A Comparison Between One-Tier and Two-Tier Board Structures in France

A Comparison Between One-Tier and Two-TierBoard Structures in France

Benedicte Millet-ReyesDepartment of Finance, Economics and Real Estate, Leon Hess Business School, MonmouthUniversity, West Long Branch, NJe-mail: [email protected]

Ronald ZhaoDepartment of Accounting, Leon Hess Business School, Monmouth University, West LongBranch, NJe-mail: [email protected]

Abstract

French companies operate in a unique environment characterized by the strong involve-ment of block shareholders such as families and banks. Furthermore, the French legalsystem allows rms to choose between a one-tier or a two-tier board structure. This studyinvestigates whether this choice can aect the rms operating and stock performance. Ourregression results provide strong evidence that ownership and board structures are usedtogether as corporate governance tools. In particular, the agency cost of debt is stronglyaected by their interaction when institutional investors are also bank lenders. Our testresults show that while family control has a negative impact on corporate governance,French institutional blockholders play a positive role as monitors of one-tier structures. Incontrast, they are more likely to misuse the two-tier board system by promotinginterlocked directorship, board opacity and their own interests as creditors. Our regressionanalysis reveals that foreign institutional investors do not have any impact on rmperformance, regardless of board structure. Finally, we do not nd any inverse relation-ship between board size and eciency in France.

1. Introduction: The Impact of Board Structure, Institutional Investorsand Creditors

Corporate governance relies on a variety of institutional factors, such as

ownership characteristics and board structure, aimed at aligning the

interests of stakeholders. Most countries have adopted only one of the

two following board structures: the rst is the unitary board of directors

used in common law countries, and the second, the two-tier board

structure, is used in several code law countries. France is one of the few

countries that allow rms to choose between a one-tier or two-tier board

The authors want to express their gratitude to Professor Frederick Choi (the editor) and twoanonymous reviewers for their constructive comments and helpful suggestions. The usualdisclaimer applies.

Journal of International Financial Management and Accounting 21:3 2010

r 2010 Blackwell Publishing Ltd., 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA.

of directors. This study explores the links between board structure,

ownership characteristics and rm performance in France. Large institu-

tional investors can improve rm monitoring and mitigate conicts of

interest with creditors. However, they can also exacerbate agency costs if

they behave as insiders, and tend to expropriate wealth from small

investors by concentrating on their xed claims. In this study, we pay

particular attention to the role of institutional blockholders on the

agency cost of debt under alternate board structures.

The paper is organized as follows. Section 2 reviews the existing

literature on corporate governance mechanisms with an emphasis on

board characteristics, ownership concentration, institutional investors

and the role of debt. Section 3 concentrates on the specicities of

corporate ownership and governance in France. We develop our hy-

potheses and the regression models used for this study in Section 4. The

data description and our test results are given in Section 5. Concluding

remarks are provided in Section 6.

2. Corporate Governance Mechanisms Around the World

2.1. Agency Versus Stakeholder Theory

In the United States, corporate governance issues stem mostly from con-

icts of interests between managers and dispersed shareholders, which

are usually studied within the framework of principalagent theory.

However, agency theory has several deciencies, especially in accounting

for country dierences in corporate governance. First, the theoretical

assumptions of agency theory do not include the diverse identities of

stakeholders within the principalagent relationship. Dierent types of

investors (such as the state, banks, families, etc.) pursue dierent

interests. Easterbrook (1991) suggests that there are substitute means

of controlling the agency costs that arise from professional management

and the separation of ownership from control. Block shareholdings and

forcing managers to return often to capital markets are two ways to

reduce these costs. The second limitation of agency theory is that it

overlooks important interdependencies among corporate stakeholders

because of its exclusive focus on the bilateral contracts between princi-

pals and agents. For example, agency theorists treat employment rela-

tions as exogenously determined by labor markets despite the employee

voice within corporate boards of many European rms. In a broader

sense, corporate governance relies on the structure of rights and

280 Benedicte Millet-Reyes and Ronald Zhao

r 2010 Blackwell Publishing Ltd.

responsibilities among all the parties with a stake in the rm. This view is

reected in the principles of corporate governance by the Organization

for Economic Cooperation and Development (1997), which describes

corporate governance as a set of relationships between a companys

board, its shareholders and other stakeholders. This principle forms the

basis for stakeholder theory that examines corporate governance in terms

of three major groups: capital, labor and management. It posits that

successful managers must systematically attend to the interests of these

stakeholders because, besides shareholders, corporations have duciary

duties to other constituencies as well, such as creditors and employees

(McDonnell, 2002).

Corporate governance mechanisms can be seen as falling into two

main categories, either internal or external. Internal governance tools

include the board of directors, subcommittees of the board, compensa-

tion programs designed to align the interests of managers and share-

holders and other corporate control systems. External governance

mechanisms include accounting rules and regulatory reporting require-

ments, external auditors, the investment community, nancial analysts,

national laws and the shareholders themselves. Agrawal and Knoeber

(1996) give a dynamic overview of these mechanisms by examining seven

approaches to control conicts of interest between corporate stake-

holders: shareholdings of insiders, institutions, blockholders, outside

directors, debt policy, the managerial labor market and the market for

corporate control. The authors nd interdependence among these

mechanisms, meaning that where one is used less, others may be used

more, resulting in equally good corporate performance.

In Europe, the deregulation and globalization of capital markets has

created the need for corporate governance principles that provide stand-

ards and accountability to domestic and international investors. The

protection of minority shareholders against insiders, blockholders and

creditors has been the main concern for European rms. Our paper

concentrates on three governance mechanisms (board characteristics,

institutional ownership and debt nancing) because of their specic

relevance to the French corporate environment.

2.2. Evidence on Board Characteristics and Corporate Performance

Previous research on the eciency of board structure has focused on the

activity of a unitary board of directors. Empirical studies mainly address

three issues: the size of the board (Jensen, 1993; Yermack, 1996; Huther,

Comparison Between One-Tier and Two-Tier Board Structures 281


1997; Eisenberg et al., 1998); its composition and independence

(Baysinger and Butler, 1985; Hermalin and Weisbach, 1988; Rosenstein

and Wyatt, 1997; Bhagat and Black, 1999); and its internal structure and

functioning (Klein, 1998; Vafeas, 1999). Most of the studies claim to have

found empirical ties between some features of a unitary board of

directors and rm performance, but the empirical results are frequently

contradictory (Andres et al., 2005). From a theoretical point of view,

few papers have considered endogenous board structure criteria in

order to achieve the optimal corporate governance system by which

companies are directed and controlled (Warther, 1998; Hermalin and

Weisbach, 2003). In particular, little empirical evidence is available on

board categories (one-tier versus two-tier) because most countries allow

only one type of board structure.

The 2007 report on corporate governance in Europe published by

Heidrick and Struggles provides a good overview of board types in

Europe. In their classication, the rst board category is limited to two-

tier structures. It includes the German two-tier system and the French

legal board structure called conseil de surveillance, the supervisory

board. Only 22 per cent of companies follow this board structure in

Europe. The second category is the unitary board structure of the United

Kingdom and Spain. The third category includes countries like Belgium,

Italy, Portugal, Sweden and Switzerland, where a system of two boards

allows some executive board directors to sit on the non-executive board.

