Abstract This paper is a survey of the literature on boards of directors, with an emphasis on research done subsequent to the Hermalin and Weisbach (2003) survey. The two questions most asked about boards are what determines their makeup and what determines their actions? These questions are fundamentally intertwined, which complicates the study of boards because makeup and actions are jointly endogenous. A focus of this survey is how the literature, theoretical as well as empirically, deals—or on occasions fails to deal—with this complication. We suggest that many studies of boards can best be interpreted as joint statements about both the director-selection process and the eﬀect of board composition on board actions and ﬁrm performance.
∗ The authors wish to thank Ji-Woong Chung, R¨ diger Fahlenbach, Eliezer Fich, John u McConnell, Ren´ Stulz, and Shan Zhao for helpful comments on earlier drafts. The authors e are especially appreciative of the comments received from three anonymous referees and the editor, Roger Gordon. † University of Queensland and ecgi (firstname.lastname@example.org). ‡ University of California, Berkeley (email@example.com). § Ohio State University (weisbach 2@ﬁsher.osu.edu)
People often question whether corporate boards matter because their day-today impact is diﬃcult to observe. But when things go wrong, they can become the center of attention. Certainly this was true of the Enron, Worldcom, and Parmalat scandals. The directors of Enron and Worldcom, in particular, were held liable for the fraud that occurred: Enron directors had to pay $168 million to investor plaintiﬀs, of which $13 million was out of pocket (not covered by insurance); and Worldcom directors had to pay $36 million, of which $18 million was out of pocket.1 As a consequence of these scandals and ongoing concerns about corporate governance, boards have been at the center of the policy debate concerning governance reform and the focus of considerable academic research. Because of this renewed interest in boards, a review of what we have and have not learned from research on corporate boards is timely. Much of the research on boards ultimately touches on the question “what is the role of the board?” Possible answers range from boards’ being simply legal necessities, something akin to the wearing of wigs in English courts, to their playing an active part in the overall management and control of the corporation. No doubt the truth lies somewhere between these extremes; indeed, there are probably multiple truths when this question is asked of diﬀerent ﬁrms, in diﬀerent countries, or in diﬀerent periods. Given that all corporations have boards, the question of whether boards play a role cannot be answered econometrically as there is no variation in the explanatory variable. Instead, studies look at diﬀerences across boards and ask whether these diﬀerences explain diﬀerences in the way ﬁrms function and how they perform. The board diﬀerences that one would most like to capture are diﬀerences in behavior. Unfortunately, outside of detailed ﬁeld work, it is difﬁcult to observe diﬀerences in behavior and harder still to quantify them in a way useful for statistical study. Consequently, empirical work in this area has focused on structural diﬀerences across boards that are presumed to correlate with diﬀerences in behavior. For instance, a common presumption is that outside (non-management) directors will behave diﬀerently than inside (management) directors. One can then look at the conduct of boards (e.g., decision to dismiss the ceo when ﬁnancial performance is poor) with diﬀerent ratios of outside to inside directors to see whether conduct varies in a statistically signiﬁcant manner across diﬀerent ratios. When conduct is not directly...