Faculty of law blogs / UNIVERSITY OF OXFORD

Return of the Board Insiders: What is at Stake?


Shibashish Mukherjee
Assistant Professor, EMLYON Business School
Jelle Bonestroo
Finance Professional


Time to read

3 Minutes

With the deepening of the global financial markets and the expansion of multinational corporations worldwide, corporate governance through and by the board has remained a constant focus of regulatory and academic inquiry. To deter increasingly powerful chief executives’ power, rent-extraction through ever-increasing compensation, and myopia, regulators have sought to empower the board of directors through regulations that favour greater board independence. Scholars have documented that such regulatory actions have increased shareholders’ wealth, perhaps a rare instance of regulatory success. Due to these regulatory actions and a growing shareholder awareness about the benefits of a strong oversight by independent directors, we document, in our new paper, a systematic decline in the proportion of insider directors within the board—that is, until some countries experienced a significant financial crisis. Figure 1 shows that the declining worldwide trend in the proportion of board insiders reversed only for those countries that experienced the spill-over effect of the 2008-2010 global financial crisis (GFC), which we measure using aggregate earnings shocks (AES). However, this reversal did not extend to firms in the countries that did not experience significant AES. It suggests that the country-level economic and financial uncertainty caused by the GFC directly affects how boards are constructed worldwide.

Figure 1: How the proportion of board insiders changed in listed firms in countries that significantly experienced the 2008-2010 financial crisis through Aggregate Earnings Shocks (AES). The control sample is the firms in countries that did not experience significant AES.


This also brings us to why board insiders still occupy over one-third of the worldwide board seats. If we exclude CEOs from this calculation, non-CEO insiders occupy a quarter of the board seats globally. Prior research has argued that board insiders bring ‘private information,’ which is likely helpful for board decision-making processes. However, the non-CEO insiders are at serious risk of co-option and other types of undue chief executive influence, which could deter effective executive monitoring leading to board capture.

Our study advances an argument based on the corporate socialization theory that board insiders, including the non-CEOs, bring a unique form of non-fungible expertise to the board. Fungible expertise is a type of experience and expertise common to an industry or a profession. Financial expertise, or experience within an industry, are common types of fungible expertise. For example, suppose an executive leaves their firm and joins a rival firm. Their industry experience and expertise are likely to benefit their new firm even if it would take time for that executive to get familiarized with their new firm’s corporate culture and operating processes. In contrast, non-fungible expertise is firm-specific, unique, and hard to gain without a long-tenured and focused experience within a firm. An executive can only gain non-fungible knowledge, experience, and expertise about the firm by staying employed there, knowing its people and processes, and other markers of corporate culture that are unique to it. It is potentially the source of the ‘private information’ that prior research has discussed. Consistent with this theory, we document that when listed firms in some countries experienced a significant financial crisis, they appointed long-tenured and firm-focused non-CEO board insiders. Here, long-tenured insiders are those executives who have long-run experience within the firm. Moreover, firm-focused are the insiders who do not have any other outside affiliations apart from their firm, which would allow them to keep their ears-to-the-ground. We further document that financially distressed firms, ie, firms with more than two years of consecutive negative market returns, have a stronger demand for these types of non-CEO board insiders.

While the financial crisis allowed us to study the non-CEO board insiders’ selection mechanism closely, it raises several concerns for the regulators, academics, and shareholders. During the previous wave of regulatory interventions, policy-makers focused on board independence. However, in the post-financial crisis period, many countries’ regulatory focus has been on the demographic aspects of the board (see Table 1). As we document in our study, this focus has led to a significant increase in non-CEO board insiders’ representation in firms that experienced a financial crisis. Therefore, regulators and other stakeholders must explore to what extent the board configuration favouring the non-CEO board insiders with non-fungible expertise is ‘good’ for the firms and if it helps increase shareholders’ wealth, especially during periods of great economic and financial uncertainty. Else, there needs to be a renewed focus on board independence, especially in countries that experienced a significant financial crisis. This call is especially urgent given the new global macro shock in the form of the COVID-19 pandemic and its economic and financial aftereffects, which are also likely to affect firms and their governance structures in unknown ways.


Shibashish Mukherjee is an Assistant Professor in Corporate Finance at EMLYON Business School, France.

Jelle Bonestroo is a Finance Professional.


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