Greenmail: A Study of Board Performance in Corporate Governance

Abstract

The author thanks David Larcker for his assistance and support in designing this study, and the following people for their constructive comments on earlier versions of this manuscript: Barry Baysinger, Robert Dewar, Robert Duncan, Gareth Jones, and the associate editor and anonymous reviewers of ASQ. Based on predictions from agency theory and a theory of managerial hegemony, this study compares the board structure of 53 companies that privately repurchased stock at a premium above the market place-i.e., paid greenmail-and 57 companies that resisted greenmail. The decision to pay greenmail is used as a proxy for the board's ineffectiveness, which is defined as the inability of the board's outside directors to prevent management from making decisions-such as paying greenmail-that are in conflict with stockholders' interests. Boards that effectively resisted greenmail were found to have more outside directors, more directors with executive experience, and more directors who represented interorganizational transactions than boards of companies that paid greenmail.'