Although the interest in corporate governance practices has been widespread among economists since the early 1900s (Jensen & Meckling, 1976), the topic has become more and more relevant in the light of fraud scandals in the United States and the recent financial crisis. These events have revealed uncertainties regarding the role of supervisors, business models and risk exposure assessment, but above all regarding the characteristics and operating profiles of the companies‟ board. To date, the delicate economic situation still underlines the need to improve management practices in order to consolidate a resilient corporate structure (Tricker, 2019). Academic studies outline the role of sound corporate governance practices in reducing agency problems while maximising shareholders‟ wealth (Carter, Simkins, & Simpson, 2003). Corporate governance regulates the relationships between the senior management, the board of directors, the shareholders and other stakeholders and aims to settle the firm‟s structure and tools to achieve and monitor business goals (OECD, 2015). Solid governance practices facilitate decision-making and can improve business strategy and performance in the long term (Bhagat & Bolton, 2008). The topic is particularly significant in the case of insurance companies and, more generally, in the financial intermediaries sector, as confirmed by the post-financial crisis reforms that have affected the financial sector, focusing on the solvency of intermediaries and on the central position of their internal governance models. In the insurance industry, default conditions are mostly linked to the financial distress arising from management inability to address risk exposure. The instability of the insurance sector may have a negative impact on a wide range of stakeholders and on the financial system itself. That is why regulators have developed a new risk-based solvency framework, as was the case with Solvency II in the European Union (Directive 2009/138/EC). Although there is no universal governance model, it is possible to set sound principles to make management activities and processes transparent and effective in the interest of stakeholders (OECD, 2015). In this context, the company board and its composition play a key role (Adams & Ferreira 2009; Adams & Mehran 2012; Ben Barka & Legendre, 2017; Baysinger & Butler, 1985; Bennouri, Chtioui, Nagati, & Nekhili, 2018; Birindelli, Dell‟Atti, Iannuzzi, & Savioli, 2018; Datta, 2018; Ghafran & O‟Sullivan, 2013; Jensen, 1993; Knyazeva, Knyazeva, & Masulis, 2013; Liu, Miletkov, Wei, & Yang, 2015; Markonah, Sudiro, Surachman, & Rahayu, 2019). The insurance companies‟ board evaluates the insurer‟s maximum acceptable risk, while monitoring minimum capital requirements according to the actual risk assumed, approves risk management policies, is responsible for audit activities and defines adequate requirements for board members and top management. In addition, the board must clearly define the governance system, while monitoring internal organisational structure to ensure efficiency, effectiveness and transparency (OECD, 2017). This research aims to investigate the relationship between a wide range of board characteristics and corporate performance in the insurance sector. The survey has been conducted on an international sample of 119 listed insurance companies operating in the period 2009-2019. The sample includes companies from 12 countries, belonging to 3 geographical areas: North America, Europe and Asia. For this purpose, we performed a dynamic pooled regression model to test the impact of a wide range of board-specific factors. The survey has been conducted on an international sample of 119 listed insurance companies operating in the period 2009-2019. The empirical analysis is based on a dynamic pooled regression model designed to test the effects on insurance companies‟ performance of a wide range of board-specific factors. Namely, to investigate the relationship between financial performance and board characteristics we developed a model composed of 26 explanatory variables regarding board features, combined into four major survey area: 1) board committee (i.e., presence and features of board committee), 2) board structure (i.e., board structure policies, board diversity, background and skills of board members, board member affiliations and individual re-elective mechanism), 3) board independence (i.e., board independence policies, share of independent and non-executive board members and CEO-Chairman separation) and 4) board operativity (i.e., number of board meetings, board meetings attendance and disclosure). For each of the four major survey areas, we elaborated an “ad hoc” indicator score. Given the presence of both qualitative and quantitative data, the metric of each item preliminarily required conversion of qualitative information into quantitative data. Individual scores have then been combined into an overall category score for each of the four survey areas. The four combined scores are assumed as possible predictors of insurers‟ performance. As a dependent variable, we used the Market-to-Book ratio, which relates to the firm‟s market price with the book value of its equity. On the side of the explanatory indicators, we also added two firm-level control variables, an economic performance indicator (ROE) and a leverage indicator (market-to-book ratio). We allowed for lagged board scores predictors since we expected shifting in internal governance take longer to reveal their effects on corporate performance. All the data required by the regression model have been collected from the Thomson Reuters database. We excluded a number of insurers due to the lack of data. We also imposed a minimum of at least four years available data in order to include companies in the study. Our final sample consists of 1,070 company-year observations. Our findings provide evidence that board structure and board independence are the most relevant governance factors, with a potentially positive impact on insurers‟ market performance. These findings indirectly outline the opportunity for insurance companies to improve corporate fair value by strengthening internal governance models through effective board policies, an adequate qualification of board members and a well-balanced membership of the board that means a solid financial expertise of board members and a satisfactory level of gender and cultural diversity within the board. At the same time, there is still room for improvement as regards the level of board independence by strengthening internal governance policies in order to maintain an adequate number of independent and non-executive board members. The study upgrades the evidence arising from the existing literature by providing a new element to support a deeper understanding of the effects of insurance companies‟ board characteristics on financial performance. We also believe empirical results may have important implications for both managers and policymakers within the insurance industry. Greater awareness of key board characteristics in the value creation process may stimulate a number of players to intensify their efforts to enhance internal governance policies and practices.
