Determinants of Board Structure: A Comparison of Publicly-Traded and Privately-Owned Insurance Companies

This paper compares board determinants of publicly-traded and privately-owned property-liability insurance firms and the impact of the Sarbanes-Oxley Act (SOX) on board structure of those firms. Although regulation imposes severe constraints on board structure of insurance firms, we find strong evidence that both public and private insurance firms endogenously choose board structure in ways consistent with the economic theory. Specifically, we find evidence in support of the scope-of-operation hypothesis, the information-cost hypothesis, the incentive-alignment hypothesis, and the executive-power hypothesis for public insurance firms and evidence in support of the scope-of-operation hypothesis and the managerial-discretion hypothesis for private insurance firms. Overall, our board determinants models explain as much as 54% variation in board structure of public insurance firms and 44% variation in board structure of private insurance firms. Although SOX applies to only publicly-traded firms, we find that SOX effects had spilled over to private firms. Larger and less levered private insurance firms are more likely to increase board independence post-SOX, suggesting board governance is resource dependent.