a Pert. = Performance, Hold, co's = Holding co's, Indus, co's = Indus, and comm. co's, Fam/Ind. = Families and Individuals, D/E = Debt/Equity, Intcov = Interest coverage, % non-ex. = Percentage non-executive directors, Num. dir. = Total number of directors. A dummy variable equal to I is included if the functions of CEO and chairman are combined by one person.

industrial investor shareholdings (in 6 out of 7 models) and by blocks held by families (5 models). Piecewise regressions - with dummies indicating whether or not the largest owner holds a blocking minority, majority or supermajority (as in Hermalin and Weisbach, 1991) - reveal that minority stakes held by industrial companies are sufficiently large to exert control and to restructure the board.17

Table 11.4 (lines 9-12) also investigates whether the ownership structure plays a performance-induced disciplining role. None of the categories of large blockholders seem to be involved in disciplinary actions against management when performance is poor. The lack of institutional investor involvement is in line with Hypothesis 3 which states that they abstain from monitoring to avoid conflicts of interest. In contrast, the fact that the large holding companies do not seem to monitor is surprising as these often cite superior corporate governance as one of the core contributions of their stable ownership stakes as 'reference shareholders'.18 The lack of significance of the interaction terms between large industrial and family owners, and performance, raises doubt about the fact whether board restructuring is initiated by families or industrial companies as a result of poor performance.19 All in all, there is little evidence about the corporate control role of existing large shareholders. The market in share stakes

When performance is poor, shareholders without a distinct interest in monitoring sell stakes, while those with strong monitoring abilities increase their stakes in order to reinforce their position as (major) shareholder. If this were true, we would expect positive signs for the increases in shareholdings (Hypothesis 3). In spite of the fact that institutions and holding companies actively trade in share stakes over 1989-1994 (Table 11.3), ownership increases by these categories are not correlated with changes in board structure (lines 13-16 of Table 11.4). However, there is one exception: when industrial companies and families obtain substantial share stakes, changes in management are implemented. Such board restructuring takes place (lines 19- 20) when prior performance was poor (negative market adjusted returns, negative changes or levels of performance), which suggests a partial corporate control market (Hypothesis 5). It can be observed that disciplining underperforming management happens in the year of turnover or in the subsequent fiscal year.20

Concerning the role of ownership concentration and the partial market for control, it is important to realise that above results were obtained after classifying all blocks of voting rights into ownership categories based on the identity of the ultimate or reference owners of each of these blocks. No significant results were attained in a first set of regressions where all ownership variables (levels and increases) were included by category of shareholder owner on the direct ownership level. For example, if a holding company holds 10% of the voting rights in a listed company, this 10% stake is classified as a stake owned by a holding company.The fact that the intermediate holding company may be directly or indirectly controlled by e.g. a family is ignored in this first set of regressions. However, when we reclassify all direct shareholdings (voting rights) in ownership categories based on the identity of the true (i.e. ultimate) owner - in the example above the 10% stake is a family controlled stake - we find the conclusions discussed above: significant results for the presence of industrial co's and families versus insignificant ones for institutions and holding companies. This suggests support for Hypothesis 4 and implies that the ultimate or 'reference' shareholder, who controls the voting rights of a listed target company by ways of a cascade of intermediate holdings, exerts corporate control.21 Gearing as a bonding mechanism

High leverage encourages management to generate sufficient funds to service the debt commitments. Consequently, a high debt-equity ratio is expected to reduce management's discretion and summon more intensive creditor monitoring, as is suggested in Table 11.4 (line 21) where executive director replacement is positively correlated with a high gearing (6 out of 7 regressions). Executive monitoring increases especially when corporate performance is negative (negative market adjusted returns, earnings losses, level and changes in ROE and cash flow adjusted for industry medians).22 Low interest coverage is an important indicator of financial distress; when the interest cover decreases below 2, a company typically loses investment grade. Table 11.4 also shows that executive board restructuring also coincides with low interest coverage (line 22), but that the interaction of poor share price and accounting performance is not correlated to executive board turnover (line 24). This implies that interest coverage may be considered as another monitoring performance benchmark and important trigger for monitoring actions.23 The strong correlation between gearing and interest cover, and performance (Hypothesis 6) suggests enhanced creditor monitoring when performance is poor. Interviews with executive and non- executive directors revealed that the monitoring role by creditors is considered limited (unless there is a danger of bond covenant violation).24 Board composition and separation of control

Table 11.4 supports the hypothesis that the board structure is instrumental for the monitoring efficiency of the internal governance mechanism (Hypothesis 2).The more independent the non- executive board from management, proxied by the proportion of non-executive directors, the easier it is to replace management when managerial performance is inadequate (lines 26 and 28).The fact that the role of large ownership stakes was not supported by our model (apart from for industrial companies) may be explained to some extent by the importance of the proportion of non-executives. It may well be that the number of non-executive directors on board is a proxy for the control power of a share block and that these large shareholder representatives are performing their roles as monitors and are executing their disciplining part well. As only a few companies could (or were willing) to disclose the representative function of its board members, this hypothesis could not be tested further. Board size differs substantially across firms; some have small boards with 6 directors, while others count 15 or more. In spite of the fact that large boards may reduce efficiency, board size does not seem to influence managerial disciplining (line 29).

For the US, Weisbach (1988) finds that CEO turnover is more sensitive to performance in firms whose boards are dominated by outsiders. Outsiders are carefully defined as directors who work neither for the corporation nor have extensive dealings with that company. In a study on the performance effects of the composition of the board of directors in the US, Baysinger and Butler (1985) conclude that those firms with stronger independent boards ended up with superior performance records, in the form of superior relative financial performance (an industry corrected return on equity). It should be emphasised that research about the impact of US board composition on CEO turnover is not directly comparable with research on Belgian boards.The emphasis in the US has been put on the independence of 'outside' directors, whereas some nonexecutives in Belgium are large shareholder representatives and 'independent or expert' non-executive directors'appointment to the board might be subject to large shareholder approval.

Next to the strengthening of the independence of non-executive board members, another recommendation in the recent Guidelines for Good Corporate Governance (of the Cardon Commission, Stock Exchange Commission, Commission for Banking and Finance) is the separation of the functions of managing director and of chairman of the board, but this necessity is not upheld by the findings of this model (lines 25 and 27 of Table 11.4).

Although larger companies may have a bigger internal managerial labour market and have better access to the external managerial labour market, corporate size is negatively related to executive board replacement (line 30).25 Are these disciplinary actions only directed at top managers who are on the board or do these actions extend to other managers, c.q. the members of the direction committee? The results with management committee turnover (executive directors and other top managers) as dependent variable gives weaker results than with executive turnover. This implies that performance related turnover is targeting the very top management, namely predominantly those three managers appointed to the board.

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