Part of my analysis on multiple directorships considers corporate governance theories such as agency theory and applies this against the issue of multiple directorships.
Agency theory in a nutshell is where somebody parts with control over their assets to the control of another due to, inter alia, an inability or unwillingness to deal with them personally. Inherent in such a relationship is the ability of the person in control to use those assets and the access to them to serve their own self-interest. In a corporate context the owner then must incur agency costs to align the interest of those in control with his own.
This is a premise for "good corporate governance" and what are the best ways, effectively, to minimise agency costs. Agency theory has developed a number of solutions to curtailing self-interest through a number of governance factors (alongside any existing legal deterrents to self-interest such as fiduciary duties). The theory identifies factors such as splitting the role of CEO and chair to two different individuals so no one individual controls the board, holding regular board meetings (as well as directors not missing too many), regular committee meetings such as the remuneration committee, executives not holding too many external appointments, a high level of independent directors to executives, high equity ownership from executives, high percentage of pay for performance element in compensation package, and a good sized board all as features of good governance.
These are just a few of potentially numerous agency problems in a firm but gives a good account of what is considered good governance according to the UK Corporate Governance Code.
The amount of agency problems present in any given firm may vary. Executives may be more able than others to impose higher agency costs. Agency theory would predict this is due to insufficient monitoring from the independent non-executives. A reason why non-executives are not monitoring effectively may be from their own external appointments that they have viewed them as a perquisite consumption due to the increasing value of remuneration available in such positions. Therefore one may predict that where a firm has more agency problems then the firm will also have a higher level of non-executives with more external appointments.
To test for this, indicator variables were created to show whether a firm had an agency problem from those just mentioned above (9 in total) and were collated. This figure was put in to a multiple regression model with other predictors (non-executive remuneration and non-executive equity) to predict the outcome of non-executive external appointments.
The first regression model did not demonstrate agency problems had a significant relationship with multiple directorships. However, to further this analysis the regression model was adapted to include each individual agency problem to identify whether there were any significant individual agency problems. Therefore the regression model included non-exec remuneration and equity as well as the 9 individual agency problems.
These results demonstrated that three agency problems (CEO-chair duality; board meetings missed; executive equity ownership) had a significant positive relationship with non-executive external appointments. Thus where a firm has these significant agency problems increasing then the non-executives will hold more appointments. There was also one significant negative relationship with the ratio of independent directors to executives. Thus where the ratio of independent directors to executives is greater the non-executives will hold fewer appointments.
Using these significant agency problems the final stage was to create dummy variables for each firm to indicate whether a firm had either 0, 1, 2, 3 or 4 of these agency problems present in the firm. These dummy variables were then placed in to the regression model again with non-executive remuneration and equity to see if there were any significant results. The dummy variable for 0 and 4 factors were omitted since they were constant.
The results show that where the firm has more of these significant agency problems present the significance of the relationship to predicting non-executive multiple directorships also increases. As a result there is evidence available that agency problems increase the amount of external appointments for non-executives and executives are thus able to place more agency costs on the firm.
Agency theory in a nutshell is where somebody parts with control over their assets to the control of another due to, inter alia, an inability or unwillingness to deal with them personally. Inherent in such a relationship is the ability of the person in control to use those assets and the access to them to serve their own self-interest. In a corporate context the owner then must incur agency costs to align the interest of those in control with his own.
This is a premise for "good corporate governance" and what are the best ways, effectively, to minimise agency costs. Agency theory has developed a number of solutions to curtailing self-interest through a number of governance factors (alongside any existing legal deterrents to self-interest such as fiduciary duties). The theory identifies factors such as splitting the role of CEO and chair to two different individuals so no one individual controls the board, holding regular board meetings (as well as directors not missing too many), regular committee meetings such as the remuneration committee, executives not holding too many external appointments, a high level of independent directors to executives, high equity ownership from executives, high percentage of pay for performance element in compensation package, and a good sized board all as features of good governance.
These are just a few of potentially numerous agency problems in a firm but gives a good account of what is considered good governance according to the UK Corporate Governance Code.
The amount of agency problems present in any given firm may vary. Executives may be more able than others to impose higher agency costs. Agency theory would predict this is due to insufficient monitoring from the independent non-executives. A reason why non-executives are not monitoring effectively may be from their own external appointments that they have viewed them as a perquisite consumption due to the increasing value of remuneration available in such positions. Therefore one may predict that where a firm has more agency problems then the firm will also have a higher level of non-executives with more external appointments.
To test for this, indicator variables were created to show whether a firm had an agency problem from those just mentioned above (9 in total) and were collated. This figure was put in to a multiple regression model with other predictors (non-executive remuneration and non-executive equity) to predict the outcome of non-executive external appointments.
The first regression model did not demonstrate agency problems had a significant relationship with multiple directorships. However, to further this analysis the regression model was adapted to include each individual agency problem to identify whether there were any significant individual agency problems. Therefore the regression model included non-exec remuneration and equity as well as the 9 individual agency problems.
These results demonstrated that three agency problems (CEO-chair duality; board meetings missed; executive equity ownership) had a significant positive relationship with non-executive external appointments. Thus where a firm has these significant agency problems increasing then the non-executives will hold more appointments. There was also one significant negative relationship with the ratio of independent directors to executives. Thus where the ratio of independent directors to executives is greater the non-executives will hold fewer appointments.
Using these significant agency problems the final stage was to create dummy variables for each firm to indicate whether a firm had either 0, 1, 2, 3 or 4 of these agency problems present in the firm. These dummy variables were then placed in to the regression model again with non-executive remuneration and equity to see if there were any significant results. The dummy variable for 0 and 4 factors were omitted since they were constant.
The results show that where the firm has more of these significant agency problems present the significance of the relationship to predicting non-executive multiple directorships also increases. As a result there is evidence available that agency problems increase the amount of external appointments for non-executives and executives are thus able to place more agency costs on the firm.
| Model | Unstandardized Coefficients | Standardized Coefficients | t | Sig. | ||
| B | Std. Error | Beta | ||||
| 1 | (Constant) | 13.048 | 2.095 | 6.227 | .000 | |
| Non-Exec Remuneration per NED | .000 | .000 | .223 | 2.850 | .005 | |
| Equity held per Non-Exec (percent) | -16.154 | 4.186 | -.297 | -3.859 | .000 | |
| One significant agency problem | 1.912 | 1.576 | .119 | 1.213 | .227 | |
| Two significant agency problems | 2.453 | 1.808 | .128 | 1.357 | .177 | |
| Three significant agency problems | 7.050 | 2.592 | .229 | 2.719 | .007 | |
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