A study by three University of Southern California professors finds that strongly independent boards at financial institutions had a negative impact on the companies’ performance during the 2007-2008 economic meltdown. The controversial study, promoted by the American Accounting Association (AAA), also blames heightened institutional ownership for hurting results, and suggests that other attempts to strengthen boards — adding directors with financial expertise, creating risk committees, and separating the CEO and chairman functions — didn’t help during the crisis.

Boards, in the AAA’s description of the study, “not only were frequently ineffectual but commonly undermined stock performance — and did so, ironically, through actions taken on behalf of transparency and good corporate governance.” Financial firms with more-independent boards and higher institutional ownership “had worse stock returns than other firms during the crisis,” the study says. “Overall,” the authors proclaim, “our findings cast doubt on whether regulatory changes that increase shareholder activism and monitoring by outside directors will be effective in reducing the consequences of future economic crises.”

The unpublished study of 296 of the world’s largest banks, brokerages, and insurance companies — 125 of them U.S.-based, but all with assets of more than $10 billion — was prepared by David Erkens and Mingyi Hung, professors at USC’s Leventhal School of Accounting, and Pedro Matos, a finance professor at USC’s Marshall School of Business. It was presented at the AAA’s August annual meeting in San Francisco, but seemed to fly under the radar until the AAA recently issued a press release.

“What our study basically found was that the board members move when something really happens,” says Erkens, speaking of both outside directors and those with financial expertise. Independent members “for some reason didn’t see these [toxic] investments as a big risk. They didn’t prevent extreme risk-taking when things really got bad.”

While the association of poor performance with more-independent boards and institutional ownership has sparked little debate, objections are vehement to the authors’ suggestion that the boards’ makeup actually caused damage. In the study itself, the discussions sometimes are couched as “potential explanations.”

In one attempt to explain worse performance by independent-director-dominated companies, the authors say that “independent board members are primarily concerned about their reputation in the market for directorships” and thus “have an incentive to avoid the reputational cost of a bankruptcy by pressuring firms to raise equity capital.” Such directors favor “requiring firms to have more transparent financial reporting,” and during the crisis “transparent recognition of losses . . . related to subprime mortgages” often forced companies to raise equity capital, lower their capital adequacy ratios, and recognize losses from their association with the subprime mortgages.

“The problem with analyses like these is that they take a very quantitative approach, as opposed to looking at whether the directors were acting independently or not,” says Paul Hodgson of governance-research firm The Corporate Library. “They need to look at the qualitative stuff. If you look at the boards of Merrill Lynch and Lehman Brothers and Bear Stearns, they did have nominally independent directors.” But “if one of them was a theater producer, and one was an opera star, and they knew nothing about business,” that would be a stronger source of problems than independence. Hodgson’s own company, he says, has studied risk committees on boards, and found that “at some companies with risk committees the risk committee didn’t meet at all.”

Adds Mark Grothe, a research analyst with governance specialist Glass Lewis, “That the study found an inverse relationship to some governance characteristics is more of a coincidence or sign of correlation to me.” Says Grothe in an e-mail: “It seems like independent directors and financial experts would be more common at the largest public companies, which were probably the ones with the most exposure to CDOs and other toxic assets, the most to lose when the crisis hit, and the ones in the spotlight when it all came crashing down. Those factors seem to explain the resulting stock performance more accurately to me than governance structure.”

He continues, “It would be interesting to see the results of a similar study over a ‘regular’ market period and over a longer time period, as well as for companies in other sectors. I think you’d find that there is no meaningful difference between over- and underperformers’ governance structures simply because most companies look the same from that standpoint anymore.”

“Although causality is always difficult to prove in these types of studies,” responds Erkens, “we feel we have compelling results.”

Editor’s note: The last paragraph of this article has been updated to reflect Erkens’s response to the comments by Hodgson and Grothe.