Directors’ Perceptions of Board Effectiveness and Internal Operations

Abstract

We contribute to the growing literature on the effectiveness of corporate boards by examining the effect of two insights that have been largely unexplored in prior studies that use public data. First, since boards’ responsibilities are wide-ranging, more holistic performance measures may better capture the full range of their duties than specific public actions and outcomes (e.g., disclosure of risk management processes, financial restatements, acquisition returns, CEO turnover). And second, because corporate boards share many characteristics of other types of teams, their effectiveness is likely to be influenced by their internal operations. To examine the performance effects of these insights, we use data from 577 directors of U.S. public firms that responded to a survey we conducted in 2015–2016 and qualitative data from interviews of 75 directors. Our study establishes a strong relation between director perceptions of board performance effectiveness and internal board operations. Further, by highlighting the critical role of internal operations, identifying areas of relative strength and weakness in boards’ effectiveness in various activities, and probing director perceptions of their primary responsibilities, we are able to offer concrete suggestions for future research on board effectiveness. This paper was accepted by Shiva Rajgopal, accounting.