Abstract
This study not only revisits, from a meta-analytic perspective, the influence of firms’ boardroom independence on corporate financial performance, but also addresses the way that countries’ social and institutional contexts moderate that connection. A meta-regression covering 126 independent samples reveals that firms’ boardroom independence has a positive and negative effect on accounting and market-based measures of corporate financial performance, respectively. Further analyses reveal that while the firms’ board independence-financial performance connection is stronger in non-communitarian societies, that relationship becomes weaker in countries with greater developed mechanisms to protect the interest of minority investors. These results are robust to different model specifications and to the presence of a set of methodological control variables. Our results are of outstanding relevance for companies’ board composition processes by suggesting the way that corporations should actively re-balance the proportion of independent directors across different social and institutional contexts to ensure their financial success.
Highlights
A large body of academic research [1,2,3] addresses the financial outcomes of different corporate board structures
While the estimates are non-significant for Model 3, the regression coefficient is negative and significant (β = −0.0631 ∗∗; SE = 0.0308; p < 0.01) when focusing on Model 4. These results reveal that the effect of board independence on corporate financial performance (CFP) is weaker for companies in common law countries only when organizational performance is measured through market-based measures
Drawing on the framework of Dalton, Daily, Ellstrand, & Johnson [13] and Rhoades, Rechner, & Sundaramurthy [14], this paper addresses that board independence does not act as a catalyst for CFP, confirming previous research findings [13,14,15]
Summary
A large body of academic research [1,2,3] addresses the financial outcomes of different corporate board structures. While some studies find a positive connection [6,7,8,9], others argue for a negative influence of board independence on CFP [10,11,12] This situation reflects the existing narrative of reviews on board composition and performance, which describe the relationship as mixed, inconsistent, and vexing. Rhoades, Rechner, & Sundaramurthy [14] revisited the above-mentioned relationship and addressed that firms’ boardroom composition only explained less than one percent of the variation in CFP They stated that one-third of the findings’ variations across firms’ boardroom composition studies was a consequence of the sampling error, their results did not reflect the “true differences in the relationship between board composition measures and financial performance” [14], p
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