FINA 1007 – Research Proposal Example 1

Does Greater Board Independence Improve Firm
Performance?

Note: This research proposal has been uploaded to the University’s anti-plagiarism software, Turnitin

1. Introduction

“The country’s economy depends on the drive and efficiency of its companies. Thus the effectiveness with which their boards discharge their responsibilities determines Britain’s competitive position. They must be free to drive their companies forward, but exercise that freedom within a framework of effective accountability. This is the essence of any system of good corporate governance”. Cadbury Report (1992, pg 10)

Over the past few years, the issue of corporate governance has seen a lot of public debate. After a series of corporate scandals in the UK such as Polly Peck and Maxwell, several committees have been set-up in order to deal with the issue of corporate governance producing several interesting reports, e.g. the Cadbury Report (1992), the Greenbury Report (1995), the Hampel Report (1998), and the Higgs Report (2003). All four reports recommend a greater role for outside and independent directors. Independence is considered as a solution for the failure in corporate governance, which appears as a mantra in listing requirements, corporate best practice standards and government regulation (Beecher-Monas, 2007).

The recent global movement towards a more prominent role for outside directors can be traced to the Cadbury Report issued in 1992, which recommends that at least three outside directors are on the board of directors of publicly-traded companies in the U.K. Gordon (2007) illustrates the powerful change in the fraction of inside and independent directors on the board of public listed firms in the U.S. In Figure 1, we can see that in 1950 the fraction of independent directors increased from approximately 20% to approximately 75% in 2005.
Figure 1. Board Composition, 1950 – 2005
[pic]
Source: Gordon (2007)

Within a