The improvement in corporate governance among the top 300 rms of

this study is revealed by the fact that 98 per cent of them now have an

audit committee, 95 per cent have a remuneration committee and 80 per

cent a nomination committee. The average board size has decreased from

13.5 in 1999 to 12.8 in 2007. The United Kingdom (unitary board only)

has an average of 8.3 directors whereas Germany (two-tier board only)

has an average of 19.1 directors. However, evidence on Germany reveals

that supervisory boards are often seen as opaque, with an elite group of

non-executive directors running most of the top companies (Financial

Times, 9 May 2007).

The most recent empirical studies on board characteristics usually

report that large boards are more likely to suer from communication

and agency problems, which aect corporate performance in a negative

way. Cheng (2008) provides evidence that larger boards lead to lower

performance variability because it is harder to reach consensus on drastic

changes in corporate strategies. As a result, it is easier for the chief

executive ocer (CEO) to control the decisions of a larger board.



Another factor inuencing corporate boards is the existence of large

blockholders. Dahya et al. (2008) document that countries with weak

investor protection benet from strong boards because they can oset the

power of large shareholders. A strong board includes more independent

directors and leads to less diversion of corporate resources. Last, Devos

et al. (2009) show that the presence of interlocked directors in U.S.

boards is associated with poor rm performance and weak governance.

2.3. Large Shareholders and Corporate Performance

The impact of large shareholders on corporate performance varies across

countries. La Porta et al. (1998) report that French-civil-law countries

have the weakest legal protection of investors and that ownership

concentration is negatively correlated to the degree of shareholder

protection. By creating a core of strong insiders, ownership concentra-

tion modies the interests of minority shareholders. On the one hand,

blockholders can strengthen monitoring and reduce conict of interests.

Historically, this has been the role of bank owners in countries like

Germany, France or Japan. Empirical evidence shows that these institu-

tional investors provide useful internal monitoring, improve access to

debt and mitigate conict of interest between shareholders, creditors and

managers. Shleifer and Vishny (1997) report a positive association

between institutional ownership and rm value. Banks may own blocks

of equity and exercise proxy votes for their clients. They are perceived as

long-term, active and informed investors who oversee corporate invest-

ments and organize internal capital markets. Also, rms with bank

owners often benet from lending relationships and privileged access to

capital markets. On the other hand, critics argue that banks enlarge

agency problems when they have large shareholdings, control access to

external capital markets and issue loans to the rm (Wenger and Kaserer,

1998). Their role as providers of debt may then conict with the interests

of minority shareholders.

Ownership concentration may also be detrimental to minority share-

holders because large blockholders, such as family owners, are liable to

misuse their inside power. Expropriation by insiders can take the form of

stealing prots, asset stripping, unqualied management and excessive

consumption of perquisites. In their study of Finnish rms, Maury and

Pajuste (2005) show that corporate value is increased when voting powers

are distributed more equally, especially when family-controlled rms

have a nancial institution as a second largest shareholder. La Porta



et al. (1999) provide evidence that reducing the expropriation of minority

shareholders can lead to higher market values. They show that rms

operating in countries with better investor protection (measured by their

anti-director rights and legal system) have a higher Tobins Q. Thomsen

et al. (2006) study the causality between large ownership and corporate

performance. Using Granger tests, they nd that block ownership is

associated with lower subsequent market and accounting value in civil-

law countries. For bank-based economies, Koke (2004) provides evi-

dence that concentrated ownership reduces the probability of control

change. Last, Anderson et al. (2009) study the role of founders and heirs

in U.S. corporate governance. They nd that entrenchment activities

dominate over their role as monitor in-place.

2.4. Institutional Investors and Creditors: The Role of Debt

Recent empirical studies have shown that debt ratios can be a good

measure of the role played by institutional investors and bankers on the

board. Because large institutional shareholders are often banks who need

to represent both equity owners and lenders, their eect on corporate

performance has resulted in mixed interpretations. On the one hand, they

can be active monitors who use inside information and their role on the

board to improve rm performance and optimize the cost or level of debt

nancing. On the other hand, the agency cost of debt may be higher if

banks use their inside position to expropriate wealth from shareholders.

Kroszner and Strahan (2001) show that U.S. bankers sit on corporate

boards only when potential conicts between creditors and shareholders

are low. Banks tend to be active monitors in large and stable rms with

high tangible assets that can be used as collateral for debt claims. Byrd

and Mizruchi (2005) examine the role of board-appointed bankers, and

nd that the presence of lending bankers on a companys board has a

negative impact on the rms debt ratio. This is because higher leverage

may trigger stronger conict of interests between shareholders and

creditors. Jiraporn and Kimberly (2007) show that U.S. rms adopt

higher debt ratios when investor rights are restricted. Under such

circumstances, leverage is used to limit agency conicts between owners

and managers. However, their ndings also show that the negative

correlation between debt and shareholder rights disappears in regulated

industries, suggesting that regulation is an alternative mechanism for

controlling agency costs.



3. Corporate Ownership and Governance in France

3.1. Ownership Characteristics in France

Although France shares some common history with its European

neighbors, it has experienced a unique form of economic development.

One of the main factors in dierentiating the French economy from

others is its traditional dependence on families and French banks (Zhao

and Millet-Reyes, 2007). The French emphasis on family-owned business

may explain why French companies went public at a slower rate than

their British and German counterparts. The states strong role in the

economy, known as dirigisme, is another main factor aecting govern-

ance in France. State intervention increased after the formation of the

Fifth Republic until the 1990s, when the state initiated a new privatiza-

tion plan, in response to pressure from the European Union and

criticisms about the inecient functioning of public enterprises (Millet-

Reyes, 2000). However, the states control over private companies still

extends indirectly through the banking system. Many of the privatized

nancial institutions still have government-appointed directors on their

boards.

Shareholdings in French companies are highly concentrated. The

French system of concentrated ownership may be an outgrowth of the

national tradition of family ownership with company founders retaining

majority interests in companies, as well as the result of the large owner-

ship interests by the state and/or banks in private companies. In addition,

blockholding is also the result of the cross-shareholding structure.

France has developed a complex system of cross shareholding (the

verrouillage system), in which shares are parked with friendly com-

panies, accounting for an estimated two thirds of the shares traded on the

Bourse (Monks and Minow, 2004). The cross-shareholding structure

consists of related companies, therefore, diminishing any one companys

incentive to monitor the behavior of another company. Furthermore,

companies are often connected by interlocking boards, where a director

of one company sits on the board of another company, and vice versa.

This system of interlocking boards encourages collusion among direc-

tors, as a manager of one company may be reluctant to criticize another

companys manager when the two sit on each others boards.

The dening characteristic of the French corporate governance (le

gouvernement dentreprise) system has long been the absence of a diverse

investment community because the state, banks and families still hold

controlling interests in most companies (see Faccio and Lang, 2002).



However, in the wake of corporate scandals in the 1990s, many French

companies began to extricate themselves from cross-shareholding

arrangements. Some did so in response to minority shareholder demands

for greater shareholder value. Others initiated corporate restructuring to

attract more foreign investors who prefer to provide funds to companies

with transparent management process. In response to these new investor

needs, France issued two codes of best practice, Vienot I (1995) and

Vienot II (1999), which proposed signicant reforms to board structures

and were aimed at promoting corporate transparency and accountability.

