Boards : Independent and committed directors?

Boards: Independent and committed directors?

Christophe Volonté

UniversityofBasel,Switzerland

a r t i c l e i n f o

JELclassification:

G30 G34 K22 Keywords:

Corporategovernance Boardofdirectors Boardindependence Outsideactivities

a b s t r a c t

Regulators,proxyadvisorsandshareholdersareregularlycallingforindependentdirectors.However,at thesametime,independentdirectorscommonlyengageinnumerousoutsideactivitiespotentiallyreduc- ingtheirtimeandcommitmentwiththeparticularfirm.UsingTobin’sQasanapproximationofmarket valuationandcontrollingforendogeneity,ourempiricalanalysisrevealsthatneitherisindependence positivelyrelatedtofirmperformancenorareoutsideactivitiesnegativelyrelatedtoit.Nevertheless,we findthat—non-independent—executivedirectors,formerexecutivesandfamilyrepresentativeshave apositiverelationshipwithTobin’sQ.Conversely,—independent—outsideexecutivesarenegatively relatedwithfirmvaluation.Moreover,thestudyindicatesthatthefrequencyanddurationofmeetings arenegativelyaffectedbythefractionofexecutivedirectorsontheboard.Insiderspotentiallyreducethe needformeetingsbecauseoftheirspecialistcompetence.Theresultsthereforeinvalidaterulesadvo- catingindependentdirectorsandopposetheengagementofdirectorswithsignificantoutsideactivities.

1. Introduction

Mosteconomistsagreethataboardofdirectors’essentialduty is to ensure that a firm is ledin the shareholders’ best inter- ests. The board of directorsis positioned betweena firm’s top managementanditsshareholderswhotypicallyhaveinsufficient ownershiptoinfluencefirmpolicies.Therefore,prescriptivelegis- lationimposesseriousresponsibilitiesondirectorsanddefinesthe publicexpectationoftheirperformance.Twoimportantresponsi- bilitiesoftheboardofdirectorsarethemonitoringandadvising ofthetopmanagement.Thefirsttask,whichisrootedinagency theory,stressestheimportanceofthedirector’sroleinsolvingthe principal-agentconflictbetweenmanagersandshareholders(see JensenandMeckling,1976;FamaandJensen,1983).Inthiscontext, theboard’sindependencefrommanagementiscrucial.Thesecond taskemphasizestheimportanceofthedirector’sroleprovidingties withtheexternalbusinessenvironmentandprofessionalspecial- istskills(forexample,strategicplanning).Thislatterresponsibility

∗ Correspondence to: Department of Financial Management, University of Basel,FacultyofBusinessandEconomics,PeterMerian-Weg6,CH-4002Basel, Switzerland.

E-mailaddress:christophe.volonte@unibas.ch

isassociatedwithoutsideactivities(forexample,outsidedirec- torships,executivepositionsorpoliticalengagements)ofdirectors andisbasedonresourcedependencetheory(PfefferandSalancik, 1978).However,thesetworolesaresubjecttotrade-offs.

Thefirsttrade-offrelatestotheposition(orindependence)of theboardvis-à-visthetopmanagement.Boarddirectorsneedsuf- ficientinformationaboutthedailybusinessandrisksofthefirm todoaproperjob.Theinformationasymmetrybetweentheman- agementandtheboardofdirectorscanbereducedbycontinuing communicationofthetwoparties.Executivedirectors(insiders) canclosethisgap.However,insidersvirtuallysupervisethemselves andexecutivedirectorsmaybetooinvolvedindailybusiness,so thattheirviewmayconflictwithanoutside,moreneutral,per- spective.Inaddition,alsoacloserelationship,friendshiporeven dependenceonthechiefexecutiveofficer(CEO)andhisexecutive boardcanimpairtheboard’sindependenceandleadtocollusion andconflictsofinterest.Forinstance,compromisedboarddecisions mayinvolveexecutivesbeingreplacedtoolateorpaidtoomuch, countertoshareholderinterests(AdamsandFerreira,2007).This isparticularlydifficultwheretheCEOhasalotofdecision-making powerasinthenominationofnewdirectors(seeShivdasaniand Yermack,1999).

As a consequence of these potential imbalances, regula- tors, proxy advisors and shareholders are regularly calling for

Konstanzer Online-Publikations-System (KOPS) URL: http://nbn-resolving.de/urn:nbn:de:bsz:352-306622

Erschienen in: International Review of Law and Economics ; 41 (2015). - S. 25-37 https://dx.doi.org/10.1016/j.irle.2014.10.002

independentdirectors.¹Theliteraturetraditionallyclassifiesboard membersasinsidersandoutsiders(seeHermalinandWeisbach, 2003;Yermack,2004).Executivedirectorsarecommonlydefined asbeinginsiders,whilenon-executivedirectorsaredenominated asbeingoutsiders.Nevertheless,notalloftheseoutsidersareinde- pendent.Suchdirectorsareoftenreferredtoas“grey”or“affiliated”

directors.Asa commonrule,directors areconsideredindepen- dentiftheyarenotcurrentlyemployedbythefirmorifagapof threeyearshaselapsedsincepreviousemploymentthere,andif theyhaveneitherfinancialnorbusinesstiestothefirm(seeSwiss Code).²

The call for independent directors launched in the United States hasled to the appointment of directors who have nei- therfinancialnorpersonalrelationstothefirm.Inconsequence, independent“professional”directorsmayengageinasignificant numberofotheroutsideactivities(forexample,outsidedirector- ships,executivepositionsorpoliticalengagements),assumingthat adirectorshipisgenerallynotafull-timejob.

Therefore,thesecondtrade-offischaracterizedbytimecon- straintsimposedbycompetingallegiancesandconflictsofinterest imposed bycompeting activities,which,however, mayprovide benefitsofbusinessexperienceandexternallinkages.Ontheone hand,theseoutsideengagementsmayreducethetimeallocated toanysingledirectorship.This,inturn,reducestheirmonitoring capacity and potentially exacerbates the agency problem, rais- ingtheagencycoststhattheywereemployedtoreduceinthe firstplace.Ontheotherhand,experienceddirectorswithmultiple appointmentsprovideimportantlinkagestotheexternalenviron- ment.Inaddition,withmultipledirectorships, directorsarenot uniquelyfinanciallydependentononesingleseatforremuneration, thusallowingthemmorescopetovoicetheirviewsindependently indiscussionsintheboardroom(seevonderCrone,2006).Suchfac- torsmayfacilitatebusinessinuncertaineconomicenvironments.

