Abstract
Research has long considered how a board of directors influences its firm’s performance. More recently, social, institutional, and legislative emphasis on stakeholder benefits and sound corporate governance have become priorities for corporate boards, forcing a recalibration of the theory of board composition on firm performance. A second consideration, often unexplored, is how boards may reduce firm performance variability. In this study, we theorize and examine the role that two different types of board composition play in influencing firm performance and variability in performance. We theorize that a board that is independent and stable enhances profitability while reducing variability due to its greater ability to monitor management and the context that stability provides in educating board members and providing processes and routines for effective governance. Alternatively, we theorize that less attentive and CEO- sympathetic boards decrease performance while increasing variability, serving as poor monitors of management behavior. Finally, we theorize that these board compositional effects are interactive, such that less attentive and CEO-sympathetic boards overwhelm the effect of board independence and stability resulting in poorer performance and greater performance variations. Using a sample of 13,308 firm year observations following the passage of Sarbanes-Oxley, we find support for propositions.
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