3.2. Characteristics of One-Tier Versus Two-Tier Board Structures

3.2.1. Legal dierences. One unique feature of the French corporategovernance system stems from the rms ability to choose its board

structure. Before 1966, French companies could only be governed by a

unitary board of directors, as is the case in most common law countries

like the United States or the United Kingdom. The Commercial Code of

1966 introduced the option to choose an alternate legal governance

structure, the two-tier board, which closely resembles the German

Vorstand/Aufsichtsrat structure. French companies are now allowed to

choose between a unitary board structure, with a combined chairman

and chief executive ocer (PDG), and a two-tier structure with a

supervisory board (conseil de surveillance), management board (direc-

toire) and separate chairpersons. The role of the supervisory board is to

oversee the management board that runs day-to-day operations. Em-

ployees must constitute up to one third of the rms supervisory board,

depending on the size of the rm. This codetermination structure of two-

tier boards implies that a sizable fraction of the non-executive directors

cannot be appointed by shareholders. Thus the uncoupling of control

rights and cash-ow rights makes codetermination potentially important

to the extent that the supervisory board controls the important decision-

making of the rm. Although most companies opt for the single-tier

system, the two-tier board is currently adopted by a number of large

French companies and favored by many corporate governance reformers.

A unitary board is generally composed of at least three and no more

than 24 directors, both executive and non-executive, who elect a single

PDG to act as both chairperson and CEO. Executive directors ordinarily

participate in the daily management of the company. The board typically

meets every 2 months. At these meetings board members are primarily

responsible for authorizing new capital and corporate reorganizations



(Caussain and Richard, 1995). Although the law authorizes shareholders

to appoint members of the unitary board, in practice, the PDG selects

board members, subject to shareholder approval at the general meeting.

This results in the prevalence of powerful PDGs and passive board

members.

In a two-tier board structure, the directorate consists of three to ve

members, and each member is appointed to a term of 4 years by the

supervisory board. The supervisory board also selects a presiding member

from among the members of the directorate. No member of a directorate

may sit on more than two corporate boards. The supervisory board

consists of a minimum of three and a maximum of 24 members, who are

appointed and dismissed at the shareholder meetings. No more than one

third of supervisory board members may be employees of the company,

who are elected to the board by their fellow employees. The supervisory

board members select a chairperson from their ranks, who is responsible

for presiding over both board and shareholder meetings. The supervisory

board meets three to four times a year, and its responsibility is to monitor

the directorate and report its ndings to shareholders. The members of the

directorate must submit quarterly reports to the supervisory board.

3.2.2. Pros and cons of two-tier boards. Aste (1999) summarized theinternal strengths of the two-tier board system as follows. First, there is

clear delineation of the directors responsibilities between the supervisory

and management board. Second, the small size of the directorate (three

to ve members) allows for quick decision-making. Third, the two-tier

structure helps non-traditional candidates to rise to the ranks of

directors, creating more diversity in the boardroom. Fourth, the two-

tier board generally generates good publicity and helps companies to

attract foreign capital. Last, it can be used to satisfy the interests of

merging companies by providing each of the former PDGs with leader-

ship positions (one as the head of the directorate and the other as head of

the supervisory board). Consequently, international parent companies

often impose the two-tier board on their French subsidiaries. This is

especially common among German parent companies, which prefer using

the familiar Vorstand/Aufsichtsrat structure for their French subsidiaries

(Berger, 1991).

The advantages of the two-tier board structure have been acknowl-

edged in reports by various European organizations, including the

European Commission (1991) and the Organization for Economic

Cooperation and Development (1997). However, the two-tier system is



not problem-free. First, interlocking directorship often takes place, with

members of the directorate and supervisory board of one company

sitting on those of other companies. The second problem is that

companies frequently adopt a two-tier structure for political as opposed

to economic reasons. For example, a director who has to resign from the

directorate (management board) can be appointed to the supervisory

board, therefore providing him with a graceful exit. As a result, the

two-tier board has the potential to be misused as a tool for entrenching

mangers as opposed to making them accountable to shareholders. Third,

a company may also alternate between unitary and two-tier board

structures. For example, when a new generation of directors rises to

power, the older directors may lack condence in the new directors

abilities and, therefore, would restructure the company so as to retain a

formal supervisory role. This may hinder the rms ability to implement

necessary operating and nancial changes (Aste, 1999).

4. Hypotheses and Models

4.1. The Impact of Board Structure on Performance

A recent study by Larcker et al. (2007) reviews a broad sample of

structural indicators of corporate governance tested in previous works.

The authors use principal component analysis to investigate whether

these indicators are useful in understanding managerial behavior and

corporate performance. The criteria used fall into seven categories:

characteristics of the board, stock ownership by executives and board

members, stock ownership by institutions, stock ownership by active

holders, debt and preferred stock holdings, compensation mix variables

and anti-takeover devices. They nd that rms with a greater proportion

of blockholders, a compensation mix that is weighted toward accounting

performance, lead directors, smaller boards and fewer busy directors

exhibit superior future operating performance. They conclude that the

typical structural indicators of corporate governance in academic re-

search and institutional rating services have only a modest ability to

explain accounting manipulation, but exhibit some ability to explain

future operating and stock performance.

Our rst hypothesis builds on these ndings to examine the impact of

board structure (one-tier versus two-tier) on the operating and stock

performance of French rms. In France, the responsibilities of the two

organs in a two-tier board structure are intended to be separate and



clearly discernible. The directorate executes decisions and manages the

company under the authority of the CEO. The supervisory board

monitors decisions and exercises control over the company under the

authority of the chairperson. We test whether structural dierences

between one-tier and two-tier boards have a signicant impact on

corporate performance. Stated in the null form (H0), the rst hypothesis

is the following:

H1: The two-tier, versus one-tier, board structure does not generate

signicant dierences in operating and stock performance.

We use the following model to test H1:

Y Family Trading SizeGrowthDebtD1 SizeD1GrowthD1DebtD1 1

where Y5OCF, ROA and Tobins Q, respectively, OCF5 (Net income

1Depreciation expense)/Total assets, ROA5Net income/Total assets,

Tobins Q5Market value of common equity/Book value of common

equity, Family5 1 (0) if family owns at least (less than) 40 per cent of the

rm, Trading5 1 (0) if the rm stock is listed for continuous trading

(auction only), Size5Log of total assets, Growth5 per cent change in

net income between period t and t 1, Debt5Debt/Total assets ratio,D15 1 (0) if two (one)-tier board structure, Size D1, Growth D1and Debt D1 are two-way interactions.

