Hints on exam preparation CSR
Table of Contents
Board of directors ........................................................................................................................... 2
Payout policy .................................................................................................................................. 5
Executive Compensation ................................................................................................................. 8
Shareholder Activism and Hedge fund Activism ........................................................................... 10
Governance for Innovation ........................................................................................................... 11
Passive Ownership ........................................................................................................................ 13
Common Ownership...................................................................................................................... 14
Corporate Scandals ...................................................................................................................... 17
Corporate Ethics ........................................................................................................................... 17
,Board of directors
How does board independence matter? Explain how you can measure board independence.
Conventional independence: director is independent if he has neither financial nor familial ties to the
CEO or to the firm.
Board independence matters since it reduces managerial entrenchments and mitigates manager-
shareholder agency problems. An obvious problem concerning the board of directors (BoD) is the CEO
duality problem.
CEO duality: executive director sitting on the board.
First, proponents state that it allows for strong leadership. Second, separation of roles might create
tension. Third, you might get the single spokesperson problem.
Opponents, on the other hand, state that CEO duality reduces/eliminates board independency.
Furthermore, it increases CEO entrenchments and the CEO might become overwhelmed by having both a
monitoring task as well as a leading task.
Board independence can be measured through the ratio of independent directors relative to the total
number of directors.
Explain the advantages of small and large boards.
- Pro small board
o There are little frictions in group decision
o It reduces free-riding and coordination
o It enables fast decision making
- Pro large board
o The more individuals on the board, the more monitoring will occur since directors can
share their responsibilities and can monitor more extensively.
o More information and knowledge.
o Greater diversity of backgrounds and opinions. Through this, more concerns can be taken
into account.
Why is it difficult to study the causal impact of board size on firm performance? (Hint: how can reverse
causality or omitted variables explain the correlation?) – paper Jenter, Schmidt and Urban (2018) –
Does board size matter?
It is difficult to study the causal impact of board size on firm performance for two reasons:
1. Reverse causality: firm performance directly influences directors.
a. Poor performance might lead to adding more people on the board.
b. But more people added on the board might result in better performance too.
2. Confounding factors: factors that both affect the number of directors as well as firm performance
directly.
a. There might be unobserved differences in firm, owner, or executive characteristics.
, i. E.g. diversified firms need more expertise, so they prefer larger boards.
ii. E.g. due to M&A, boards grow in size à as a result of mergers and acquisitions
there might be worse firm performance.
You could say that the root cause of the problem is that board size is endogenous.
Explain the main idea behind the empirical design by Jenter, Urban and Schmidt (2018) who study the
impact of board size on firm performance.
This paper examines whether large boards reduce firm performance through the use of regulatory
minimum board size. They find robust evidence that forcing firms to have large boards is detrimental to
firm performance. ROA drops by 2-3 percentage points and Tobin’s Q declines by 0.2-0.3.
In their study, their empirical strategy is to use 2 research designs based on data from 2 time periods.
They use both a RDD in which they compare forms below and above the threshold (10k domestic
employees) as well as a DD analysis around the introduction of the board size requirement. This allows
them to see whether the effect found among the firms around the threshold are driven by the introduction
of the board size requirement.
Interpret the table (exam would present table shown and discussed in class). What do you learn about the
impact of board size?
I inserted this table from the lecture slides. As previously stated, you can see that ROA drops by 2-3
percentage points and Tobin’s Q declines by 0.2-0.3. These results show that board effectiveness declines
when boards become larger/too large.
Interpret findings of a given table with results (for example, table shown in class), and explain what you
can learn about the impact of the quota on firm value.
Trouble with all studies on boards: board composition is endogenous.
- For example: whether knowledgeable board members increase firm value through their actions.
Or if highly valued firms simply attract more knowledgeable board members.
This is why we need natural experiments.
In class we looked at a new law passed in Norway in 2003 that targeted a female representation level in
the BoD by 40%.