Allthesame,increasingly,governancecodesrecommendrestric- tingthenumber ofexternal directorships, asis thecase inthe NetherlandsorFrance.³

In light of regulations and shareholders calling for board independenceand alimitationregardingthenumber ofoutside activitiesadopted,thequestionariseswhethersuchrulesimprove theeffectivenessoftheboardandasaresult,thevalueofallfirms onaverage. Directorsmusthave therequisitecapacityandskill tofulfilltheirfunction,andmustdevotethenecessarytimeand efforttothedischargeoftheirduties.Fromajudicialpointofview, insufficienteffort,skillsortimedonotreleasedirectorsfromtheir

1SeeSarbanes-OxleyAct(SOX)of2002Section301(m)(3)(A):“Ingeneral—Each memberoftheauditcommitteeoftheissuershallbeamemberoftheboardof directorsoftheissuer,andshallotherwisebeindependent.”Thisdirectandexoge- nousimpactledtoareductionofinsidersonU.S.boardsofunregulatedfirmsfrom 2001to2004(seeLincketal.,2008).Especiallysmallfirmswithtraditionallyhigher proportionsofinsidersloweredtheirshare.By2004,onlyfewfirmsstillhadinsider- dominatedboards.Besides,boardsizesincreasedduetoahighercomplexityand requirementsoftheboard.Asamatteroffact,thefractionofsuchindependent directorshasrisenfrom22%to73%intheperiodfrom1950until2005intheUnited States(Gordon,2007).Accordingly,thefractionofinsidedirectorsorgreydirectors hasdecreasedto16%and11%,respectively.

2Inaddition,non-independencecanalsoapplytodirectorswithrelationstosig- nificantshareholdersordirectorswithalongtenure(see“CodedeGouvernement d’EntreprisedesSociétésCotées”inFranceor“CombinedCodeofCorporateGov- ernance”intheUnitedKingdom).Firmsmayalsoemployadditionalindependence criteria.Forinstance,theSwissbankUBSemploys13independencecriteriabased ontheCorporateGovernanceListingStandardsoftheNewYorkStockExchange forboardmembersand16formembersoftheauditcommittee(http://www.

ubs.com/1/g/investors/corporategovernance/independencecriteria.html,accesson 21.02.11).

3“DutchCorporateGovernanceCode.PrinciplesofGoodCorporateGovernance andBestPracticeProvisions”bytheCorporateGovernanceCodeMonitoringCom- mittee and “RecommendationsonCorporate Governance” by the Association Franc¸aisedelaGestionFinancière.

dutyofcare.Thissuggeststhatindividualswithmultipleboard seatsencounterseriousdangerofviolatinggoodfaith.Hence,the examinationofthesequestionshaspolicyimplications.A legis- lationamendmentforallfirmsthat,however,onlyimprovesthe corporategovernanceofspecificfirms(forexamplelargeandinter- nationalbanks)mayadverselyaffectandseriouslyburdenallother firmssincetheoptimalityofboardcompositionisaffectedbythe firm’srequirements(seee.g.HermalinandWeisbach,2003).Inap- propriaterulesrestrictthefreedomoffirmstoorganizetheirboard structure accordingtotheirneedsin a value-maximizingman- ner.Inshort,corporategovernancereformsareonlybeneficialand welfare-improvingifthenet-effectoverallfirmsispositive.

Therefore, a problemin modern boardsliesin thetrade-off betweenboardindependenceandtheoutsideactivitiesofinde- pendentdirectors.Currentresearchonthetopicfailstoexplicitly connectindependencewithoutsideactivities.Somedosoimplic- itlybyinvestigating theimpactofso-called“busy”outsiderson firmperformance(Ferrisetal.,2003;FichandShivdasani,2006).

Furthermore,studiesusebroadproxiesforeitherindependenceor outsideactivities.Andfinally,mostacademicpapersfocusonthe U.S.marketwhereownershipisdispersed,requirementsforinde- pendentdirectorsexigent,andalargepoolofdirectorsavailable.

Weaddressthetwoissues(independenceandoutsideactivities) andexaminetheireffectonfirmperformanceinSwitzerland.Swiss firmsareaninterestingresearchobjectfortwo reasons.Firstly, thelegislatureallowsinsiderstooccupypositions ontheboard ofdirectors,asisthecaseinmarket-orientedgovernancesystems (“one-tierboardstructure”).Thus,aboardcanconsistofexecutive directors(insiders),aswellasnon-executivedirectors(outsiders), andtheleadershipstructurecanalsobecombined(wheretheCEO isalsochairman).⁴TheSwissone-tierboardstructurecontraststhe two-tieredboardsystemstipulatedinGermany(andotherconti- nentalEuropeancountries)whichstrictlyseparatesthesupervisory board(“Aufsichtsrat”)fromthemanagementboard(“Vorstand”).

Inadualisticsystem,novarianceinboardcompositionrelatingto executivedirectorscanbeobserved,andconsequently,empirical investigationsarenotpossible.InSwitzerlandsuchexaminations arefeasible.

Secondly,thenarroworilliquidmarketfordirectorsgenerates lowsupplyofdirectors(seeLodererandPeyer,2002).Aspecial featureofSwitzerlandasasmalleconomyisitshighconcentration oflargeglobalfirms,whichusedtobecontrolledbyarelatively smallnumber of business leaders.The so-called “old boysnet- work”operatedthroughbusinessassociations,societies,interest groups,politicalaffiliations,andtheSwissArmy.Famousexamples ofbusinessleadersincludeFritzGerber,RainerE.Gut,andUlrich Bremi.Later,anewgroupofconnecteddirectorsappearedwiththe likesofRolfHüppi,AndresLeuenberger,andLukasMühlemann.

Nowadays,importantbusinessleadersarelessactiveinpolitics, althoughmanypoliticiansaremembersofpoliticallyinfluenced boardsintheutilitiesandhealthindustrysectors.Overthepast twodecades,theaverageboardsizedecreasedfrom15to11board members,precipitatingafallinthenumberofcross-relationships.⁵ Moreover,Swissdirectorshavebeenreplacedbydirectorsfrom abroadtosomeextent.Whilein1988,88%ofallboardmembers wereSwissmales,thisnumbergraduallydecreasedto31%in2013 (Volonté,2014).Eventhoughsomedirectorsareveryactivetoday, thenetworkintensitycannotbecomparedto20yearsago.Fur- therstatisticalfeaturesunderlinethisperception.In2008,1574

4CEOdualityisgivenifonepersonholdsboththejoboftheCEOandthechairman oftheboardofthesamefirm.

5In2012,onlyfourdirectorsofoursampleholdfourormoreboardappointments inSwissPerformanceIndex(SPI)firms.AllofthemareSwiss,male,andover50years old.

directorseatsweresharedwith1349directors.Hence,theratioof seatstodirectorsis86%.Incomparison,thisratiowas94%forSMI firmsin2013(and73%in1988)(Volonté,2014).

