Ownership, Board Structure, and Institutional Context of Business Groups : The Role of the Apex Firm

Research Question/Issue: This study seeks to understand both how hierarchical business groups configure the structure of the boards of directors of subsidiary firms, and what is the effect of the institutional context on this configuration.Research Findings/Insights: We find that the proportion of outside directors on the board of a subsidiary firm is positively related to the proportion of outside directors in the apex firm. The larger the difference between the institutional context of the apex firm and the subsidiary, the greater is the proportion of outside directors in the subsidiary, and the lower is the transmission of the board structure from the apex firm to the subsidiary.Theoretical/Academic Implications: Grounding on agency theory and on resource dependence theory respectively, we provide evidence on the role of the structure of the boards of directors of subsidiaries in controlling the agency conflict between the apex firm (principal) and the subsidiary (agent), and on the role of the subsidiary’s board to obtain the necessary resources to adapt to its local institutional context.Practitioner/Policy Implications: Business groups may consider our findings useful when designing the boards of directors of their subsidiaries. Moreover, corporate governance regulators could consider the subsidiary board structure as a mechanism both to solve the agency conflict between the apex firm and the subsidiaries and to provide resources to the subsidiaries. Regulators should also pay attention to foreign apex firms from countries with a similar institutional context, as drivers of the diffusion of foreign corporate governance practices