The Effects of Legal Measures to Empower Supervisory Directors: Evidence from a Financial Distress Perspective

Abstract

A great number of studies have been conducted over the past 20 odd years in search of the Holy Grail of corporate governance: the relationship between the corporate governance structure of a company and its financial performance. These studies predominantly hypothesize that ‘better’ corporate governance generates better corporate performance. The analysis is ‘upward-performance’ directed. This paper stresses that the ‘downward performance’ issue i.e. how does the company handle arising serious financial difficulties, is equally important, since it affects the sustainability of the company. A governance structure that facilitates the company to discover, analyse and solve its problems in a timely manner will improve the chances to avoid or survive serious financial difficulties. Our analysis shows that measures to strengthen the position of supervisory directors, to require a minimum number and a minimum availability are statistically significantly more often found in the control group of companies than in our financially distressed group. As for measures to ascertain independence and diversity of supervisors, our results suggest that these provisions have opposite effects. Control companies have less diverse and less independent supervisory boards than financially distressed companies.