Do larger boards improve shareholder value creation? – Effects of the board size on business performance in Eastern Central Europe

Zsolt Lakatos

doi:10.1556/204.2020.00007

Abstract

AbstractThe aim of this study is to analyse the impact of board size on a firms' operational and market performance at the largest East Central European listed non-financial, non-public utility firms. The literature debates the effects of the size of the board. While the resource dependency theory supports a positive effect, the agency theory supports a negative impact on firm value. This question is rarely investigated in two-tiered corporate governance models. This paper estimates the effects of management board and supervisory board size, between 2007 and 2016. The results indicate that the effect of management board size depends heavily on the size of the observed company. In both fixed effects and GMM-type dynamic panel regression models, using Tobin's Q, market-to-book ratio, total shareholder value and ROA as firm performance measures, increase in management board size has a significant positive impact on firm performance; however, in the case of larger firms, the effect is significantly negative. Moreover, the increase in the ratio of outside directors has a positive impact on the firm's performance in all dynamic panel regression models and this effect is even more significant in Tobin's Q and market-to-book ratio models. This can indicate the effective monitoring role of the supervisory board.

Highlights

Corporate governance has become a popular research field in management sciences in the last 30 years, a single definition for corporate governance does not exist
The results indicate that the effect of management board size depends heavily on the size of the observed company
The paper has analysed the relationship between corporate governance characteristics and firm performance measures

Summary

Introduction

Corporate governance has become a popular research field in management sciences in the last 30 years, a single definition for corporate governance does not exist. According to Dobak and Steger (2003: 223), ‘corporate governance from an overall perspective is the structuring of the control mechanisms, monitoring, and organisation of a company or a group of companies in a manner that satisfies owners’ objectives.’. A well-known definition of corporate governance comes from Shleifer and Vishny (1997), who consider it as how investors get the managers to give them their money back. Professional managers run the company because they have expertise, but the shareholders as the owners of the company, bear the risks. A corporate unit must exist that can protect the interests of the owners. This unit is called the Board of Directors. Modern corporate governance theory is based on the seminal study of Jensen and Meckling (1976) that forms the foundation of the agency theory

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Conclusion