Three dependent variables are used to proxy for rm performance:

OCF (ROA) is a cash (accrual)-based measure of operating performance

and Tobins Q is a market-based measure of stock performance. OCF

provides information on shareholders cash-ow rights, whereas the

dierence between OCF and ROA has implication for accounting

manipulation. Tobins Q measures the market response to the rms

equity and investment opportunities. The discrepancy between the

proxies for operating and stock performance reects the gap between

shareholders cash-ow and control rights. Two dummy variables,

Family and Trading, are used to control for major features of the French

economic system: dominant family ownership of businesses and segmen-

ted capital markets. The variable Family measures majority ownership

control at the 40 per cent level. Trading distinguishes between rms listed

on the continuous trading versus auction markets, with rms listed on

the former enjoying greater stock liquidity. Size, growth and debt

ratio are explanatory variables used to measure rms operating,



investing and nancing proles. Following conventional wisdom, we

expect good corporate governance indicators to be statistically asso-

ciated with positive performance measures. We expect the board struc-

ture dummy (D15 0 for one tier, D15 1 for two tier) to be signicant

across all three performance measures, therefore indicating that board

type has an impact on the operating and stock performance of French

rms.

4.2. Interaction of Ownership and Board Structure

It is worth noting that four of the seven categories of governance

indicators surveyed by Larcker et al. (2007) are related to ownership

structure. This strongly suggests that corporate board choices cannot be

evaluated independently from stakeholder characteristics. Such a case is

especially true for France, where the monitoring functions of the board

are often controlled by large blockholders (Zhao and Millet-Reyes,

2007). Our second hypothesis tests whether the impact of board structure

on rm performance varies across ownership structures.

H2: Block shareholding does not modify the impact of board structure

on the operating and stock performance of French rms.

We hypothesize that the impact of a board structure on performance

will reect whether blockholders monitoring functions dominate over

their incentives to behave as insiders. In theory, the separation of

responsibilities between the supervisory and management boards that

characterizes two-tier board structures should contribute to the indepen-

dence and eectiveness of board decisions. In the absence of bloc-

kholders such as families or institutional investors, both tiers of the

board should be able to execute their prescribed responsibilities in the

interests of the majority. However, dominant shareholders may have

incentives to divert corporate resources from other stakeholders by

exploiting the complexity and opacity of a two-tier board system. Under

such circumstances, a two-tier board would lose its structural advantages

and facilitate wealth transferring activities.

We pay particular attention to a rms debt ratio as a proxy for the

conicts of interest between shareholders and creditors. Previous re-

search on U.S. corporate capital structure has emphasized the role of

agency conicts between managers and shareholders on the rm nan-

cing decisions and cost of capital (Jensen and Meckling, 1976; Stulz,

1990). In a creditor-oriented market like France, blockholders provide



both equity and debt capital to companies and may aect rm perfor-

mance in dierent ways. If there is a coincidence of interests between

majority shareholders/creditors and minority shareholders, the former

will exert a benign inuence and reduce the cost of debt. However, if their

interests are not aligned, blockholders will dominate at the expense of

minority shareholders and may increase the cost of debt (Gordon and

Schmid, 2000). Therefore, a boards ability to protect minority share-

holders will be constrained by blockholders who inuence the rms

capital structure and cost of debt.

In H2, we test the roles of two types of blockholders in France:

families and institutional investors. First, we remove the Family dummy

from equation (1) and split the whole sample into two groups based on

whether family ownership is greater or smaller than 40 per cent (majority

control). Then, we add an institutional ownership dummy (D25 1 for

French institutional ownership, and D25 0 for no French institutional

ownership) to equation (1), and run the model on the two subsamples.

Hypothesis 2 becomes

Y Trading SizeGrowthDebtD1D2 SizeD1GrowthD1DebtD1 SizeD2GrowthD2DebtD2 SizeD1D2GrowthD1D2DebtD1D2

2

where Size D1 D2, Growth D1 D2 and Debt D1 D2 arethree-way interactions. All other variables are as dened in equation (1).

The interactions terms of D1 with other variables would enable us to

evaluate how the role of board structure is aected by the ownership

structure under which it operates.

4.3. Impact of Foreign Institutional Ownership and Board Size

We develop H3 to test two new factors that may aect board eective-

ness: foreign institutional ownership and board size. We investigate

whether their roles dier between one-tier and two-tier boards based

on the following rationale. First, foreign institutional investors, as

opposed to their French counterparts, are often minority shareholders

rather than insiders. They dier from French institutional investors,

especially bank lenders, because they do not provide debt nancing to the

rm. Therefore, their impact on rm performance may be limited

regardless of board type. Second, studies of unitary board structures in



common law countries suggest an inverse relationship between board size

and eciency. We examine whether this relationship holds in France

where blockholders and two-tier boards exist.

H3: Foreign institutional ownership and/or board size do not generate

signicant dierences in operating and stock performance.

We split the sample into two categories based on board type and

consequently remove the dummy D1 from equation (1). Next, we add

two new variables: a dummy for foreign institutional ownership (D35 1

for foreign institutional ownership and D35 0 for no foreign institu-

tional ownership) plus a continuous variable for Directors (number of

board members). Hypothesis 3 becomes

Y Family TradingDirectors SizeGrowthDebtD2D3DirectorsD2 SizeD2GrowthD2DebtD2DirectorsD3 SizeD3GrowthD3DebtD3

3

A comparison of the test results for the two groups will indicate if the

role of foreign institutional ownership and board size diers between

one-tier and two-tier boards.

5. Sample Data and Test Results

5.1. Sample Construction and Descriptive Statistics

The sample consists of 665 rm-year observations covering 174 French

companies from 28 industries over the period 20002004. Ownership and

board structure information was obtained from the database Dafsaliens

for 2004. Financial data were collected from Bloomberg. The sample is

based on all non-nancial rms that were publicly traded on the second

market for the period of 19982004. Table 1a reports descriptive statistics

on the whole sample and also by board structure categories (one tier

versus two tier). The sample includes 57 rms with a two-tier board (33

per cent of the sample). In comparison, 18.3 per cent of the 1,033 publicly

traded rms in France in 2004 had a two-tier structure. The larger

proportion of rms with a two-tier board in our sample may be explained

by the greater number of younger and medium-sized corporations with

initial public oerings in the late 1980s and 1990s, a period when the two-

tier board structure regained popularity.



Table 1a reports the sample means and quantiles for all dependent and

explanatory variables used in the regression analysis. Denitions of the

variables are given below each table. The median number of directors is

six (the mean is 6.19) for one-tier boards, and nine (the mean is 9.52) for


Table 1a. Descriptive statistics for full sample

Mean 25% (Q1) Median 75% (Q3)

Number of directorsWhole sample 7.35 5 7 9One tier 6.19 4 6 8Two tier 9.52 7 9 12

Family own. %Whole sample 47.69 16.4 57.1 72.1One tier 42.28 16.2 57.1 72.3Two tier 48.46 21.1 57.2 72.1

French own. %Whole sample 5.95 0 0 6.9One tier 6.30 0 0 7.1Two tier 5.28 0 0 6.9

Foreign own. %Whole sample 1.30 0 0 0One tier 1.41 0 0 0Two tier 1.11 0 0 0

Total assetsWhole sample 298.9 40.6 92.3 248.0One tier 346.0 38.6 85.7 229.5Two tier 210.3 44.8 96.5 268.2

Growth NIWhole sample 0.048 0.668 0.021 0.436One tier 0.191 0.709 0.030 0.475Two tier 0.220 0.613 0.011 0.347

