Corporate Governance and the Board of Directors: Performance Effects of Changes in Board Composition

Abstract

Recent advances in economic theory suggest that the board of directors is an important part of the governance structure of large business corporations (Fama and Jensen, 1983a; Williamson, 1983, 1984). The board of directors, which has the power to hire, fire, and compensate senior management teams, serves to resolve conflicts of interest among decisionmakers and residual risk bearers. This economizes the transaction (agency) costs associated with the separation (specialization) of ownership and control and facilitates the survival of the open corporation as an organizational form. Thus, it is not surprising that state corporation laws require that the affairs of business corporations be managed under the guidance of a board of directors (Cary and Eisenberg). Both economic theory and state corporation laws, however, are largely silent on matters concerning the size, composition, and structure of boards; directors' compensation; place, time, and frequency of board meetings; and so forth. The laissez-faire attitude of the state toward board composition has permitted substantial compositional diversity among the board dimensions listed above. Even among the relatively small group of very large corporations, boards may differ considerably with respect to such potentially salient