Board Composition, Grey Directors and Corporate Failure in the UK

48 Pages Posted: 8 Jan 2010 Last revised: 6 Aug 2014

See all articles by Hwa-Hsien Hsu

Hwa-Hsien Hsu

Durham University Business School

Chloe Yu-Hsuan Wu

Leeds University Business School; University of Leeds - Faculty of Business

Date Written: December 1, 2013

Abstract

This study examines the effect of board composition on the likelihood of corporate failure in the UK. We consider both independent and non-independent (grey) non-executive directors (NEDs) to enhance our understanding of the impact of NEDs’ personal or economic ties with the firm and its management on firm performance.We find that firms with a larger proportion of grey directors on their boards are less likely to fail. Furthermore, the probability of corporate failure is lower both when firms have a higher proportion of grey directors relative to executive directors and when they have a higher proportion of grey directors relative to independent directors. Conversely, there is a positive relationship between the likelihood of corporate failure and the proportion of independent directors on corporate boards. The findings discussed in this study support the collaborative board model and the view that corporate governance reform efforts may have over emphasised the monitoring function of independent directors and underestimated the benefits of NEDs’ affiliations with the firm and its management.

Keywords: Corporate Governance, Board Composition, Grey Director, Corporate Failure

JEL Classification: G30, G33, G34, G38

Suggested Citation

Hsu, Hwa-Hsien and Wu, Chloe Yu-Hsuan, Board Composition, Grey Directors and Corporate Failure in the UK (December 1, 2013). British Accounting Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1532997 or http://dx.doi.org/10.2139/ssrn.1532997

Hwa-Hsien Hsu (Contact Author)

Durham University Business School ( email )

Mill Hill Lane
Durham, DH1 3LB
United Kingdom

Chloe Yu-Hsuan Wu

Leeds University Business School ( email )

Leeds, LS2 9JT
United Kingdom

University of Leeds - Faculty of Business ( email )

Leeds LS2 9JT
United Kingdom

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