Debt/assetsWhole sample 0.648 0.512 0.644 0.763One tier 0.667 0.516 0.652 0.772Two tier 0.613 0.502 0.629 0.733

OCFWhole sample 0.076 0.044 0.080 0.117One tier 0.077 0.041 0.078 0.120Two tier 0.073 0.048 0.082 0.113

ROAWhole sample 0.024 0.002 0.031 0.064One tier 0.023 0.001 0.031 0.064Two tier 0.026 0.007 0.033 0.064

Tobins QWhole sample 1.415 0.976 1.169 1.535One tier 1.433 0.993 1.183 1.574Two tier 1.380 0.929 1.118 1.495

Notes: French own. % is the percentage of French institutional ownership.Foreign own. % is the percentage of foreign institutional ownership.Total assets is the log of assets measured in millions of euros.OCF5 (Net Income1Depreciation Expense)/Total Assets.


two-tier boards. Statistics provided by Heidrick and Struggles on the

CAC40, the 40 largest rms traded in France, report an average of 14.3

directors without distinguishing between one-tier and two-tier board types.

t-test and non-parametric test were run on the two board cate-

gories. Two variables were found to be statistically lower at the 5 per cent

level for two-tier boards: debt ratio and Tobins Q. Ownership character-

istics were found to be similar across board structures as reected by the

quantiles for family, French and foreign institutional ownership. Half of our

sampled rms have family ownership at the 57 per cent level or higher.

Table 1b splits the sample based on family control at the 40 per cent

level. Our descriptive statistics show that rms controlled by families are

smaller and have less French and foreign institutional ownership. Both

their operating cash ow and Tobins Q are also statistically lower than

companies with a more dispersed ownership.

Table 1c presents the mean and median values for four subcategories:

rms with no French institutional ownership and one-tier board (D15 0,

D25 0), no French institutional ownership and two-tier board (D15 1,

D25 0), with French institutional ownership and one-tier board (D15 0,

D25 1) and with French institutional ownership and two-tier board

(D15 1, D25 1). Among rms without French institutional ownership

(D25 0), two-tier structures are associated with larger companies and

lower debt ratios. For companies with French institutional ownership

(D25 1), none of the descriptive variables (except the number of

directors) is statistically dierent at the 5 per cent level.

5.2. Discussion of Regression Results

5.2.1. Results of equation (1). Table 2 reports the regression results forthe whole sample (equation (1)) with a board structure dummy (D1).

Three measurements of rm performance are used: OCF, ROA and

Tobins Q. The OCF model tests the impact of board type on rm

operating performance in terms of operating cash ow, whereas ROA is

an accrual-based measure, with accounting earnings being equal to OCF

plus accounting accrual. Tobins Q is a widely used measure of rm stock

performance. Industry dummies have been added to the models in order

to control for SIC codes, but they are not reported.

The regression results show that two-tier boards have a signicantly

positive xed impact on operating performance, but not on stock

performance. The discrepancy between the measures for operating

versus stock performance suggests potential agency conicts among



stakeholders. The rst control variable, Family, is signicantly negative

across all three performance measures, indicating that family dominance

has a negative impact on both operating and stock performance. This is

consistent with the ndings of Anderson et al. (2009), who report that

founders and heirs exploit opacity to expropriate wealth from minority

shareholders. The second control variable, Trading, has a signicantly

positive impact on Tobins Q, indicating a positive correlation between

equity liquidity and rm valuation. The negative correlation between size


Table 1b. Descriptive statistics by family control

No family control(217 observations)

With family control(448 observations)

Number of directorsMean (n) 8.4n 6.8n

Median 8.0 6.0Family own. %Mean (n) 8.2n 66.8n

Median 0.7 69.1French own. %Mean (n) 9.9n 4.0n

Median 1.9 0.0Foreign own. %Mean(n) 2.7n 0.6n

Median 0.0 0.0Total assetsMean (n) 605.7n 150.3n

Median 133.0 70.8Growth NIMean 1.448 0.772Median 0.022 0.021

Debt/assetsMean 0.667 0.639Median 0.637 0.647

OCFMean (n) 0.089n 0.069n

Median 0.082 0.079ROAMean 0.033 0.020Median 0.033 0.031

Tobins QMean (n) 1.554n 1.347n

Median 1.270 1.121

Notes: French own. % is the percentage of French institutional ownership.Foreign own. % is the percentage of foreign institutional ownership.Total assets is the log of assets measured in millions of euros.OCF5 (Net Income1Depreciation Expense)/Total Assets.nindicates that t-tests are statistically signicant at the 5% level.


and Tobins Q suggests that large and mature rms face a reduced pool

of new investment opportunities. This is oset by the signicantly

positive interaction between rm size and two-tier structures, implying

that two-tier board systems may have a positive eect on rm investment

opportunities. Last, the test results show that the impact of debt on

performance diers signicantly based on board structure. Debt has a

signicantly positive role on both operating and stock performance for

rms with a one-tier board, but a signicantly negative impact on

operating performance for rms with two-tier boards. This suggests


Table 1c. Descriptive statistics by ownership and board categories

Category1D15 0 D25 0

(229observations)

Category 2D15 1 D25 0

(113observations)


(205observations)


(118observations)

Number of directorsMean 5.9n 8.9n 6.5n 10.1n

Median 6.0 8.0 6.0 10.0Family own. %Mean 52.8 56.4 41.1 40.9Median 63.0 71.1 44.6 50.0

French own. %Mean 0.0 0.0 13.4 10.3Median 0.0 0.0 8.8 6.6

Foreign own. %Mean 1.0 1.2 1.9n 1.0n

Median 0.0 0.0 1.0 0.0Total assetsMean 136.2n 195.3n 580.4 224.7Median 72.1 94.0 97.7 103.8

Growth NIMean 1.58 0.08 1.36 0.35Median 0.02 0.00 0.05 0.01

Debt/assetsMean 0.66n 0.60n 0.68 0.63Median 0.67 0.60 0.64 0.65

CF operationMean 0.070 0.072 0.085 0.074Median 0.078 0.082 0.078 0.082

ROAMean 0.019 0.026 0.028 0.027Median 0.031 0.036 0.030 0.029

Tobins QMean 1.43 1.51 1.44 1.26Median 1.20 1.17 1.17 1.09

Notes: D15 0 if one-tier board (5 1 for two-tier).D25 0 if no French institutional ownership (5 1 with French institutional ownership).nindicates that t-test signicance at the 5% level for categories 1 versus 2, and category 3 versus 4.