Our studyuses a hostof refinedvariables tomeasure inde- pendence(10variables)andoutsideactivities(11variables).The definitionsgobeyondtheusualclassificationofindependentor

“busy”directorsmadebyregulatorsandacademicresearchers.This way,weaimtoexplaintheinconclusiveresultsofpaststudiesthat mayhavebeendrivenbydeficitsinvariablespecifications.Fur- thermore,thisbreakdownallowsusalsotoexaminewhichfactors reallydriveboardstructure-performancerelationships.Wetackle endogeneityissuesusingabatteryofcontrolvariables,fixedeffects modelsandtwo-stageleastsquaresmethod.Afterall,ourresearch findingsdocumentwhetherinvestorstrustspecifictypesofdirec- torscategorizedbytheextenttowhichtheyactintheshareholders’

bestinterests.

2. Literaturereview

Boardofdirectorsshouldbecomposedofdirectorswithvari- ousfunctionsandskills.BaysingerandButler(1985)suggestthat directors execute distinct functionson boards.They categorize directors’functionsintothreeboardcategories:insiderscarrying outexecutivefunctions,independentdirectorsactinginamonitor- ingcapacity,andotherdirectorswhoareinstrumentallyengaged inproviding,forinstance,legalcounsel.Theboard’scomposition shouldreflectthefirm’sneedsinrelationtothedirectors’functions alsoinrelationtotheirindependenceandexternalcommitments.

2.1. Boardindependence

Theeffectofboard composition(andindependence)onfirm performance or firm policy (namely CEO dismissal) is a topic researched in legal, business, and finance literature. Executive directorsmightfaceconflictsofinterestbecausetheirjobincludes supervisingthemselves,amongotherthings.Thereby,thepropor- tionofinsidersortheextentofCEOdualityisexpectedtonegatively impactfirm performance.For thisreason, shareholders,namely institutional investors, favor independent boards: TIAA-CREF, a largeU.S.mutualfund,onlyinvestsinfirmswhichhaveamajority ofoutsidedirectors,andCalPERS,alargeU.S.pensionfund,sug- geststhattheCEOshouldbetheonlyinsideronaboard(seeBhagat andBlack,1999;Colesetal.,2008).Furthermore,someU.S.stock exchangessuchastheNYSEandNASDAQalsorequireamajorityof outsidedirectors;alsoSOXrequiresindependentauditcommittees.

Themostobviousproblemassociatedwithboard independence concerns theleadership structure of a firm. CEO dualityis fer- ventlydebated.Dualmandatesarewidelyarguedtohaveanegative impactonfirmperformance.Accordingly,BhagatandBolton(2008) demonstrateinanempiricalpaperthataseparationofthefunc- tionsisbeneficialforperformance.Incontrast,Brickleyetal.(1997) findevidencethataseparationisdetrimentaltoperformance,as itisvalue-decreasing. AndbothBaligaetal.(1996)and Schmid and Zimmermann(2008)showthat neitherthestock pricenor performanceisaffectedbyachangeintheleadershipstructure.

Faleye(2007)explainstheseresultsbyarguingthatthebenefitsof aseparationdependonCEOandfirmcharacteristics.

Fromamoregeneralperspective,researchonboardindepen- dencefocusesonthecompositionoftheboardwithoutsideormore strictly,independentdirectors.Independentdirectorsareexpected tobemorelikelytoprotecttheshareholders’intereststhaninsid- erswould.Asevidenceofthistheory,Weisbach(1988)findsthat CEOs of poorly performingfirms are more frequentlyremoved byoutsider-dominatedboardsthanbyinsider-dominatedboards.

However,severalstudiesfindnooranegativerelationshipbetween

outsiders and firm performance (e.g.,Hermalin and Weisbach, 1991;Yermack,1996;AgrawalandKnoeber,1996;Daltonetal., 1998;Klein,1998;BhagatandBlack,1999,2002;Beineretal.,2006;

BhagatandBolton,2008).

Incontrast,employingvariousidentificationstrategies, Black and Kim (2012) using regulatorychanges, Nguyen and Nielsen (2010)usingindependentdirector’ssuddendeath,andKnyazeva etal.(2013)usinglocaldirectorpoolfindapositiveeffectofboard independenceonfirmvalue.

AndersonandReeb(2004)underlinetheperceptionthatinde- pendentdirectors representminorityshareholders’ interests.In balancingfamilyandminorityinterests,independentdirectorsadd valuetofamilyfirmsandlimitthefamily’sopportunitytoextract privatebenefitsofcontrol.However,independentdirectorsmay alsohavelinkstothefirmandmanagementthatarenotobvious inthefirstplace.Forinstance,Cohenetal.(2012)findevidence thatanalystswhoaretechnicallyindependentarechosentoboards whentheirpriorrecommendationasanalystswereinfavorofthe firm.

Itisalsoimportanttorememberthatempiricalresultsareprone tobeinfluenced bysamplefirms(namelyinstitutionalenviron- ment of thecountrystudied,industry affiliation,firm size, and ownershipstructureofthefirms)andtheperiodofthestudy(for example,beforeoraftertheintroductionofSOX,seee.g.,Helland andSykuta,2004).

2.2. Outsideactivitiesofdirectors

Theoutsideactivitiesofdirectorscompriseengagementsdirec- torsholdoutside thespecificfirm board.Expressedin termsof marketeconomics,weexpectagrowthindirectors’outsideactiv- itiesorengagementsincaseofaseller’smarketfordirectorships.

Fama(1980)aswellasFamaandJensen(1983)arguethatreliable—

“good”—supervisorsandmanagerialtalentmayberewardedwith directorships.However,directorswithnumerousexternalappoint- mentsmayhaveinsufficienttimefortheirboarddutiesowingto over-commitment.FichandShivdasani(2007)findsupportingevi- dence forthis view. Theyrevealthat thenumber of additional directorshipsthatadirectorhasdeclinesifthefirmfacesshare- holder class action lawsuitsfollowing financial fraud. Caiet al.

(2009)showthatshareholderspunishlazydirectors.Theirresults indicatethatdirectorsarenormallyelectedbylargemajoritieswith votingrightsinexcessof90%.Incontrast,incumbentdirectorswho attend fewermeetingsreceive fewershareholder votes(−14%).

MasulisandMobbs(2014)showthatdirectorsdevotemoretime todirectorshipswithhigherprestige andconcludethatreputa- tionplaysanimportantroleforindependentdirectors.Similarly, DeJongetal.(2014)findthatintrinsicmotivesaffectadirector’s decisiontojoinaboard.

