time is an important resource in improving the effectiveness of a board. This view is reinforced by recent criticisms, in both the financial and the academic press, of directors who spread their time too thin by taking on too many outside directorships, confounding their ability to attend meetings regularly and, therefore, to monitor management well (e.g., Byrne, 1996; NACD, 1996). A clear implication of these articles is that directors in boards that meet more frequently are more likely to perform their duties in accordance with shareholders’ interests.

An opposing view is that board meetings are not necessarily useful because the limited time outside directors spend together is not used for the meaningful exchange of ideas among themselves or with management. This problem is a byproduct of the fact that chief executive officers almost always set the agenda for board meetings (Jensen, 1993). Moreover, routine tasks absorb much of the meetings limiting opportunities for outside directors to exercise meaningful control over management. In fact, Jensen suggests that boards should be relatively inactive, and that boards are usually forced to maintain higher activity levels in the presence of problems. In this view, board meetings serve as a fire-fighting device rather than as a proactive measure for improved governance. Thus, while the consequences of higher board activity are unclear, higher board activity is a likely corporate response to poor performance.

In the backdrop of conflicting views on the nature of board activity, the importance of board meeting frequency seems to be an open question. Evidence regarding the significance of board meeting frequency carries potentially important governance implications. That is, it would seem much easier and less costly for a firm to adjust the frequency of its board meetings to attain better governance than to change the composition of its board or its ownership structure or approve charter amendments. In this paper I examine the importance of board meeting frequency by testing whether firms with boards that meet more frequently outperform firms with inactive boards. First, I investigate the determinants of board meeting frequency and the association between this frequency and firm value for 307 firms over 1990–1994, both in independently estimated equations and in a simultaneously determined system. Furthermore, I examine the relationship between changes in board meeting frequency and prior, contemporaneous, and subsequent firm performance.

The results suggest that board meeting frequency is related to corporate governance and ownership characteristics, in line with contracting and agency theory. Boards that meet more frequently are valued less by the market, a finding that seems to be driven by share price declines being followed by higher meeting frequencies. Importantly, years with an abnormally high meeting frequency are followed by improvements in operating performance. Moreover, performance improvements are most significant for firms experiencing poor prior performance and firms not engaged in corporate control transactions.

The study is organized as follows: Section 2 discusses testable propositions on the determinants of board activity and the association between board activity and performance; Section 3 describes the data and variable definitions; Section 4 presents and discusses results from cross-sectional tests; Section 5 discusses results from tests on changes in board activity; Section 6 presents evidence of changes in operating performance surrounding years of abnormally high board activity; Section 7 provides concluding remarks.

Section snippets

The determinants of board activity

To explain the role of board activity in corporate governance, I develop arguments linking board activity to a wide array of governance variables. The discussion in this section primarily relies on the notion that governance mechanisms are substitutes or complements, their levels being determined by each firm's broader control environment. Governance mechanisms may be related in complicated ways, so the posited predictions regarding the substitutability/complementarity of board activity with

Sample selection and variable definitions

The sample firms cover the period 1990–1994 and are chosen in two stages. First I select the 350 largest firms that are listed in the Forbes compensation survey for 1992 as measured by total sales and meet the following additional criteria: (1) the proxy statements for these firms are available for fiscal years 1991 and 1993 in the SEC ONLINE branch of the SilverPlatter database;

Univariate tests

To provide preliminary evidence on the association between meeting frequency and firm value, I compare firm values across the range of different board meeting frequencies for 1991. The choice of 1991 is desirable because it is one of two years with no missing data by sample design (the other being 1993) given that there is little variation in meeting frequency and firm value across different years. Results for other years (not tabulated) are similar to those reported in Table 2.

I partition

The association between past performance and changes in board activity

The results thus far suggest that the market values firms with more inactive boards more highly, a relation that springs from higher meeting frequencies following poor corporate performance. The direction of this relationship is not fully answered by cross-sectional tests, which consider the net effect of the antecedents and consequences of board activity but do not attempt to distinguish between the two. By contrast, tests of the association between changes in board activity and firm

Operating performance changes around years of abnormally high board meeting frequency

In this section I examine changes in operating performance following years of abnormally high meeting frequency and expect that such years will be followed by significant improvements in operating performance. Specifically, I treat firm-years of abnormally high meeting frequency as “events” and employ a methodology that is similar to that outlined in Barber and Lyon (1996). A firm-year is an event if the number of board meetings for that year exceeds the firm's sample-period average by more

Summary and conclusions

An often-heard criticism of corporate boards is that outside director members are only given limited interaction time to perform their monitoring role. This study examines whether the frequency of board meetings is a remedy to the problem of limited director interaction. Initial tests on the determinants of meeting frequency provide weak evidence that more appropriately structured boards are more active since board activity rises with the number of other directorships held by independent

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    I have benefitted from discussions with Petros Hadjicostas, Elena Karahanna and Lenos Trigeorgis and especially from the numerous and insightful suggestions of Marc Zenner (the referee). Research support from the University of Cyprus is gratefully acknowledged.

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