Table2.Wholesampleregression:one-tier

versustwo-tierboards

Variable

OCF

ROA

TobinsQ

Coe

cient

t-statistics

p-value

Coe

cient

t-statistics

p-value

Coe

cient

t-statistics

p-value

D1

0.097nn

2.10

0.04

0.090nn

2.09

0.04

0.320

0.88

0.38

Family

0.019n

1.92

0.06

0.016n

1.76

0.08

0.221nnn

2.92

0.00

Trading

0.005

0.41

0.68

0.008

0.75

0.46

0.278nnn

3.21

0.00

Size

0.000

0.07

0.95

0.005

1.29

0.20

0.079nn

2.26

0.02

Growth

0.001nnn

5.87

0.00

0.001nnn

4.07

0.00

0.001

0.69

0.49

Debt

0.173nnn

13.14

0.00

0.115nnn

9.32

0.00

0.620nnn

5.99

0.00

SizeD1

0.015n

2.09

0.04

0.013n

1.90

0.06

0.145nnn

2.53

0.01

GrowthD1

0.000

1.00

0.32

0.000

0.27

0.79

0.002

0.20

0.84

DebtD1

0.263nnn

5.78

0.00

0.232nnn

5.44

0.00

0.554

1.54

0.12

F-value

15.81

10.13

5.55

p4F

0.001

0.001

0.001

R2

0.251

0.171

0.093

Notes:D151(0)iftwo(one)-tierboard

type.

n,nn,nnnSignicantatthe0.10,0.05and0.01levels,respectively.


that conicts of interest between shareholders and creditors are magni-

ed in two-tier structures.

Taken as a whole, the test results of equation (1) reject the hypothesis

that there is no signicant dierence in the performance of rms with one-

tier versus two-tier boards. However, the results for the key variable, board

structure (D1), are not consistent across the three models (OCF, ROA and

Tobins Q), implying that its eect may be inuenced by omitted variables.

Because of the historical role of French institutional owners as large debt

providers in France, we include it as a new variable in the test of H2.

5.2.2. Results of equation (2). The test results of H1 provide evidencethat it is dicult to assess the role of board structure without controlling

for other governance tools such as ownership structure. In France,

institutional blockholders are often entrenched shareholders as well as

providers of debt capital. Consequently, they can control the operations

of the rm and aect the independence and eectiveness of its board. The

second hypothesis tests the relationship between ownership and board

structure by investigating the eect of family control and French

institutional ownership on rm performance. At this point, we exclude

foreign institutional ownership, which will be examined in H3. In order

to avoid using too many xed and multiplicative dummies, we split the

sample into two parts based on family control and compare the

coecients between the two categories.

The considerable increase in the adjusted R2 for equation (2) over

equation (1) indicates that the inclusion of French institutional owner-

ship substantially enhances the explanatory power of the model. Table 3a

shows the results for rms with family control. D1 alone (board dummy)

is negative for all three dependent variables suggesting that one-tier

boards work better than two-tier boards in family dominated rms. This

may be because families can use the organizational complexity of a two-

tier board to hide their self-serving activities. Next, Table 3a conrms

that board structure has an impact on the agency cost of debt. However,

because of full family control in this subsample (over 40 per cent of

ownership), the statistical signicance of the coecients disappears in

some of the models.

Table 3b presents the results for rms without family control. The R2

of all three models is signicantly improved for this group, suggesting a

higher degree of transparency when the rm is not under family control.

The positive Debt D2 is consistent with the existing literature on themonitoring role of institutional blockholders in a one-tier environment.




Table3a.Regressionresultsforrm

swithfamilycontrol

Variable

OCF

ROA

TobinsQ

Coe

cient

t-statistics

p-value

Coe

cient

t-statistics

p-value

Coe

cient

t-statistics

p-value

D1

0.153nnn

6.49

0.00

0.061

1.12

0.26

0.952n

1.82

0.07

D2

0.023

0.52

0.60

0.012

0.27

0.79

0.103

0.25

0.81

D1D2

0.100

1.18

0.24

0.009

0.11

0.91

0.329

0.41

0.68

Trading

0.007

0.84

0.40

0.005

0.54

0.59

0.324nnn

3.94

0.00

Size

0.00

0.01

0.99

0.006

1.33

0.18

0.070

1.51

0.13

SizeD1

0.020nn

2.25

0.03

0.008

0.94

0.35

0.121

1.44

0.15

SizeD2

0.008

1.08

0.28

0.005

0.61

0.54

0.021

0.30

0.77

SizeD1D2

0.017

1.22

0.22

0.000

0.00

0.99

0.078

0.60

0.55

Growth

0.001nnn

6.97

0.00

0.001nnn

4.29

0.00

0.000

0.27

0.79

GrowthD1

0.001

0.91

0.36

0.000

0.44

0.66

0.004

0.39

0.70

GrowthD2

0.002nnn

3.46

0.00

0.002nnn

2.72

0.01

0.001

0.08

0.94

GrowthD1D2

0.003n

1.88

0.06

0.002

1.19

0.23

0.011

0.62

0.53

Debt

0.184nnn

6.53

0.00

0.175nnn

6.22

0.00

0.440n

1.66

0.10

DebtD1

0.097n

1.91

0.06

0.035

0.69

0.49

0.816n

1.70

0.09

DebtD2

0.040

0.84

0.40

0.072

1.55

0.12

0.225

0.50

0.62

DebtD1D2

0.028

0.33

0.74

0.024

0.29

0.77

1.178

1.49

0.14

F-value

11.29

10.91

3.27

p4F

0.001

0.001

0.001

R2

0.358

0.361

0.139


structure.

D251(0)with(without)French

institutionalownership.




Table3b.Regressionresultsforrm

swithoutfamilycontrol

Variable

OCF

ROA

TobinsQ

Coe

cient

t-statistics

p-value

Coe

cient

t-statistics

p-value

Coe

cient

t-statistics

p-value

D1

0.133

0.68

0.50

0.239

1.30

0.19

3.691nn

2.21

0.03

D2

0.125

1.16

0.25

0.220nn

2.16

0.03

0.332

0.36

0.72

D1D2

0.315

1.33

0.18

0.399n

1.80

0.07

3.019

1.49

0.14

Trading

0.014

0.49

0.62

0.006

0.24

0.81

0.334

1.38

0.17

Size

0.021

1.19

0.24

0.014

0.83

0.41

0.096

0.65

0.52

SizeD1

0.007

0.25

0.80

0.014

0.58

0.56

0.310

1.37

0.17

SizeD2

0.029

1.51

0.13

0.012

0.67

0.50

0.038

0.23

0.82

SizeD1D2

0.003

0.08

0.94

0.010

0.35

0.73

0.156

0.58

0.56

Growth

0.002

0.63

0.53

0.001

0.59

0.56

0.028

1.25

0.21

GrowthD1

0.001

0.21

0.83

0.000

0.04

0.97

0.001

0.02

0.99

GrowthD2

0.001

0.34

0.73

0.001

0.35

0.73

0.024

1.05

0.30

GrowthD1D2

0.001

0.16

0.87

0.002

0.31

0.75

0.003

0.07

0.94

Debt

0.169n

1.78

0.08

0.252nnn

2.81

0.01

0.188

0.23

0.82

DebtD1

0.146

0.60

0.55

0.269

1.17

0.25

3.919n

1.86

0.06

DebtD2

0.416nnn

4.31

0.00

0.436nnn

4.79

0.00

1.010

1.22

0.22

DebtD1D2

0.476n

1.71

0.09

0.537nn

2.04

0.04

4.715nn

1.97

0.05

F-value

10.71

6.88

2.62

p4F

0.001

0.001

0.001

R2

0.536

0.426

0.220


structure.