Most empirical studies on multiple directorships find that thereisanegativerelationshipwithfirmperformance.Fichand Shivdasani(2006)define“busyboards”asbeingcomposedof a majorityofoutsidedirectorsholdingthreeormoredirectorships.

Theirresultsindicatethat suchboardsarenegativelyrelatedto profitabilityandmarket-to-bookratios;additionally,CEOturnover sensitivitytofirmperformanceislower.Also,Jirapornetal.(2008) findthatdirectorsholdingmultipleboardseatsnegativelyaffect firmvalue.Incontrast,Ferrisetal.(2003)findnoevidencethat busydirectorsservelessresponsiblyandthereforerejectpolicies limitingthenumberofoutsidedirectorships.

Many studies directly link the number of directorships to firmperformance,suggesting,forinstance,thattimeconstraints translateintolowerfirmvaluation.Nevertheless,oneimportant questionis howmultipledirectorshipsaffectfirm performance.

Over-commitment of external board members’ has also been showntoberelatedtovalued-decreasingfirmstrategies(seee.g.,

Jirapornetal.,2008; Ahnetal.,2010).Yermack(2006)demon- stratesthatstockpriceeffectsduetomajoreventsinonefirmare transmittedtootherfirmsthatsharethesamedirector.

Boardsareoftencomposedbyexternalexecutives, especially CEOs,and politically-connectedpeople.AccordingtoLorsch and MacIver(1989),managersknowbesthowtooptimallymonitor managers. However, some corporate governance codes recom- mend a maximum number ofdirectorships for executives, and CEOsarelesslikelytoserveonboardstodaythan10years ago (seeSpencerStuart,2010).⁶ Onenotoriousproblemagainisthe constraintontime,becauseCEOpositionsaredemandingandtime- consuming.Conyon and Read(2006)argue thatexecutiveswill acceptalargernumberofoutsideappointmentsthanisoptimal fortheirprimaryemployer.Additionally,conflictscanalsooccur wheredirectorsrepresentinterestsofbothsuppieranddemaner.

Nevertheless,MasulisandMobbs(2011)provethatinsidedirectors withoutsidedirectorshipsarepositivelyrelatedtomarket-to-book ratiosandoperatingperformance.Inaddition,event-studiesshow thatthemarketreactionontheappointmentofCEOs(Fich,2005) andexecutivesappointedfromfirmswithlowagencyproblems (PerryandPeyer,2005)ispositive.Incontrast,Fahlenbrachetal.

(2010)donotfindanypositiveeffectofCEOsappointedasoutside directorsonfirmperformance.Theirresultsdepictanegativeeffect ifitisaninterlockingCEO.Recurrentfindingsillustratethatregu- latedfirmshavemoredirectorswithabackgroundinpoliticsand thatpoliticiansonboardhaveanimpactonfirmvalue(Agrawaland Knoeber,2001;HellandandSykuta,2004;Hillman,2005;Goldman etal.,2009).

In summary, while provisions for independent boards have been launched by investors and regulators, the empirical evi- dencesupportingboard-performanceeffectsismixed,whetherit isconcernedwithCEOdualityortheproportionofindependent directorsontheboard(SchmidandZimmermann,2008;Bhagat andBolton,2008).Withrespecttodirectors’outsideactivities,our literaturereviewshowsthatmoststudiesfindanegativerelation- shipbetweenthenumberofdirectorshipsandfirmperformance (FichandShivdasani,2006;Jirapornetal.,2008).Incontrast,the presenceofpoliticians andinside directorswithexternaldirec- torshipsonboardsseemstobevalue-enhancing(Hillman,2005;

MasulisandMobbs,2011).Thissupportsthenotionthattheboard canconsistofvarioustypesofdirectors.Theoptimalcomposition oftheboardmaynotbeequalfor everyfirm,thus callingfor a considerationofindividualfirmcharacteristics.

3. Datadescriptionanddefinitionofvariables

TheDirectiveonInformationRelatingtoCorporateGovernance fromSIXSwissExchangerequiresalllistedfirmstodiscloserele- vantinformationabouttheirdirectors.Thisinformationincludesa curriculumvitae,anoutlineofthedirector’spositionvis-à-visthe firm,andalistoftheirexternalprofessionalactivities.⁷Thedetailed dataprovidesthebasisforthisstudy.

6InGermany,corporatemanagersshouldnothavemorethanthreesupervi- soryboardseatsfromlistedfirms(“DeutscherCorporateGovernanceKodex”).In France,executivesshouldnothavemorethanfouroutsidedirectorships(“Codede Gouvernementd’EntreprisedesSociétésCotées”).

7“Otheractivitiesandfunctions;Foreachmemberoftheboardofdirectors:(a) ActivitiesingoverningandsupervisorybodiesofimportantSwissandforeignorga- nizations,institutionsandfoundationsunderprivateandpubliclaw;(b)Permanent managementandconsultancyfunctionsforimportantSwissandforeigninterest groups;(c)Officialfunctionsandpoliticalposts.¨(seeSIXDirectiveonInformation RelatingtoCorporateGovernance3.2).

3.1. Data

AllfirmsoftheSwissPerformanceIndex(SPI)from2005to2012 withcompleteannualreports excluding“investment firms”and

“financialservices”weretargeted.Therefore,theselectionbiasis negligible(exceptthat non-listedfirmsareexcluded).Thesam- plethusconsistsof1494firmswhoseannualreportsenabledus tohand-collectdataon10,683directors.Cross-checkingthedata ofdirectorswho holddirectorshipsintwo ormorelistedfirms revealsthatnotallannualreportsdisclosethesameinformation.

Thedetailsdisclosedonmultipledirectorshipsvariedacrossfirms.

Someexceptionsrestrictthedisclosuretoonlyrelevantpiecesof information;forexample,membershipofotherlistedfirms.Incon- sequence,thedatawasalignedwherepossible.

3.2. Firmperformance:Tobin’sQ

WeuseTobin’sQasaproxyforfirmperformance.OurTobin’sQ iscalculatedasthetotalassetsplusmarketvalueofequityminus bookvalueoftotalequitydividedbytotalassets(seeAgrawaland Knoeber,1996;LodererandPeyer,2002;Beineretal.,2006).⁸The omittedintangibleassetsinthebookvaluereflect—amongother things—thedirectorcompetenceor investorconfidenceinthe board’scomposition.

3.3. Independencevariables

Independencevariablesdescribetheboard’srelationtothefirm.

