Academic journal article Academy of Accounting and Financial Studies Journal

Pressures for the Creation of a More Independent Board of Directors in the Post-Restructuring Period

Academic journal article Academy of Accounting and Financial Studies Journal

Pressures for the Creation of a More Independent Board of Directors in the Post-Restructuring Period

Article excerpt

INTRODUCTION

Corporate restructuring has been a significant area of interest in helping to understand the limits of firm growth, the implications of changes in the firm's business portfolio, as well as the effectiveness of changes in organizational and capital structures (Bergh, 2001; Bowman & Singh, 1993; Johnson, 1996). Portfolio restructuring involves the process of divesting and acquiring businesses that entails a refocusing on the organization's core business(es), resulting in a change of the diversity of a firm's portfolio of businesses (Bowman, & Singh, 1993; Bowman, Singh, Useem & Bhadury, 1999).

A multitude of empirical and theoretical investigations into the antecedents of restructuring revealed that the premier explanation of asset restructuring is the agency explanation, which suggests that firms engage in restructuring as a direct response to less-than-desirable performance (Hoskisson & Hitt, 1994; Hoskisson, Johnson & Moesel, 1994; Johnson, 1996; Johnson, Hoskisson & Hitt, 1993). Additionally, it is posited that the suboptimal performance is driven by managerial inefficiencies arising from weak governance mechanisms. Due to its overwhelming acceptance by researchers, the agency explanation has made portfolio restructuring synonymous with weak or poor governance (Bethel & Liebeskind, 1993; Chatterjee, Harrison & Bergh, 2003; Markides & Singh, 1997). Research has not proven that governance is weak in the pre-restructuring period, yet this school of thought has become ingrained in the literature.

One area that has received little attention is post-restructuring governance. In calls for future portfolio restructuring research, Johnson (1996) asked if governance is truly weak or a complete failure in the pre-restructuring period, then what changes does a firm make in the post-restructuring period? The basic implications of this question is that if firms do not correct such inefficiencies or shortcomings, then the process of portfolio restructuring may be followed by renewed expansion or continued inefficiencies in various governance mechanisms.

This paper argues that firms suffering from poor performance in the pre-restructuring period will initiate governance changes in the post-restructuring period. The belief is that it is common for these firms to have their governance structures labeled as weak or inadequate. As such, boards of directors and the CEO are pressured to not only address the performance issues but also address the governance issues that are frequently linked with poor performance.

To date, there has been no empirical examination that specifically addresses governance as an outcome of the restructuring process. Governance is the most discussed antecedent of portfolio restructuring, yet it is completely ignored in the post-restructuring period. Due to its overwhelming popularity, the agency explanation of restructuring suggests that firms suffering from poor performance in the pre-restructuring period will be saddled with the same weak governance structures they possessed in the pre-restructuring period if corrective actions are not taken. As such, the idea of governance reforms in the post-restructuring period has merit, but is yet to be addressed in the restructuring literature.

By drawing on the basic tenets of institutional theory (DiMaggio & Powell, 1983; Meyer & Rowan, 1977), this paper suggests that firms redesign their governance structures in post-restructuring periods to enhance, or even maintain, organizational legitimacy (Oliver, 1991). By changing governance structures that adhere to the prescriptions of rationalizing myths in the institutional environment, an organization may demonstrate that it is behaving on collectively valued purposes in a proper and adequate manner (Meyer & Rowan, 1977). Thus, by not making changes in post-restructuring governance structures, the firm becomes more vulnerable to claims that they are negligent or irrational. …

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