Board Composition and Corporate Control : Evidence from the Insurance Industry

We investigate the role of outside directors in the corporate-control process by exploiting variation in ownership structure within the insurance industry. In mutuals, ownership rights are not transferable. This inalienability restricts the effectiveness of control mechanisms like external takeovers, thus increasing the importance of monitoring by outside directors. Consistent with this hypothesis we find: (1) mutuals employ more outside directors than stocks; (2) firms that switch between stock and mutual charters make corresponding changes in board composition; (3) mutuals' bylaws more frequently stipulate participation by outside directors; and (4) mutuals with more outside directors make lower expenditures on salaries, wages, and rent