AsAdamsetal.(2010)pointout,outsidersarefrequentlynotreally independent,stressingtheneedtoaccountforadditionalvariables ofboardindependence.Independenceisthefractionofindepen- dentdirectorsontheboard.Independencedefinesdirectorswho areneitheractualExecutives,norGrey(oraffiliated)directors.Affil- iateddirectorshavecurrentBusinessrelationshipswiththefirmor wereFormerexecutivesofthefirm.Additionalvariablesareused toclassifythedirector’sFullindependence.Longtenureisthefrac- tionof directorswithtenurelongerthan nine yearssuch as in theUK’sCombinedCode.Blockholdingdirectorsisthefractionof directorswithsignificantshareholdings(morethan3%ofvoting rights).Finally,ShareholderrepresentativesandFamilyrepresenta- tivesindicatethefractionofdirectorswhorepresentashareholder orafamily,respectively,otherthanthemselves.

3.4. Outsideactivityvariables

Outsideactivityvariablesdescribeboard-memberengagements outsidethefirm.First,theaggregateofanyboarddirectors’out- sideactivitiesdividedbythenumberofboardmembersislabeled Totaloutsideactivities.SPIdirectorshipsdenotesallSPIdirectorships orSPIchairmanships.Second,chairmanships(Chairmanships)and directorships(Directorships)measurethetotalnumberofconcur- rent(Swissorforeign) board seatssomeoneholdsas chairman or director, respectively. If annual reports refer to“various” or

“other”directorships,weaddavalueofthree.Wedonotinclude directorships insubsidiaries. Third,management functionsout- sidetheboardaretermedOutsideCEOpositionsandOutsideofficer positions if the director is also a CEO or an officer of another firm, respectively.Finally, non-corporate appointments arealso defined.Interestgroup membersidentifies membershipofinter- estgroups(namelychambersofcommerce)andPoliticallyaffiliated

8Inthisstudy,allclassesofequityincludingnon-listedequityclassesareused forthecalculationofthemarketvalueofequity.Themarketvalueofequityisthe averagestockprice15daysaroundthelasttradingdayineachyear,multipliedby thenumberofoutstandingshares.s

membersareactualorformerrelationstogovernmentandpolitical activities.Charitymembersismembershipofacharity(foundation ornon-governmentorganization),Advisoryappointmentssignifies advisoryservices(forexample,membershipsinscientificresearch groups),andCommissionmembersarememberships incommis- sions(forexample,investmentcommissions).

3.5. Controlvariables

Weuseseveralcontrolvariablestotackleomittedvariablebias.

Empiricalevidencesuggeststhat large, diversifiedand complex firmshavemoreindependentboards,whileyoung,fast-growing firmshave insider-dominatedboards (Booneet al.,2007; Coles etal.,2008;Lincketal.,2008;Lehnetal.,2009).Olderfirmsmay havemore severeagencyproblems(forexample,empirebuild- ing) while younger firms may benefit from lower information costsbecausefirm-specificinformationismoreimportanttothem (Raheja,2005;Adams andFerreira,2007).Furthermore,owner- ship structure characterizestheagencyproblems withina firm andinfluencesthepurposeoftheboard.Forinstance,thedirec- torsappointedtoafirmwhichiscontrolledbyoneoracoalitionof shareholders—aspre-dominantoutsideAnglo-Saxoncountries— havetoensurethatminorityshareholderinterestsarerespected.In somecases,theprincipalshareholders,thedirectors,andtheexec- utiveboardoverlaplargelywherethestandardstipulationsonthe independenceofdirectorsmayberelaxed.

WeincludeBoardsizewhichisthenumberofdirectorsonthe board(seeYermack,1996).Firmageislogofthenumberofyears sincethefirm’sincorporationplus1(seePuglieseandWenstøp, 2007).Ownershipconcentrationmeasuresownershipconcentration bymeansofaHerfindahl–HirschmanIndex.⁹Salesgrowthiscom- putedasthegeometricmeanofyearlysalesgrowthover4periods (seeBlackandKhanna,2007).Diversificationequals1ifthefirm hasmorethanonebusinesssegment(and0otherwise).Thecorpo- ratecenterasabusinesssegmentisexcluded.Thismayberelevant since,accordingtoAndersonetal.(2000),diversifiedfirmshave moreoutside directors.Firmsizeislogofthefirm’stotal assets (totalliabilitiesplusshareholder’sequity)(Yermack,1996).Finally, weincludeindustryandyearfixedeffects.Industriesdifferintheir growthopportunities,competition,andindustryregulationwhich allmayaffecttherelationshipbetweenboardsandfirm perfor- mance(seee.g.KoleandLehn,1999;Boothetal.,2002;Booneetal., 2007).

3.6. Summarystatisticsandunivariateanalysis

Table1providesdescriptivestatisticsofthevariablesappliedin thisstudy.Thefirstsetofvariables,the“independencevariables”, depictsthat,onaverage,threequartersoftheboardmembersare independent,and10%areexecutivedirectors.Both,formerexe- cutivesanddirectorswithbusinessrelationsmakeuparound7%

ofthedirectorships.Greydirectorsaccountfor14%ofalldirector- ships.Thesecondsetofvariables,the“outsideactivityvariables”, presentstheaveragenumberofoutsideengagementsperdirector.

Inthemeanboard,eachdirectorhas3.51outsideappointments (totaloutsideactivities),butonly0.36appointmentsinSPIboards.

Hence,suchSPIdirectorshipsrepresentabout16%ofalldirector- ships(=SPIdirectorships/(Chairmanships+Directorships)).17%of alldirectorsholdoutsideCEOpositions,25%outsideexecutiveoffi- cerpositions,and12%havepoliticalaffiliations.

9Theindexcanassumevaluesbetween0and1.Intheoneextremecase,ifthe indexis1,allvotesarecombinedinonlyonevotingblockwhereonehas100%of thevotingrights.Conversely,iftheindexis0,thennooneownssignificantvoting rights(over3%).

TherelationshipsbetweenTobin’sQandbothIndependenceand TotaloutsideactivitiesareillustratedinFig.1.Thechartindicates thatTobin’sQishigherforfirmsinthelowestpercentilegroupof bothIndependenceandTotaloutsideactivitiesthanforfirmsin thehighestgroup.Thefiguresuggeststhathigherindependence andmoreoutsideactivitiesarerelatedtolowerfirmperformance.

However,thefiguremustbeinterpretedwithcaresinceomitted variables andotherendogeneityissues arelikely todrivethese results.

Our sample consists of 10,683 directorships of which 871 areheldbyexecutivedirectors.Thesedirectorsexhibitdifferent characteristicsincomparisontonon-executivedirectors.Table2 presents statistical evidence that executive directors hold sig- nificantly fewer positions outside the firm in comparison to non-executive directors. Calling for more board independence willthereforepotentiallyleadtoboards’composedbydirectors whoholdsignificantlymoreengagements.Furthermore,executive directorsareyounger,maleandmorelikelytobeforeignersthan non-executivedirectorsonaverage.

