Since the 1990s, regulatory reforms worldwide have significantly increased the independence of corporate boards. By 2023, nearly all of the top 50 equity markets had implemented minimum requirements for board or board committee independence. While extensive literature highlights the benefits to shareholders of board independence, its impact on non-shareholder stakeholders – whose interests frequently conflict with those of shareholders – remains less understood.

In a new paper, we help fill this gap by leveraging a regulatory shock in the U.S. in 2003, which increased board and board committee independence in certain public firms but not others. We analyze how this change affected employee safety and health. Workplace injuries and illnesses are among the most serious threats to employee well-being and are associated with substantial welfare costs. For example, from 1996 to 2008, which is the sample period we studied, there were 4.9 million non-fatal injuries and over 5,700 fatal injuries annually in the U.S. private sector. These work-related injuries and illnesses cost the United States an estimated $250 billion each year. Given that U.S. workplaces rank among the safest globally, these statistics underscore the relevance of workplace safety.

In 2003, the NYSE and Nasdaq implemented new listing standards requiring more than half of the directors of each publicly traded company to be independent and audit, compensation, and nominating committees to be fully independent. Using this regulatory change as a quasi-natural experiment and applying a difference-in-differences methodology, we find that transitioning from a non-independent to an independent board significantly improved workplace safety in the operating units of affected firms.

In our sample, work-related injury and illness rates at the operating units of firms that were forced to transition to an independent board fell by 9 percent relative the sample mean injury and illness rate, relative to the change in injury and illness rates at operating units of control firms over the same period. The likelihood of safety violations also fell significantly, with the probability of an operating unit of an affected firm violating Occupational Safety and Health Administration (OSHA) safety standards dropping 17 percent relative to the sample mean. The transition to a fully independent audit committee also had a large, positive impact on workplace safety.

To explain these results,  we propose a conceptual framework that considers the interactions between shareholders’ interests in safety, managers’ agency problems, and the labor market incentives of independent directors. According to basic economic theory, each firm has an optimal level of investment in workplace safety that maximizes shareholder welfare. However, agency problems often lead to deviations from this level. Since independent directors’ careers depend more heavily on shareholder approval than do those of non-independent directors, they have stronger incentives to correct these deviations. While agency problems can theoretically lead to either underinvestment or overinvestment in workplace safety, meaning increased board independence could improve or harm safety, our findings suggest that the underinvestment agency problem is the predominant issue.

We test our explanation by analyzing cross-sectional variations in the treatment effect. Our findings show that the improvement in workplace safety is more pronounced at operating units of affected firms with higher labor-related lawsuit risk and greater media coverage, supporting the idea that independent directors’ concerns about their labor market reputation drive safety improvements. Additionally, the safety gains are concentrated in operating units of affected firms with above-median ownership by long-term, employee-friendly institutional investors. This suggests that independent directors increased safety investments primarily in firms where the largest shareholders valued it the most, either due to its contribution to long-term shareholder value or alignment with the preferences of these shareholders. However, the effect of board independence on workplace safety was smaller in operating units of affected firms facing greater product market competition or strong labor union presence, consistent with the notion that both competition and unions impose constraints on underinvestment in safety.

We identify two ways independent directors improved workplace safety. First, treated firms increased safety investments relative to both total assets and sales. Second, these firms were more likely to incorporate safety-related benchmarks into CEO compensation contracts. Both methods align with our hypothesis that independent directors enhance workplace safety by mitigating the underinvestment problem in safety and increasing managers’ safety efforts.

Our study expands the literature on the benefits of board and board committee independence, traditionally explored in relation to shareholders, by examining its impact on non-shareholder stakeholders. We find that such independence can also benefit non-shareholder stakeholders. However, because directors are ultimately elected by shareholders and not all shareholders value investments in non-shareholder stakeholders, the effect of board and committee independence on non-shareholder stakeholders largely depends on the firm’s ownership structure. Specifically, independent boards and committees are more likely to benefit non-shareholder stakeholders when the shareholder base primarily consists of long-term investors or shareholders who prioritize corporate social responsibility. Our findings suggest that the combination of board independence and particular ownership structures can help drive improvements in corporate environmental and social performance.

This post comes to us from professors Lixiong Guo at the University of Mississippi and Zhiyan Wang at Wingate University. It is based on their recent paper, “Board Structure and Employee Safety and Health,” available here.