Boards of directors : the influence of board size, leadership and composition on corporate financial performance

Abstract

Boards of directors are believed to influence corporate performance. Such influence may be direct, e.g., through boards monitoring management, or indirect; through the actions of a Chief Executive Officer selected by the board. Various structural characteristics of boards are often argued to influence - either positively or negatively - corporate financial performance. Previous empirical literature has typically examined the influence of three such characteristics of boards on corporate performance: board leadership - whether or not the board chairperson is an executive; board composition - representation of outsider (typically non-executive) directors on boards; and board size - the number of board members. The purpose of this paper is to review studies that have sought to relate board leadership, composition or size to corporate financial performance. The arguments relating to these board characteristics and each of their relationships with financial performance are reviewed in the next section of this paper. For each characteristic, I then analyse all existing studies with the aid of meta-analysis. Results for each board characteristic are then discussed.