Board independence not translating into corporate governance

Just because a company has increased the formal side of the independence of its board of directors, does not actually mean that that it has improved its corporate governance standards, a recently-released study has warned.

Published in the February edition of the Academy of Management Journal, the study, conducted by researchers James Westphal and Melissa Graebner, noted that corporate CEOs are adopting tactics which give an impression of high board independence – something which is traditionally equated with good corporate governance practices in the financial community, the report said. However, this appearance of board independence was only superficial, and was being done to manipulate investment bank stock analysts into producing favourable reports of the company, they said.

Surveying 1,300 CEOs from large companies in the US, the report noted that while many companies appointed directors which had no formal ties to the company he is charged with monitoring, but in reality they are typically connected socially with its senior management – most notably the CEO. While this may give an appearance that the company’s board of directors had a high degree of independence from senior management, such a board may in actuality be influenced through the personal ties that its individual members have with the company’s CEO, the report said.

The latest research is part of series of studies conducted by the authors on impression management– which examines how companies manipulate outside impression of its management practices, without effecting actual change in the company itself. The study found that by engaging in activities that are typically pleasing to stock analysts, they increased the likelihood of a stock upgrade by 36 per cent, and reduced the likelihood of its downgrade by 45 per cent.

“Obviously, the CEOs were pushing the right ideological buttons,” noted the study’s authors, who also suggested that companies include information on the social relationships of board members to CEOs as part of standard information provided in basic company literature.

“If the CEO is a college classmate of a director or they worked together for the same firm or they are board members of the same organisation, these relationships are probably going to affect a company’s governance. Why should it be hard for stock analysts or investors or other interested parties to get access to that information? Certainly there is a case for transparency here,” they said.