Does mandated independence improve firm performance? Evidence from New Zealand

Purpose This paper aims to examine the relationship between board independence and firm performance for publicly listed New Zealand (NZ) firms over the period 2004-2016. Design/methodology/approach To address endogeneity concerns, the relationship between firm performance and board independence is modelled using three different approaches: firm fixed-effect estimation, difference-in-difference estimation and two-stage least squares estimation, while controlling for firm and governance characteristics. Findings The main finding is that the mandated board independence introduced by the Best Practice Code does not improve operating or market performance for listed NZ firms. Research limitations/implications The fact that NZ firms choose greater board independence than required is puzzling. Research examining director characteristics and connectedness, not captured by the NZX Code, may be a fruitful area for future research when disclosure allows. Practical implications Regulators may need to review reasons for mandating changes in factors affecting firm governance before implementing further regulations concerning board structure. Social implications The findings cast doubt on the benefit of mandated board independence for NZ firms. The results imply that good governance practices proposed by regulators are not universal. Originality/value This paper tests the impact of mandated board independence following the adoption of the Best Practice Code in 2004 using methodologies that account for endogeneity using 13 years of data.