D251(0)with(without)French




The signicantly positive sign for Debt D1 suggests that two-tierboards without institutional blockholders would also result in a lower

agency cost of debt. The positive eects of Debt D1 and Debt D2are consistent with the ndings of Agrawal and Knoeber (1996) that

substitute means of improving corporate governance can be used inside

the rm. However, the potential for institutional blockholders to

expropriate wealth from minority shareholders is clearly shown in the

results linked to the debt variable Debt D1 D2. The statisticallynegative coecient of the three-way interaction in all three models

implies that, when French institutional blockholders (mostly banks)

participate in a two-tier board without family control, they are likely

to put their interests as creditors above those of shareholders. These

results demonstrate the multi-dimensionality of stakeholders interests in

French rms. While a two-tier board structure may alleviate one kind of

agency cost (e.g., improved labor relationship), it may lead to the

exacerbation of other kinds of conict (e.g., creditors versus equity

holders, blockholders versus outside shareholders). Overall, our test

results strongly reject H2 by providing empirical evidence on the

interdependence of ownership and board structures.

5.2.3. Results of equation (3). In order to test H3, the whole sample issplit into two groups based on board structure categories (one tier versus

two tier). Table 4a (4b) reports the results for rms with a one (two)-tier

board. Two new variables are added to the model; a dummy variable for

foreign institutional ownership (D3) and a continuous variable for number

of board members (Director). A comparison of the two panels identies

the following signicant between-group similarities and dierences.

First, we see that French institutional ownership (D2) plays a negative

(signicantly positive) role under one (two)-tier board structure. However,

foreign institutional ownership (D3) does not have any statistical signi-

cance in either table, reecting the fact that foreign investors usually have

minor stakes in the rm.

Second, the number of directors (board size) is not signicant in both

panels, indicating that there is no inverse correlation between board size

and rm performance both within and between the two groups. This result

provides empirical evidence that size is not a determinant of board

eciency in France. The positive interaction of DirectorD2 suggeststhat directors appointed by French institutional blockholders are likely to

play a more independent and eective role in protecting minority share-

holders interests. The lack of signicance of DirectorD3 implies that




Table4a.Regressionresultsforone-tier

board:withforeigninstitutionalownershipandnumber

ofdirectors

Variable

OCF

ROA

TobinsQ

Coe

cient

t-statistics

p-value

Coe

cient

t-statistics

p-value

Coe

cient

t-statistics

p-value

D2

0.170nnn

3.16

0.00

0.166nnn

3.28

0.00

0.510

1.26

0.21

D3

0.022

0.23

0.81

0.009

0.11

0.92

0.801

1.15

0.25

Family

0.000

0.01

0.99

0.006

0.46

0.64

0.206nn

2.06

0.04

Trading

0.008

0.58

0.56

0.004

0.29

0.78

0.310nnn

2.81

0.01

Director

0.001

0.22

0.82

0.001

0.37

0.72

0.021

0.68

0.50

DirectorD2

0.007

1.20

0.23

0.011nn

1.93

0.05

0.084nn

1.93

0.05

DirectorD3

0.009

0.09

0.28

0.004

0.56

0.58

0.001

0.02

0.99

Size

0.007

0.90

0.37

0.013n

1.79

0.07

0.044

0.74

0.46

SizeD2

0.028nnn

2.70

0.01

0.028nnn

2.82

0.01

0.189nn

2.40

0.02

SizeD3

0.026

1.45

0.15

0.020

1.19

0.23

0.118

0.88

0.38

Growth

0.001nnn

4.43

0.00

0.001nnn

2.79

0.01

0.000

0.13

0.90

GrowthD2

0.002nn

2.29

0.02

0.001n

1.76

0.08

0.001

0.11

0.91

GrowthD3

0.002

0.93

0.35

0.001

0.77

0.44

0.002

0.14

0.89

Debt

1.172nnn

4.15

0.00

0.186nnn

4.76

0.00

0.468

1.50

0.13

DebtD2

0.392nnn

9.02

0.00

0.343nnn

8.37

0.00

1.216nnn

3.71

0.00

DebtD3

0.108

1.10

0.27

0.103

1.11

0.27

1.105

1.49

0.14

F-value

13.83

9.20

4.85

p4F

0.001

0.001

0.001

R2

0.395

0.294

0.164

Notes:D251(0)with(without)French


D351(0)withforeigninstitutionalownership.



foreign institutional investors do not have a voice in the appointment of

directors.

Third, the test results demonstrate again the impact of board structure

on the agency cost of debt. In Table 4a, the coecient on Debt is

signicantly negative, but its interaction with French institutional owner-

ship is signicantly positive for rms with one-tier boards, which is

consistent with the results of Table 3b. These results conrm the positive

monitoring role and reduced agency cost of debt associated with French

institutional investors who participate in one-tier boards. However, under

a two-tier board structure (Table 4b), the interaction of debt with French

institutional ownership is signicantly negative, verifying again that

French banks increase the agency cost of debt by behaving as creditors

at the expense of equity holders. Two-tier board structures allow dominant

institutional blockholders with substantial voting control to appoint their

agents to the supervisory board of related companies. This allows them to

exert pressure on both the supervisory and management boards in order to

serve the interests of rms in which they own both stock and debt

(Cremers and Nair, 2005). In such instances, two-tier boards may lose

their integrity as has happened in some of the Vorstand/Aufsichtsrats in

Germany. In both Tables 4a and b, the interaction of foreign institutional

ownership with debt is not statistically signicant, conrming the role of

foreign institutional investors as minority shareholders.

In conclusion, the test results cannot reject H3. No additional structural

indicators of corporate governance, such as foreign institutional owner-

ship and/or board size, can alter the test results of the previous two

hypotheses. Test results for all three hypotheses are consistent in showing

that a two-tier board structure can impact the agency cost of debt and the

interests of minority shareholders. However, its role is restricted by the

ownership structure under which it operates. In particular, two-tier boards

seem to function better when they are not combined with strong control

rights from families or French institutional investors.

5.3. Summary of Regression Results

Table 5 combines the test results for H2 and H3 to facilitate a quick

comparison of coecients across our sample splits (family control

and board structure). More specically, Table 5 shows the signicant

impact of debt on rm performance and its interaction with board and

ownership structure. One dominant feature of French rms is the inside

nature of their governance system, which relies on the monitoring of




Table4b.Regressionresultsfortwo-tierboard:withforeigninstitutionalownershipandnumber