The impact of board characteristics on financial performance: international evidence from insurance industry
P. di Biase
;
2020-01-01
Abstract
Although the interest in corporate governance practices has been widespread among economists since the early 1900s (Jensen & Meckling, 1976), the topic has become more and more relevant in the light of fraud scandals in the United States and the recent financial crisis. These events have revealed uncertainties regarding the role of supervisors, business models and risk exposure assessment, but above all regarding the characteristics and operating profiles of the companies‟ board. To date, the delicate economic situation still underlines the need to improve management practices in order to consolidate a resilient corporate structure (Tricker, 2019). Academic studies outline the role of sound corporate governance practices in reducing agency problems while maximising shareholders‟ wealth (Carter, Simkins, & Simpson, 2003). Corporate governance regulates the relationships between the senior management, the board of directors, the shareholders and other stakeholders and aims to settle the firm‟s structure and tools to achieve and monitor business goals (OECD, 2015). Solid governance practices facilitate decision-making and can improve business strategy and performance in the long term (Bhagat & Bolton, 2008). The topic is particularly significant in the case of insurance companies and, more generally, in the financial intermediaries sector, as confirmed by the post-financial crisis reforms that have affected the financial sector, focusing on the solvency of intermediaries and on the central position of their internal governance models. In the insurance industry, default conditions are mostly linked to the financial distress arising from management inability to address risk exposure. The instability of the insurance sector may have a negative impact on a wide range of stakeholders and on the financial system itself. That is why regulators have developed a new risk-based solvency framework, as was the case with Solvency II in the European Union (Directive 2009/138/EC). Although there is no universal governance model, it is possible to set sound principles to make management activities and processes transparent and effective in the interest of stakeholders (OECD, 2015). In this context, the company board and its composition play a key role (Adams & Ferreira 2009; Adams & Mehran 2012; Ben Barka & Legendre, 2017; Baysinger & Butler, 1985; Bennouri, Chtioui, Nagati, & Nekhili, 2018; Birindelli, Dell‟Atti, Iannuzzi, & Savioli, 2018; Datta, 2018; Ghafran & O‟Sullivan, 2013; Jensen, 1993; Knyazeva, Knyazeva, & Masulis, 2013; Liu, Miletkov, Wei, & Yang, 2015; Markonah, Sudiro, Surachman, & Rahayu, 2019). The insurance companies‟ board evaluates the insurer‟s maximum acceptable risk, while monitoring minimum capital requirements according to the actual risk assumed, approves risk management policies, is responsible for audit activities and defines adequate requirements for board members and top management. In addition, the board must clearly define the governance system, while monitoring internal organisational structure to ensure efficiency, effectiveness and transparency (OECD, 2017). This research aims to investigate the relationship between a wide range of board characteristics and corporate performance in the insurance sector. The survey has been conducted on an international sample of 119 listed insurance companies operating in the period 2009-2019. The sample includes companies from 12 countries, belonging to 3 geographical areas: North America, Europe and Asia. For this purpose, we performed a dynamic pooled regression model to test the impact of a wide range of board-specific factors. The survey has been conducted on an international sample of 119 listed insurance companies operating in the period 2009-2019. The empirical analysis is based on a dynamic pooled regression model designed to test the effects on insurance companies‟ performance of a wide range of board-specific factors. Namely, to investigate the relationship between financial performance and board characteristics we developed a model composed of 26 explanatory variables regarding board features, combined into four major survey area: 1) board committee (i.e., presence and features of board committee), 2) board structure (i.e., board structure policies, board diversity, background and skills of board members, board member affiliations and individual re-elective mechanism), 3) board independence (i.e., board independence policies, share of independent and non-executive board members and CEO-Chairman separation) and 4) board operativity (i.e., number of board meetings, board meetings attendance and disclosure). For each of the four major survey areas, we elaborated an “ad hoc” indicator score. Given the presence of both qualitative and quantitative data, the metric of each item preliminarily required conversion of qualitative information into quantitative data. Individual scores have then been combined into an overall category score for each of the four survey areas. The four combined scores are assumed as possible predictors of insurers‟ performance. As a dependent variable, we used the Market-to-Book ratio, which relates to the firm‟s market price with the book value of its equity. On the side of the explanatory indicators, we also added two firm-level control variables, an economic performance indicator (ROE) and a leverage indicator (market-to-book ratio). We allowed for lagged board scores predictors since we expected shifting in internal governance take longer to reveal their effects on corporate performance. All the data required by the regression model have been collected from the Thomson Reuters database. We excluded a number of insurers due to the lack of data. We also imposed a minimum of at least four years available data in order to include companies in the study. Our final sample consists of 1,070 company-year observations. Our findings provide evidence that board structure and board independence are the most relevant governance factors, with a potentially positive impact on insurers‟ market performance. These findings indirectly outline the opportunity for insurance companies to improve corporate fair value by strengthening internal governance models through effective board policies, an adequate qualification of board members and a well-balanced membership of the board that means a solid financial expertise of board members and a satisfactory level of gender and cultural diversity within the board. At the same time, there is still room for improvement as regards the level of board independence by strengthening internal governance policies in order to maintain an adequate number of independent and non-executive board members. The study upgrades the evidence arising from the existing literature by providing a new element to support a deeper understanding of the effects of insurance companies‟ board characteristics on financial performance. We also believe empirical results may have important implications for both managers and policymakers within the insurance industry. Greater awareness of key board characteristics in the value creation process may stimulate a number of players to intensify their efforts to enhance internal governance policies and practices.I documenti in IRIS sono protetti da copyright e tutti i diritti sono riservati, salvo diversa indicazione.
