TITLE:
Economic Crisis and Corporate Governance: How Can Board Independence and Expertise Maximize the Firm Value?
AUTHORS:
Patricia Crifo, Gwenael Roudaut
KEYWORDS:
Corporate Governance, Board, Independent Directors, Expert Directors, Sustainability
JOURNAL NAME:
Theoretical Economics Letters,
Vol.12 No.5,
September
15,
2022
ABSTRACT: In the context of recurrent crises and the necessity
to move to more sustainable firm level changes, this paper analyzes the
trade-off between board’s dual role of monitoring and advising the CEO,
especially relevant for the integration of sustainable development into
corporate strategy, depending on board independence and expertise. We propose a
theoretical model in which boards may choose to be either monitoring or
advisory type towards the CEO. In this framework, the board’s incentives to
adopt a high monitoring level are non-monotonically (U-shaped) related to the expertise level. On the
other hand, the incentives for an advisory board to discipline the CEO are increasing with expertise,
if the business has high opportunity for growth. Finally, under specific
parameter values, the model generates a disciplining effect of expertise in the
sense that the more expert the board is, the less opportunistic the CEO is. We then test these theoretical results
using a dataset on the French 120 largest listed companies over the
2006-2011 period. Empirical evidence reveals that expertise plays a mediating
role in the relationship between independence and performance in French firms.
Directors’ competences for sustainable development hence are likely to play a
crucial role for firms to integrate such issues into their core strategy.