4. Empiricalanalysis

We evaluate the effect of board independence and outside activities onfirm performance in severalsteps. Firstly,we use pooledordinaryleastsquaresregressionmodelswithWhite(1980) standarderrors.Wecontrolfortimetrendsusingyeardummies andfortime-varyingfirmcharacteristicsusingasetofcontrolvari- ables.Secondly,weestimatethemodelswithDriscollandKraay (1998)standarderrorsandcluster-robustHuber/Whitestandard errors.Inaddition,weuseFixedeffectsmodelstoaccountforomit- tedvariablebias.Thirdly,wetacklereversecausalitywith2SLS.

Fourthly,weexaminetheimpactoftheoverallboardstructureon firmperformanceanddecomposeboardindependenceandoutside activitiesintoseveralsub-elements.Finally,weassesstheboard’s impactonboardmeetings.

4.1. Ordinaryleastsquares(OLS)regressionmodels

Table3presentstherelationbetweenindependenceandout- sideactivityandTobin’sQusingpooled OLSregressionmodels.

Surprisingly,boardindependenceissignificantlynegativelyrelated toTobin’sQ(ColumnI).Incontrast,thereisnosignificantrelation- shipbetweenTobin’sQandtotaloutsideactivities(ColumnII).The sameresultsholdwhentheeffectsofindependenceandoutside activitiesonTobin’sQaresimultaneouslyestimatedbecauseinde- pendentboardsarelikelytobeexternallyactiveboards(Column III).

4.2. Pooled,fixedandrandomeffectsregressionmodels

Inthenextstep,weestimatethemodelsusingstandarderrors thatarepotentiallybettersuitedtothedataset.DriscollandKraay (1998)standarderrorsaccountforcross-sectionalandserialcor- relationwhereascluster-robustHuber/Whitestandarderrorstreat eachfirmasaclusterandaccountforwithin-firmcorrelationofthe errorterms.However,theresultsremainthesameaswhenWhite (1980)standarderrorsareused(Table4,ColumnsIandII).

Endogeneityissuespresentseveralproblemsincorporategov- ernancestudies.¹⁰ Panel data enables tacklingomitted variable bias by the use of firm fixed effects. Fixed effects control for time-invariant and unobserved firm characteristics. Therefore,

10Endogeneityoccursinthepresenceofomittedvariablesbias,selectionbias, misspecifiedorerroneousvariables,measurementerrors,andjointsimultaneity (seeVerbeek,2008).

Table1

Summarystatistics.

Variable Mean Median Min Max s.d. 2005 2006 2007 2008 2009 2010 2011 2012

Numberoffirms 1494 178 184 191 194 191 191 185 180

Performancevariable

Tobin’sQ 1.56 1.26 0.74 4.49 0.78 1.61 1.82 1.78 1.28 1.49 1.61 1.42 1.49

Independencevariables

Independence 0.76 0.80 0.00 1.00 0.21 0.76 0.76 0.75 0.75 0.76 0.77 0.76 0.77

Fullindependence 0.46 0.44 0.00 1.00 0.26 0.48 0.46 0.45 0.45 0.45 0.45 0.45 0.45

Grey 0.14 0.13 0.00 1.00 0.16 0.13 0.13 0.14 0.15 0.14 0.14 0.15 0.14

Executives 0.10 0.00 0.00 1.00 0.15 0.11 0.11 0.11 0.10 0.10 0.09 0.09 0.08

Formerexecutives 0.07 0.00 0.00 1.00 0.12 0.08 0.08 0.08 0.08 0.08 0.08 0.09 0.08

Businessrelationships 0.07 0.00 0.00 0.83 0.13 0.06 0.06 0.07 0.08 0.07 0.06 0.07 0.06

Longtenure 0.28 0.25 0.00 1.00 0.26 0.26 0.27 0.27 0.27 0.28 0.29 0.29 0.29

Blockholdingdirectors 0.07 0.00 0.00 0.67 0.13 0.07 0.08 0.08 0.08 0.08 0.07 0.06 0.06

Shareholderrepresentatives 0.13 0.00 0.00 1.00 0.22 0.12 0.12 0.13 0.12 0.14 0.13 0.14 0.15

Familyrepresentatives 0.08 0.00 0.00 1.00 0.16 0.07 0.08 0.08 0.08 0.08 0.08 0.08 0.08

Outsideactivityvariables

Totaloutsideactivities 3.51 3.33 0.00 13.33 1.65 3.41 3.44 3.41 3.47 3.53 3.59 3.59 3.61

SPIdirectorships 0.36 0.29 0.00 1.80 0.35 0.37 0.37 0.38 0.39 0.38 0.36 0.33 0.30

Chairmanships 0.53 0.43 0.00 4.00 0.46 0.54 0.53 0.55 0.54 0.54 0.53 0.52 0.50

Directorships 1.69 1.57 0.00 7.33 1.00 1.65 1.68 1.65 1.67 1.68 1.73 1.71 1.72

OutsideCEOpositions 0.17 0.14 0.00 1.25 0.18 0.15 0.15 0.16 0.16 0.18 0.17 0.18 0.19

Outsideofficerpositions 0.25 0.20 0.00 1.25 0.22 0.23 0.23 0.23 0.24 0.24 0.26 0.28 0.30

Interestgroupmembers 0.24 0.17 0.00 1.43 0.28 0.22 0.23 0.22 0.22 0.24 0.25 0.26 0.26

Politicallyaffiliatedmembers 0.12 0.00 0.00 0.92 0.17 0.13 0.12 0.12 0.12 0.12 0.11 0.11 0.11

Charitymembers 0.32 0.17 0.00 3.13 0.45 0.32 0.31 0.31 0.32 0.34 0.34 0.32 0.31

Advisoryappointments 0.17 0.08 0.00 1.83 0.26 0.16 0.15 0.14 0.15 0.17 0.18 0.19 0.19

Commissionmembers 0.04 0.00 0.00 1.33 0.12 0.04 0.03 0.03 0.04 0.04 0.05 0.05 0.04

Controlvariables

Boardsize 7.1 7.0 2.0 20.0 2.7 7.3 7.2 7.2 7.1 7.1 7.1 7.0 7.1

Firmage(years) 74.7 58.0 1.0 494.0 62.7 75.9 74.8 73.4 73.1 73.9 74.9 74.8 76.8

Ownershipconcentration 0.19 0.11 0.00 1.00 0.21 0.19 0.19 0.19 0.20 0.20 0.20 0.19 0.20

Salesgrowth 0.05 0.03 −0.32 1.53 0.19 0.05 0.09 0.11 0.11 0.05 0.04 −0.01 −0.01

Diversification 0.71 – – – 0.45 0.72 0.72 0.71 0.71 0.70 0.70 0.71 0.72

Firmsize(inmillionsCHF) 26,630 873 0 2,393,000 160,241 29,220 30,570 29,940 26,540 23,160 23,210 25,180 25,420 Note:Thesampleconsistsof1494firm-yearobservations.Thetablepresentsmean,median,minimum(Min),maximum(Max),andstandarddeviation(s.d.)foreachvariable.

within-firmchangesareusedtoexplainvariationinthedepend- ent variable (see e.g., Coles et al., 2008). Indeed, several tests (Wooldridge’stest[Wooldridge,2010],Ftest,Lagrangemultiplier test)suggestthatunobservedeffectsareimportantandthatthe modelsshouldbeestimatedusingfixedeffects.

