The Efficiency View of Corporate Boards: Evidence from Italian Listed Firms

We investigate the determinants and characteristics of the board structure of Italian listed companies over the period 2004-2007. Our results are consistent with the view, commonly shared by the governance literature, that corporate boards are designed so as to control agency issues and maximize firm value. The idea that boards in closely held firms — typical of the Italian market — are shaped in order to enable large shareholders to extract private benefits is refuted by the data. In particular, we find that board composition favors independent members in firms where free cash flow (measuring the scope for private benefit extraction) is higher. Conversely, it favors executive members in firms with high ownership concentration, where small shareholders are more protected by the “incentive alignment effect”; the same holds for family firms. Large boards are more likely to be organized in committees, presumably to enhance the efficiency of the decision process. Firms with higher growth opportunities — and high tech firms in particular — rely more heavily on the specific knowledge provided by executive members.