ofdirectors

Variable

OCF

ROA

TobinsQ

Coe

cient

t-statistics

p-value

Coe

cient

t-statistics

p-value

Coe

cient

t-statistics

p-value

D2

0.168nnn

3.27

0.00

0.107nn

2.09

0.04

1.450nn

2.17

0.03

D3

0.070

0.47

0.64

0.093

0.62

0.53

0.875

0.45

0.65

Family

0.008

0.70

0.48

0.016

1.53

0.13

0.012

0.08

0.93

Trading

0.006

0.46

0.65

0.020

1.58

0.12

0.230

1.39

0.17

Director

0.002

0.82

0.41

0.000

0.04

0.97

0.035

0.94

0.35

DirectorD2

0.002

0.61

0.55

0.005

1.30

0.20

0.027

0.52

0.61

DirectorD3

0.004

0.74

0.46

0.000

0.01

0.99

0.112

1.49

0.14

Size

0.030nnn

3.65

0.00

0.023nnn

2.79

0.01

0.070

0.65

0.52

SizeD2

0.015

1.55

0.12

0.003

0.34

0.74

0.017

0.14

0.89

SizeD3

0.034

1.30

0.20

0.022

0.84

0.40

0.329

0.96

0.34

Growth

0.000

0.04

0.97

0.001

1.00

0.32

0.009

0.81

0.42

GrowthD2

0.001

0.47

0.64

0.000

0.16

0.87

0.012

0.82

0.41

GrowthD3

0.001

0.48

0.64

0.001

0.43

0.67

0.003

0.13

0.90

Debt

0.047

1.36

0.18

0.087nnn

2.51

0.01

1.317nnn

2.92

0.00

DebtD2

0.099nn

1.94

0.05

0.090n

1.77

0.08

2.082nnn

3.13

0.00

DebtD3

0.115

0.79

0.43

0.029

0.20

0.84

1.143

0.60

0.55

F-value

5.72

6.17

2.30

p4F

0.001

0.001

0.002

R2

0.301

0.321

0.106

Notes:D251(0)with(without)French


D351(0)withforeigninstitutionalownership.




Table5.Summary

table

Model2:withversusnofamilycontrol

OCF

ROA

TobinsQ

With

No

With

No

With

No

D1

0.153nnn

0.133

0.061

0.239

0.952n

3.691nn

D2

0.023

0.125

0.012

0.220nn

0.103

0.332

D1D2

0.100

0.315

0.009

0.399n

0.329

3.019

Trading

0.007

0.014

0.005

0.006

0.324nnn

0.334

Size

0.00

0.021

0.006

0.014

0.070

0.096

SizeD1

0.020nn

0.007

0.008

0.014

0.121

0.310

SizeD2

0.008

0.029

0.005

0.012

0.021

0.038

SizeD1D2

0.017

0.003

0.000

0.010

0.078

0.156

Growth

0.001nnn

0.002

0.001nnn

0.001

0.000

0.028

GrowthD1

0.001

0.001

0.000

0.000

0.004

0.001

GrowthD2

0.002nnn

0.001

0.002nnn

0.001

0.001

0.024

GrowthD1D2

0.003n

0.001

0.002

0.002

0.011

0.003

Debt

0.184nnn

0.169n

0.175nnn

0.252nnn

0.440n

0.188

DebtD1

0.097n

0.146

0.035

0.269

0.816n

3.919n

DebtD2

0.040

0.416nnn

0.072

0.436nnn

0.225

1.010

DebtD1D2

0.028

0.476n

0.024

0.537nn

1.178

4.715nn



Model3:one-tier

versustwo-tier

Onetier

Twotier

Onetier

Twotier

Onetier

Twotier

D2

0.170nnn

0.168nnn

0.166nnn

0.107nn

0.510

1.450nn

D3

0.022

0.070

0.009

0.093

0.801

0.875

Family

0.000

0.008

0.006

0.016

0.206nn

0.012

Trading

0.008

0.006

0.004

0.020

0.310nnn

0.230

Director

0.001

0.002

0.001

0.000

0.021

0.035

DirectorD2

0.007

0.002

0.011nn

0.005

0.084nn

0.027

DirectorD3

0.009

0.004

0.004

0.000

0.001

0.112

Size

0.007

0.030nnn

0.013n

0.023nnn

0.044

0.070

SizeD2

0.028nnn

0.015

0.028nnn

0.003

0.189nn

0.017

SizeD3

0.026

0.034

0.020

0.022

0.118

0.329

Growth

0.001nnn

0.000

0.001nnn

0.001

0.000

0.009

GrowthD2

0.002nn

0.001

0.001n

0.000

0.001

0.012

GrowthD3

0.002

0.001

0.001

0.001

0.002

0.003

Debt

1.172nnn

0.047

0.186nnn

0.087nnn

0.468

1.317nnn

DebtD2

0.392nnn

0.099nn

0.343nnn

0.090n

1.216nnn

2.082nnn

DebtD3

0.108

0.115

0.103

0.029

1.105

1.143


type.D251(0)with(without)French


D351(0)with(without)foreigninstitutionalownership.



corporate performance by all interested stakeholders. In countries where

external control is exercised through the stock market, the threat of

takeover may act as a disciplinary device for management. In France,

stakeholders usually take actions to correct management decisions

through internal channels, leading to a more marked cohesion between

owners and managers. The choice of a two-tier board should be a signal

that all stakeholders can exercise their inuence through participation in

the supervisory board. However, our results clearly show that bloc-

kholders, especially institutional investors, are in a position to exploit a

two-tier board system to serve their own interests. In France, banks provide

long-term nancing to the rm and are often some of its dominant

shareholders. Their role is enhanced by the practice of proxy voting at

shareholder meetings on behalf of investors who have deposited their

shares with banks. The benets of a governance system which relies heavily

on long-term relationships and on credit as a source of nance seem to be

that rms have a high probability of surviving and enhanced possibilities of

growing without having to seek new equity. Our results show that while a

two-tier board structure can serve as a corporate governance mechanism

for insiders to monitor and control management performance, it can also

suer from too much rigidity in protecting the interests of banks as major

providers of internal nance (Kim, 1995; Jungmann, 2006).

6. Concluding Comments

This study provides empirical evidence that signicant dynamics exist

between ownership and board structures in French corporate govern-

ance. The operating and stock performance of French rms is aected by

agency conicts among various stakeholders, such as insiders versus

minority shareholders, equity owners versus debt holders and family

versus institutional blockholders. In this context, the option to choose a

two-tier board structure may be taken as a signal to improve corporate

governance. But the test results indicate otherwise because blockholders

are in a position to manipulate two-tier boards. In particular, French

institutional investors, mostly banks, are likely to misuse their dual role

as providers of both equity and debt capital when the board structure is

more complex and less transparent.

As one of the rst empirical studies on the strengths and weaknesses of

alternative board structures, this paper makes three contributions to the

literature. First, it broadens the analysis of board eciency from the

perspective of agency theory to that of stakeholder theory. A comparison



of test results across three performance measures (OCF, ROA and

Tobins Q) identies areas in which agency conicts are more likely to

exist. Second, it rejects the common hypothesis that blockholding,

especially domestic institutional shareholding, always improves corpo-

rate monitoring. Our test results show that while family dominance

usually has a negative impact on corporate governance, French institu-

tional blockholding also plays a negative role when combined with a less

transparent two-tier structure. Furthermore, we show that foreign

institutional investors have no eect on rm performance. Third,

previous ndings on the inverse relationship between board size and

eciency based on common law countries do not appear to be applicable

to code law countries. In France, concentrated ownership dominates

over other structural indicators of corporate governance. Board size is

not inversely correlated with board eciency for rms with either one-

tier or two-tier boards.

This empirical study suggests potential ground for new research on

rm survival and board structure in code law countries. Control changes

are the result of poor corporate performance and management, weak

governance and inadequate ownership stakes. In this context, it will be

interesting to analyze the role played by the choice of board structure in

the context of a limited market for corporate control.

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A Comparison Between One-Tier and Two-Tier Board Structures in France