Table4,ColumnIII, indicatesthat boardindependenceisno longersignificantlyrelatedwithTobin’sQwhenfirmfixedeffects areincluded.However,corporategovernancearrangementsoften changeveryslowlyovertimewhichposesproblemswhenusing fixedeffects(seee.g.Gompersetal.,2003).Timevariationforboth independenceandoutsideactivityisindeedverylow.Thelagged

variablesofindependenceandtotaloutsideactivitiesexplain79%

and88%respectivelyoftheirvariation.Analternativemethodisthe useofRandomeffectsmodels.Randomeffectsmodelscorrectfor within-firmcorrelationandthefirm-specificeffectisuncorrelated withtheexplanatoryvariable.However,Hausman(1978)testsug- geststhatfixedeffectsmodelsarepreferredoverrandomeffects models.

Notonlyistheuseoffixedeffectsproblematicincaseswhere thevariablesofinterestarequasitime-invariant,theyalsodonot solvethecausalityproblem.Independenceandoutsideactivities arestillseenasexogenouslydetermined.

1.40 1.60 1.80 2.00 2.20 2.40 2.60

Tobin's Q (mean)

Percentiles

Independence Total outside activities

Fig.1.ComparisonofboardindependenceandoutsideactivitieswithTobin’sQ.

Table2

Directorcharacteristics.

All Executivedirectors Non-executivedirectors

Observations 10,683 871 9812 t-Test/(Wilcoxon-test)

In% 100.00% 8.15% 91.85%

Age 57.7 54.5 58.0 ^***/(^***)

Tenure 7.6 9.5 7.4 ^***/(^***)

Female 6.7% 3.8% 7.0% ^***/(^***)

Foreigner 27.9% 34.9% 27.3% ^***/(^***)

Totaloutsideactivities 3.6 2.1 3.8 ^***/(^***)

SPIdirectorships 0.4 0.2 0.4 ^***/(^***)

Chairmanships 0.5 0.3 0.6 ^***/(^***)

Directorships 1.7 1.0 1.7 ^***/(^***)

OutsideCEOpositions 0.2 0.1 0.2 ^***/(^***)

Outsideofficerpositions 0.2 0.1 0.3 ^***/(^***)

Interestgroupmembers 0.3 0.2 0.3 ^***/(^**)

Politicallyaffiliatedmembers 0.1 0.1 0.2 ^***/(^***)

Charitymembers 0.4 0.3 0.4 ^***/(^***)

Advisoryappointments 0.2 0.1 0.2 ^**/(^***)

Commissionmembers 0.0 0.0 0.0 ^**/(^***)

Blockholdingdirectors 5.7% 24.1% 4.1% ^***/(^***)

Shareholderrepresentatives 14.3% 8.6% 14.8% ^***/(^***)

Familyrepresentatives 7.1% 18.4% 6.1% ^***/(^***)

Note:Thetablepresentscomparisonsbetweenexecutivedirectorsandnon-executivedirectorsboards.TheequalityofmediansistestedusingaWilcoxonranksumtest withcontinuitycorrectionandthequalityofmeansistestedusingaWelchTwoSamplet-test.

*p<.10.

**p<.05.

***p<.01.

Table3

Independenceandoutsideactivities.

Independentvariables Dependentvariable:Tobin’sQ

(I) (II) (III)

(Intercept) 1.50436 (^**) 1.28808 (^**) 1.50312 (^**)

(0.592) (0.590) (0.592)

Independence −0.50733 (^***) −0.49849 (^***)

(0.194) (0.185)

Totaloutsideactivities −0.01759 −0.00604

(0.023) (0.022)

logBoardsize 0.11499 0.03938 0.11216

(0.123) (0.131) (0.122)

logFirmage −0.02558 −0.03077 −0.02454

(0.045) (0.047) (0.045)

Ownershipconcentration −0.17339 −0.13441 −0.16839

(0.165) (0.174) (0.170)

Salesgrowth 0.14469 0.20396 0.14667

(0.195) (0.195) (0.194)

Diversification −0.17819 −0.19798 (^*) −0.17945

(0.113) (0.115) (0.113)

logFirmsize 0.02925 0.03050 0.03063

(0.030) (0.032) (0.031)

Industry Included Included Included

Year Included Included Included

MultipleR² 0.3341 0.3204 0.3342

AdjustedR² 0.3274 0.3140 0.3273

F-statistic 25.3 ^*** 23.8 ^*** 24.5 ^***

Note:ThetablepresentspooledOLSregressioncoefficientestimatesforindependenceandoutsideactivityvariables.Thesampleconsistsof1494firm-yearobservations.

White(1980)standarderrorsarereportedinparentheses.

*p<.10.

**p<.05.

***p<.01.

4.3. Instrumentalvariables

Instrumentalvariablesusing2SLSarecommonlyusedtotackle causalityproblems(seee.g.AgrawalandKnoeber,1996).However, thismethodrequiresvalidinstruments.¹¹Validinstrumentsmust

11Asanexampleofreversecausation,thinkofahighlyvaluedfirm.Suchafirm maybeattractivetoindependentdirectors.Inaddition,thisfirmmayhaveprivi- legedresourcesandisnotinneedtoseekdirectorswhodirectlyhelpindealingwith

berelevantandexogenous.Relevantinstrumentsaresignificantly correlatedwiththeendogenousvariableconditionalontheother variables(relevancecondition).¹²Exogenousinstrumentsrequires

day-to-daybusiness.Asaresult,afirmwithahighTobin’sQmaychooseahigher levelofboardindependence,andnotviceversa.Similarexamplescanbefoundfor outsideactivitiesofboardmemberswherecasuallinkscannotdirectlybeestab- lished.

