The evolution and interrelationships of corporate governance mechanisms as firms mature

Corporate governance is the set of mechanisms that exists to align managerial incentives with shareholder interests and to monitor managerial actions on behalf of shareholders. The myriad of governance mechanisms that exist to mitigate the agency costs of equity suggests that governance structures may be interdependent. After firms go public, agency costs of equity have the potential to increase significantly if inside ownership declines subsequent to the initial public offering (IPO). Greater separation of ownership and control may entice shareholders to enhance monitoring activities to ensure that managerial incentives remain aligned with their own. Shareholders may develop superior internal governance mechanisms, such as an independent board of directors or incentive-based compensation toward this end. External monitoring may also increase if inside ownership declines after the IPO. This study aims to determine whether alternative governance mechanisms respond to mitigate the resulting higher agency costs after a firm is taken public. This paper provides empirical evidence on how governance structures evolve after a firm is initially taken public. I find that as CEO ownership declines over an eleven-year post-IPO period, unaffiliated blockholder ownership and the fraction of equity-based pay increases over the same period. I find that boards of directors do not exhibit an increase in independence after firms go public, but boards do demonstrate some interesting changes. The fraction of gray directors increases on average over time after a firm is taken public. In addition, both the number of meetings and the number of committees of the board increase as a firm matures which is evidence of superior monitoring activities of the board. However, the likelihood that the CEO also serves as Chairman of the board and board size increase over the time period examined. I demonstrate that there are significant interrelationships between inside ownership, blockholder ownership, board structure and compensation structure. I find that compensation structure and unaffiliated blockholder ownership demonstrate a complementary association with board structure. Firms with higher outside blockholder ownership and higher equity-based pay have a higher fraction of independent outside directors. I find limited evidence that unaffiliated block ownership, compensation structure, and board independence are substitutes for inside ownership.