COLUMBUS, Ohio -- Businesses are less likely to go bankrupt if their boards of directors have greater percentages of people from outside the company and if the board chairperson isn't the chief executive officer.

Researchers have found that independent boards may be more likely to take the timely and necessary actions to stabilize a struggling firm than are boards consisting of company management and affiliated directors.

Catherine Daily, an assistant professor of strategic management at Ohio State University, and Dan R. Dalton of Indiana University, reported their findings in the current issue of Strategic Management Journal.

Previous studies of financially healthy firms have shown that there isn't one best governance structure in terms of producing good financial performance. However, Daily said, when a firm is in financial difficulty or crisis, the type of governance structure can make a big difference.

"With a joint CEO-chairperson leadership structure and a lower proportion of independent directors, control is centralized

with management," Daily said.

"It is doubtful that top management and directors appointed by the CEO can be reasonably expected to monitor and control the CEO in times of crisis, or otherwise.

"Separating the positions of CEO and board chairperson and structuring the board such that there is a majority of independent directors reduces the opportunity for the CEO and inside directors to exercise behaviors which are self-serving and costly to the firm's owners."

In their study, Daily and Dalton matched 50 bankrupt firms with successful competitors having similar volumes of sales and numbers of employees. They evaluated governance structures and financial performance five years and also three years prior to the year that the bankrupt firms filed for Chapter 11 protection. They also looked at these factors at the time of the bankruptcy filing.

The researchers looked at whether the CEO also served as chairperson of the board and whether the majority of directors were dependent or independent. Dependent directors were either employed in management or nominated by the current CEO. Independent board members were defined as directors who were not employed by the firm and were appointed prior to the arrival of the CEO.

"In the five- and three-year time periods prior to filing, the bankrupt firms were three to four times more likely than the successful firms to rely on the joint CEO-chairperson structure and dependent board membership," Daily said.

Centralizing management and erecting barriers to prevent the outside community from knowing about company troubles aren't the answers. Daily and Dalton said that outside directors can marshal helpful resources and information that may be unavailable to firms with inside-dominated boards. They also can also help the organization manage its relationships with banks and other creditors and constituents.

The researchers found that some of the firms that eventually became bankrupt changed their governance structures, but waited too long to do it.

"At the time of filing, there was no difference in the propensity toward leadership structure between the bankrupt firms and the successful ones. Evidently, the financially troubled firms were changing, but in the final two years companies were in a death spiral, so the changes were not effective."

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Contact: Catherine Daily, (614) 292-4102

Written by Tom Spring, (614) 292-8309