Are Foreign Directors Valuable Advisors or Ineffective Monitors? by Masulis and Wang (2008) Discussion: Diana Knyazeva

Theme Boards as a mechanism of resolving / mitigating agency conflicts Large literature on boards as a governance mechanism: independent directors, insiders, compensation / audit committees, busy directors. Does having foreign independent directors strengthen or weaken board monitoring?

This paper Do foreign independent directors (FID) increase or decrease firm value? Are they as efficient as domestic directors? Empirically test the effects of foreign independent directors on: Performance: Tobin’s Q, ROA, CARs Governance: Attendance of board meetings, executive compensation Earnings restatements

Key findings Performance: Board meeting attendance: Presence (higher %) of FID decreases firm value, ROA The negative effect is partially mitigated for firms with foreign operations, but does not go away. Negative market reaction on announcement of FID appointment Board meeting attendance: FID are more likely to miss 25% or more board meetings. Earnings restatements: FID firms have more earnings restatements Especially when FID sit on audit committees

Overall Very interesting and insightful paper A new, important and clearly formulated research question Well executed empirically: control variables, methodology, various cuts of the data. Do not take the “one size fits all” approach to governance Some thoughts on presentation / possible extension of this analysis

Thoughts / Comments Differences in accounting standards The paper hypothesizes that FID are unfamiliar with US accounting standards and regulations. The earnings restatement result supports such argument. Direct test. Consider accounting standards & disclosure regulations in countries of FID. Bigger differences compared with US=> a stronger effect of FID on restatements, possibly firm value

Thoughts / Comments Investor protections The authors argue that if FID come from countries with poor property rights protections, will be less likely to push for good governance, scrutiny & oversight. Directly consider the effect of investor rights protections of FID countries. FID from poor investor protections countries provide less oversight => bigger negative effect on performance.

Thoughts / Comments Further qualification of FID characteristics Does it matter if FID have US business education? Might affect their attitudes towards more stringent managerial oversight / good governance (especially post-Enron). Endogeneity Paper addresses the issue thoroughly. Governance (especially board governance) is very stable over time. To the extent that there is time invariant endogeneity, fixed effects mitigate it.

Thoughts / Comments Effect of having US independent directors on boards of foreign companies. Same negative effect (benefits of familiarity)? Or is it actually value improving for foreign firms to have US directors (benefits of good governance / disclosure environment)? Ultimately, is it about having directors from environments of property rights protections & managerial oversight. Data availability??

In sum, An excellent paper and a pleasure to discuss Tells us something new and important about how boards work