Board Independence: Integrating Agency and Resource Dependence Theories

This paper addresses the determinants of board independence combining agency and resource dependence theories. Board independence has been traditionally seen as an important mechanism of shareholder representation and activism. In particular, we address the impact of directors and managers’ ownership, shareholder type, shareholder involvement, and shortage of certain managerial capabilities on the proportion of independent board members. Our results show that non-executive directors and executives’ ownership has a negative impact on board of director’s independence. Additionally, we find that active involvement of shareholders is associated with the design of the board. Finally, we observe that boards are designed after an internal analysis of the resources provided by other non-independent directors. The paper contributes to the growing literature on board of directors’ design. In particular, it combines agency and resource dependence theories to explore how the incentives of shareholders and executive directors shape the governance of the firm. The paper provides empirical evidence on factors associated with director’s independence that is a significant aspect of shareholder activism