The inner workings of the board

The inner workings of the board: Evidence from emerging markets

How boards perform their dual role of supervisor and advisor of corporate management is difficult to see from outside of the business. This column presents a survey of non-executive directors in a variety of emerging markets which reveals substantial variation in the structure and conduct of boards aswell as in directors’ perceptions about the neighborhood legal environment. Directors who feel adequately empowered by local legislation appear less inclined to vote against board proposals, and in addition form boards that play a stronger role in the company’s strategic decision making.


Why is a board effective? For a long time, policymakers and academic researchers alike have offered an identical response to this question: a highly effective board is one where its members are independent from the executives they are likely to monitor. This answer is, however, too simplistic. Board members are appointed by shareholders to market their interests also to supervise and advise the principle executive and other executives. Basically, boards perform multiple function. To judge board performance, we thus have to look beyond simple measures of board independence.

How boards perform their dual role of supervisor and adviser of corporate management is normally difficult to see from beyond your company, and board conduct therefore remains an underexplored topic in the academic literature. That is specially the case for boards in developing countries and emerging markets, where transparency and reporting requirements have a tendency to be less advanced. Although corporate boards play an extremely important role in lots of emerging markets, we still know hardly any about how exactly effective they are also to what extent their functioning depends upon external factors. Klapper and Love (2004) use data from 14 developing countries showing that firm-level corporate governance matters more in countries with weak legal environments, and that firms may partially compensate for ineffective laws by establishing good corporate governance. This insight is confirmed by Dahya et al. (2008), who analyse 799 firms (all with a dominant shareholder) in 22 countries. They look for a positive relationship between corporate value and the proportion of independent board directors. Especially in countries with weak legal shareholder protection, dominant shareholders can appoint an unbiased board to make sure minority investors that they can avoid diverting resources.

In recent work, we exploit data collected via an paid survey of 130 current and past board directors (De Haas et al. 2017). These non-executive directors were on the boards of companies across 27 emerging markets and were all nominated by the European Bank for Reconstruction and Development (Figure 1). We use these nominees as entry points to gain access to detailed information regarding the behaviour and conduct of their boards.

Figure 1 Geographical distribution of the sample of surveyed board directors

Note: Map shows the amount of respondents (board directors) by country. Darker colours indicate an increased number of observations per country.

The resulting data allow us to create measures of advising and monitoring activity inside boards. Within their monitoring role, directors are likely to take care of the interests of most shareholders – including non-controlling ones – and, sometimes, of other stakeholders, as mentioned in the neighborhood corporate law. While performing their duty, directors will most likely end up in disagreement with management and controlling shareholders. Such disagreement can result in concrete actions, such as for example voting against management and/or controlling shareholders. Within their advisory role, directors contribute with their business expertise to the formulation and implementation of a company’s strategy (e.g. Adams and Ferreira 2007). For such advice to be meaningful, the board has to be empowered to create strategic decisions.

To research the relative need for the monitoring and advisory roles of boards, we analyse two subjective measures of decision making. The first pertains to the board’s capability to participate meaningfully in strategic decision making. The next measure proxies for the frequency of disagreement between directors and all of those other board. We find that in 52% of most cases, the board makes the ultimate decision on strategic issues, while in 41% of companies it’s the majority shareholder, and in the rest of the 7% it really is management. This means that that generally in most companies, board directors are empowered within their advisory functions and don’t limit themselves to merely monitoring management. However, the break down of answers also reveals striking differences between countries. One possible explanation for these cross-country differences is variation in the perception of the grade of the legal environment.

Indeed, our data show wide variation in how board directors measure the quality of the neighborhood legal system and the extent to which it empowers them to fulfil their role. When board directors were asked whether courts within their country normally ruled fairly and objectively, exactly half of most board directors said they did, whereas the other said they didn’t. However, perceptions of court quality vary a whole lot across and within regions, which range from 81% in central Europe and the Baltic states to only 21% in Central Asia. Relatedly, the survey also presented board members with a research study in regards to a hypothetical conflict between shareholders and the board. Respondents were asked if they thought that the courts within their respective countries would rule fairly and objectively in cases like this. The opinions were again split – around half of most board members said they didn’t think that this might happen.

When asked whether local legislation provides director enough capacity to fulfil their role within the board, the common score is 4.6 on a scale of just one 1 (“Strongly disagree”) to 6 (“Strongly agree”). Variation is again substantial with a typical deviation of 0.82. While 66% of the directors (strongly) concur that local legislation gives them enough power, the rest agree only somewhat and even disagree altogether. Legal empowerment is higher in central Europe and the Baltic states (4.9) and reduced Russia (4.4).

Further analysis indicates that whenever board directors feel more empowered by the neighborhood legal system (that’s, the power of local laws to empower directors is above the mean), it really is much more likely that final decisions are taken by the board (58%) than when directors feel less empowered (39%). This analysis thus indicates that in the event board directors are adequately empowered by local legislation, it really is much more likely that the boards they comprise play a stronger role in the company’s strategic decision making.

The second way of measuring decision making in the board may be the proportion of directors who’ve ever voted against board proposals. Our data show that 69% of directors have voted against board proposals at least one time throughout their tenure. Our sample directors thus look like significantly engaged in monitoring activities. We expect independent directors to vote against projects that may harm the interest of non-controlling investors. Thus, a higher frequency of voting against projects could possibly be explained by a combined mix of high degrees of director independence and a lot of proposals that are bad for the interests of non-controlling shareholders. We note, however, that the actual fact a substantial minority of directors never votes against board proposals isn’t necessarily a bad thing, since it is quite easy for disagreements to be discussed and solved in the boardroom with out a formal vote occurring.

Lastly, we remember that formal legal protection on the book might not apply in equal measure to all or any board directors, or could be perceived in various ways. The amount of (perceived) legal protection may subsequently affect directors’ inclination to actively vote against board proposals. Our findings indeed claim that those that feel most subjected to too little legal back-up will be the ones that resort more often to active voting. To place it the other way around, the ones that feel the energy of the courts on the side are also the ones that are most relaxed in the boardroom.

Authors’ note: · The views are those of the authors , nor necessarily reflect those of the EBRD.


Adams, R B and D Ferreira (2007), “A Theory of Friendly Boards”, Journal of Finance 62(1): 217-250.

Dahya, J, O Dimitrov and J J McConnell (2008), “Dominant Shareholders, Corporate Boards, and Corporate Value: A Cross-Country Analysis”, Journal of Financial Economics 87: 73-100.

De Haas, R, D Ferreira and T Kirchmaier (2017), “The Inner Workings of the Board: Evidence from Emerging Markets”, CEPR Discussion Paper No. 12317.

Klapper L F and I REALLY LIKE (2004), “Corporate Governance, Investor Protection and Performance in Emerging markets”, Journal of Corporate Finance 10(5): 703-728.

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