How Reported Board Independence Overstates Actual Board Independence in Family Firms: A Methodological Concern

Despite successive codes of best practice of France, Germanyand the UK highlighting the importance of the independenceof non-executive directors, the codes tend to ignore thelinks that directors of family firms might havewith thecontrolling shareholders. This is of particular concern forfirms with concentrated family control as terisk of minorityshareholder expropriation is greater for such firms. Thispaper proposes a new measure of board independence forfamily firms. Using a sample of listed French, German andUK family firms with an incumbent family CEO due forre-appointment or replacement over 2001-2010, we show thatour measure of board independence is significantly lowerthan reported board independence. In contrast to reportedboard independence, our measure is a good predictor ofthe type of new CEO succeeding the incumbent CEO. Ourresults suggest that conventionally defined, orreported,board independence is biased and fails to provide investors,including minority shareholders, with an accurate measureof board independence. This conclusion has important policyimplications for regulators and best practice in corporate governance.