Survey of Literature on Boards of Directors

Renée B. Adams, Benjamin Hermalin and I have recently completed a survey of the literature on boards of directors, with an emphasis on research done in the last five years. This survey updates and expands significantly the survey I completed with Benjamin Hermalin in 2003. In the 2008 survey, we focus on how the literature, theoretical and empirical, deals with the complications that arise from the joint endogeneity of board makeup and board action.

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 variations 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.

Some help with the heterogeneity issue could be forthcoming from more theoretical analyses. The common perception of the literature on corporate governance, particularly related to boards of directors, is that it is largely empirical. However, such a view overlooks a large body of general theory that is readily applied to the specific topic of boards. Unfortunately, this literature also has some shortcomings. Often, a simplified, and thus tractable model can produce theoretical results that are unattainable in practice. To an extent, this problem can be finessed by restricting attention to incomplete contracts. However, the assumption of incomplete contracts can fail to be robust to minor perturbations of the information structure or the introduction of a broader class of mechanisms. A further issue is that corporations are complex, yet, to have any traction, a model must abstract away from many features of real-life corporations.

We organize our survey into four main sections that address four key questions about directors: What do directors do? What are the issues related to board structure? How do boards fulfill their roles? What motivates directors? Throughout the paper, 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 full paper is available for download here.