Economic Crisis and Corporate Governance: How Can Board Independence and Expertise Maximize the Firm Value?

Abstract

In the context of recurrent crises and the necessity to move to more sustainable firm level changes, this paper analyzes the trade-off between board’s dual role of monitoring and advising the CEO, especially relevant for the integration of sustainable development into corporate strategy, depending on board independence and expertise. We propose a theoretical model in which boards may choose to be either monitoring or advisory type towards the CEO. In this framework, the board’s incentives to adopt a high monitoring level are non-monotonically (U-shaped) related to the expertise level. On the other hand, the incentives for an advisory board to discipline the CEO are increasing with expertise, if the business has high opportunity for growth. Finally, under specific parameter values, the model generates a disciplining effect of expertise in the sense that the more expert the board is, the less opportunistic the CEO is. We then test these theoretical results using a dataset on the French 120 largest listed companies over the 2006-2011 period. Empirical evidence reveals that expertise plays a mediating role in the relationship between independence and performance in French firms. Directors’ competences for sustainable development hence are likely to play a crucial role for firms to integrate such issues into their core strategy.