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Independence`s third dimension: innovation and value creation

In the last decade, scholars have focused on agency relationship between board and managers, so that recommendations mostly addressed the composition or structure of the board, differently said, its independence, in order to enhance the oversight and monitoring role.


More recently, scholars or practitioners also argue that independence is key for a board to defend minority shareholder`s rights when there is a controlling shareholder; a board is also deemed to preserve a view on the shareholders`s long-term interests, so independence is necessary in order to fence-off short-termism`s attacks.


McCahery and Vermeulen tough focus on a third aspect of independence: its connection with innovation and value creation. In other words, formalities derived from both previously cited concerns, (agency costs and short-termism), somehow limit the understanding of boards. Thus, the third aspect: what characteristics of independence are more connected to skills and capacities that will take the firm to lead its market?



  1. 1.     A new approach to Corporate Governance: a three-dimensional model.


McCahery and Vermeulen first introduce the Apple case, mainly the lessons of its board evolution; back to Apple in 1997, Jobs realized Apple needed a board composed of industry experts and Apple heavy users. Even if a politician was engaged, (Al Gore) he had what was needed to take the stock price up until Mr Jobs passed away in 2011. What happened to the board then? It has not changed as fast as needed, the authors argue. There has been no change to a more independence and risk-management style. In fact, this shows a different approach to Corporate Governance where the board is an extension of management.


Given this example, the authors present a three-dimensional model that focuses on the dynamics of corporate governance. A one-dimensional model focuses in oversight and the agency costs, with the aim in shareholder value; a two-dimensional model goes beyond oversight and includes long-termism to the equation. In both models independence and regulation is king; the new approach is already in the core of current regulations, as they assign strategy design and oversight to boards, but in practice those regulations force boards to abandon that strategic and growth-oriented role in favor of compliance and oversight: (i) lack of time, (ii) the dominant role of lawyers and governance experts in the board,  (iii) excessive independence, that impoverishes quality of information, and (iv) shirking in the oversight function, which leads to short-term and check the box mentality.


As a consequence the authors advocate nomination criteria that lead boards to hire enough product and market knowledge.



  1. 2.     Empirical contrast: board practices thar enhance performance


In order to back their proposal they offer empirical evidence of how more successful boards in terms of value creation are more connected with that third dimension of knowledge in product and market areas. This is the case of start-ups and their venture capitalist, who don`t just focus on oversight but on growth and value. Their role is relevant until IPO`s and even later, given the lock-in periods somehow retain their expertise and value-driven approach to the board dynamics. Board age, gender and expertise diversity has also a very remarkable connection with these successful firms; on the other hand these firms usually adapt their board composition to the current of foreseeable situation: accounting problems entail accountants are hired, internationalization brings experts in exports or direct investments, and so on. Finally, Chairman and Ceo positions use to be kept by the same person.


In brief and as a conclusion, McCahery and Vermeulen argue that high performance and high growth companies have taken this perspective (the aim of sustainable growth and value creation) when designing their board. Venture capitalist-kind directors, product and market oriented, diversity, and the capacity to adapt the board composition to changes, apart from not necessarily separating chairman and Ceo roles are the main features to be followed.



(1) This post is Based Understanding the Board of Directors after the Financial Crisis, by J.A. McCahery and E.P.M. Vermeulen, ECGI Working Paper Series in Law. ©.


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