Table of Contents
Board of directors ........................................................................................................................... 2
Payout policy .................................................................................................................................. 5
Executive Compensation ................................................................................................................. 8
Shareholder Activism and Hedge fund Activism ........................................................................... 10
Governance for Innovation ........................................................................................................... 11
Passive Ownership ........................................................................................................................ 13
Common Ownership...................................................................................................................... 14
Corporate Scandals ...................................................................................................................... 17
Corporate Ethics ........................................................................................................................... 17
,Board of directors
How does board independence matter? Explain how you can measure board independence.
Conventional independence: director is independent if he has neither financial nor familial ties to the
CEO or to the firm.
Board independence matters since it reduces managerial entrenchments and mitigates manager-
shareholder agency problems. An obvious problem concerning the board of directors (BoD) is the CEO
duality problem.
CEO duality: executive director sitting on the board.
First, proponents state that it allows for strong leadership. Second, separation of roles might create
tension. Third, you might get the single spokesperson problem.
Opponents, on the other hand, state that CEO duality reduces/eliminates board independency.
Furthermore, it increases CEO entrenchments and the CEO might become overwhelmed by having both a
monitoring task as well as a leading task.
Board independence can be measured through the ratio of independent directors relative to the total
number of directors.
Explain the advantages of small and large boards.
- Pro small board
o There are little frictions in group decision
o It reduces free-riding and coordination
o It enables fast decision making
- Pro large board
o The more individuals on the board, the more monitoring will occur since directors can
share their responsibilities and can monitor more extensively.
o More information and knowledge.
o Greater diversity of backgrounds and opinions. Through this, more concerns can be taken
into account.
Why is it difficult to study the causal impact of board size on firm performance? (Hint: how can reverse
causality or omitted variables explain the correlation?) – paper Jenter, Schmidt and Urban (2018) –
Does board size matter?
It is difficult to study the causal impact of board size on firm performance for two reasons:
1. Reverse causality: firm performance directly influences directors.
a. Poor performance might lead to adding more people on the board.
b. But more people added on the board might result in better performance too.
2. Confounding factors: factors that both affect the number of directors as well as firm performance
directly.
a. There might be unobserved differences in firm, owner, or executive characteristics.
, i. E.g. diversified firms need more expertise, so they prefer larger boards.
ii. E.g. due to M&A, boards grow in size à as a result of mergers and acquisitions
there might be worse firm performance.
You could say that the root cause of the problem is that board size is endogenous.
Explain the main idea behind the empirical design by Jenter, Urban and Schmidt (2018) who study the
impact of board size on firm performance.
This paper examines whether large boards reduce firm performance through the use of regulatory
minimum board size. They find robust evidence that forcing firms to have large boards is detrimental to
firm performance. ROA drops by 2-3 percentage points and Tobin’s Q declines by 0.2-0.3.
In their study, their empirical strategy is to use 2 research designs based on data from 2 time periods.
They use both a RDD in which they compare forms below and above the threshold (10k domestic
employees) as well as a DD analysis around the introduction of the board size requirement. This allows
them to see whether the effect found among the firms around the threshold are driven by the introduction
of the board size requirement.
Interpret the table (exam would present table shown and discussed in class). What do you learn about the
impact of board size?
I inserted this table from the lecture slides. As previously stated, you can see that ROA drops by 2-3
percentage points and Tobin’s Q declines by 0.2-0.3. These results show that board effectiveness declines
when boards become larger/too large.
Interpret findings of a given table with results (for example, table shown in class), and explain what you
can learn about the impact of the quota on firm value.
Trouble with all studies on boards: board composition is endogenous.
- For example: whether knowledgeable board members increase firm value through their actions.
Or if highly valued firms simply attract more knowledgeable board members.
This is why we need natural experiments.
In class we looked at a new law passed in Norway in 2003 that targeted a female representation level in
the BoD by 40%.
