Director control in large corporations: An agency theory perspective

This study was designed to determine if compensation to, and ownership of common stock by, corporate directors is related to the performance of their respective firms. In recent years the governing performance of boards of directors has been seriously questioned. That is, many analysts believe corporate directors make decisions that are self-serving rather than benefiting the shareholders for whom their decisions are, by law, intended to enhance. The performance of directors vis-a-vis their respective organizations was measured using excess returns, for the 317 publicly held Fortune 500 Industrial firms with fiscal years ending in 1988. Excess returns is a capital market measure comparing a firm\u27s returns only to the returns of firms having similar levels of systematic risk. Hence, extraneous factors are controlled for. The findings indicated that economic performance of large corporations is enhanced (i.e., there is a significant relationship between compensation of boards of directors and excess returns) when their officer-directors are highly compensated. The primary underlying reasons for officer-directors pursuing excellent performance are the financial rewards possible and the impact of such performance on their ability to obtain comparable or better positions in other organizations. However, the results of the analyses failed to indicate any significant relationship between stock ownership by board directors and economic performance. The evidence suggests that board directors of companies listed on the New York Stock Exchange do not own a substantial number of shares of common stock of the companies for which they are directors. Although multiple regression and correlation cannot actually establish cause-effect relationships (a limitation of the statistical tool), it can allow the researcher to examine the nature and extent of association between the dependent variable and potential-independent-variables. Associations of this type were examined in the present dissertation, leading to the findings noted above