12So-called“weakinstruments”havealowcorrelationwiththeendogenousvari- able;thatis,theyexplainonlyalowvariationintheendogenousvariablethatisnot

Table4

Pooled,fixed,andrandomeffects:independenceandoutsideactivities.

Independentvariables Dependentvariable:Tobin’sQ

(I) (II) (III) (IV)

(Intercept) 1.50312 (^***) 1.50312 (^***) 2.63229 (^***)

(0.053) (0.245) (0.466)

Independence −0.49849 (^***) −0.49849 (^***) 0.00812 −0.12221

(0.052) (0.090) (0.100) (0.097)

Totaloutsideactivities −0.00604 −0.00604 0.00344 0.00989

(0.007) (0.011) (0.018) (0.016)

logBoardsize 0.11216 (^**) 0.11216 −0.00502 0.01520

(0.045) (0.070) (0.075) (0.073)

logFirmage −0.02454 −0.02454 −0.40280 (^***) −0.06138

(0.015) (0.019) (0.096) (0.039)

Ownershipconcentration −0.16839 (^*) −0.16839 (^*) 1.12112 (^***) 0.56051 (^***)

(0.096) (0.090) (0.195) (0.152)

Salesgrowth 0.14667 0.14667 0.19723 (^**) 0.14676 (^*)

(0.126) (0.100) (0.081) (0.081)

Diversification −0.17945 (^***) −0.17945 (^***) −0.40450 (^**) −0.17285 (^*)

(0.036) (0.045) (0.190) (0.092)

logFirmsize 0.03063 (^**) 0.03063 (^**) −0.30917 (^***) −0.06894 (^***)

(0.015) (0.014) (0.035) (0.023)

Industry Included Included Excluded Included

Year Included Included Included Included

MultipleR² 0.3342 0.3342 0.2676 0.2265

AdjustedR² 0.3273 0.3273 0.2288 0.2218

F-statistic 24.5 ^*** 24.5 ^*** 31.1 ^*** 14.3 ^***

Method Pooling Pooling Two-waysFixedeffects Random

Standarderrors Driscoll–Kraay Cluster-robustHuber/White Cluster-robustHuber/White Cluster-robustHuber/White Note:Thetablepresentsregressioncoefficientestimatesforindependenceandoutsideactivityvariables.Thesampleconsistsof1494firm-yearobservations.Driscolland Kraay(1998)orcluster-robuststandarderrorsarereportedinparentheses.

*p<.10.

**p<.05.

***p<.01.

thattheyaredeterminedoutsideofthemodelandnotcorrelated withtheerror(exclusioncondition).Hence,theselectionofvalid instrumentsisnottrivial,especially inthecontextof corporate governance.Thedifficultyarisesbecausevariablesthatarerelated withtheendogenous(governance)variablearemostoftenother potentialcontrolvariables.Inaddition,therewerenofundamental legalchangesinSwitzerlandduring2005–2012whichoftenserve asinstruments(seee.g.,Blacketal.,2006;BlackandKim,2012).

Our instruments are based on the reflections of Knyazeva et al. (2013).They usethelocal supply of directors (measured asthenumberofU.S.nonfinancialfirmsheadquarterednearthe firm)asaninstrumentforindependence.Boardindependenceis higherwhen thepool of potentialdirectorsis larger.However, in thisstudy, weusedummyvariables for 10 differentregions in Switzerland accordingto where the firm’s headquarters are located.¹³ Theseregionsinclude urbanand rural/peripheraland central areas and cover different cultures (three different lan- guages: Swiss German, French, and Italian; and two religions:

ProtestantismandCatholicism).OnethirdoftheSwissareliving inthefivelargestagglomerations(Basel,Bern,Geneva,Lausanne and Zurich) and importantinternationalairports arelocated in Basel,GenevaandZurichwhichpotentiallyincreasestheinterna- tionaldirectorpool.Furthermore,theoverlapofpeopleinvolvedin political,economic,culturalactivitiesandcharityworkislargerin someregionsthaninotherswhichpotentiallyaffectthenumberof outsideactivities.Hence,economic,culturalandnetworkeffects arelikely toaffectin variousdegreesboth boardindependence

alreadydescribedbytheotherexogenousvariables.Ifthecorrelationbetweenthe instrumentandtheregressorislow,thestandarderrorsofinstrumentalvariables’

estimatorsarehigh(Wooldridge,2010).Hence,aninstrumentmustbesignificantly relatedtotheendogenousvariableinthereducedform.

13 Basel(205),Bern(98),CentralSwitzerland(174),Geneva(90),Lausanne(98), Mittelland(93),St.Gallen(59),Ticino(21),Zurich(418)andother(238).

andtotaloutsideactivityofdirectors.HighF-statisticof53.8for Independenceand77.8forTotaloutsideactivitiesindicatetherel- evanceoftheseinstruments.

Furthermore,regionaleffectsaremostlikelytobeexogenous.

Firstly,therearenoargumentsthatthefirm’sheadquartersinflu- encesafirm’sperformance.Thereareindustrialclustersinsome regionssuchasthefinancialcentersinZurichorGenevaorthephar- maceuticalindustryinBasel.However,industryeffectsarelikelyto absorbthiscorrelation.Secondly,relocationsofheadquartersare veryrareandhappenonlyinveryunusualcircumstances.Almost allfirmshavebeenheadquarteredatthesameplacesincetheir incorporation,thereforebeforetheirlistingonthestockexchange andbeforedirectorshavebeenselected.Inaddition,nofirmissell- ingtheirproductsonlylocallyandcouldthereforebeaffectedby economicconditionsintheirregion.Afterall,regionaldummiesdo onlyaffectfirmperformanceviaboardcomposition.

Table5showsfirst-stageregressionswhereregionaldummies areincluded(ColumnsIandII).Weexcludeyearfixedeffectsfrom thefirst-stageregressionssincecorporategovernancestructures (including Independence and Totaloutside activities) are quasi time-invariant,especially intheperiodfrom2005to2012.The resultsindicatethatneitherIndependencenorTotaloutsideactiv- itiesissignificantlyrelatedwithTobin’sQ.However,theresults dependonthevalidityoftheinstrumentschosenandtherefore, furtherexaminationofboardindependenceandexternalcommit- mentsareneeded.

4.4. Independenceandoutsideactivitiesre-examined

Wenextinvestigatewhichfactorsinaboard’sindependence andindirectors’outsideactivitiesaffectfirmperformance.

Table6indicatesthatone-tierboardsarepositivelyrelatedwith Tobin’sQ.WedefineOne-tierboardsashavingatleastoneexecutive director(insider)ontheboard,whiletwo-tierboardsaredefined