Corporate Governance and Ownership Structure of Property-Liability Insurers.

A separation exists between the ownership and control of most firms, and this separation creates potential incentive conflicts, with managers acting in their own interests rather than in the interests of the owners (resulting in what is referred to as "agency costs"). There are varying degrees of this separation, depending upon the organizational form and ownership structure of the firm. An effective way in which to monitor management's behavior and to reduce agency costs is with outside board members, those members who are not themselves in management positions with the company. An analysis of approximately 1,130 property- liability insurers over nine years suggests that insurers use varying degrees of participation from outside directors, depending upon the firm's ownership structure, to effectively monitor management behavior. Results show that the greatest use of outside board members is found with ownership structures that have the greatest need for monitoring management. In addition, those structures with the least separation of ownership and control employ the fewest outside board members. [ABSTRACT FROM AUTHOR]