Board Structure and the Governance Role of Independent Board in Dual-Class Firms

I study the board structure of a sample of dual-class firms from 1996 to 2002, and relate it to the degree of control-cash flow rights divergence. Compared to a group of matched single-class firms with similar contracting environment when ownership structure was made, dual-class firms have slightly bigger and less independent board. Two measures of control-cash flow rights divergence are used: voting control divergence and board seat control divergence. I document that board size increases in board seat control divergence at a decreasing rate, and board independence decreases in voting control divergence at an increasing rate. Board independence also optimally decreases in CEO incentive alignment. Over time, more dual-class firms adopt an independent board mechanism. For those who do so, an independent board helps reduce firm value discount and CEO percentage cash compensation arising from the agency problems associated with disproportional ownership structure. Therefore, independent board plays a marginally significant monitoring role in dual-class firms to limit agency costs