Influence of Board Size and Independence on Firm Performance: A Study of Indian Companies

Abstract

Corporate governance issues have attracted a good deal of public interest because of their apparent importance for the economic health of corporations and society in general, especially after the plethora of corporate scams and debacles in recent times. Corporate governance issues flow from the concept of accountability and governance and assume greater significance and magnitude in the case of corporate form of organization where the ownership and management of organizations are distanced. And, it is in this context that the pivotal role played by the board of directors in maintaining an effective organization assumes much importance. A major part of the debate on corporate governance centres around board composition especially board size and independence. Various committees have mandated a minimum number of independent directors and have given guidelines on board composition. However, the relationship of board characteristics such as composition, size, and independence with performance has not yet been established. This paper addresses this question: Does the board size and independence really matter in terms of influencing firm's performance? The findings suggest that: There is an inverse association between board size and firm performance. Different proportions of board independence have dissimilar impact on firm performance. The impact of board independence on firm performance is more when the board independence is between 50 and 60 per cent. Smaller boards are more efficient than the larger ones, the board size limit of six suggested as the ideal. Independent directors have so far failed to perform their monitoring role effectively and improve the performance of the firm. The guidelines on corporate governance should take into account the ‘cross-board’ phenomenon while defining the criteria for eligibility for appointment as an independent director. Lack of training to function as independent directors and ignorance of the procedures, tasks, and responsibilities expected of them could be reasons for the independent directors' non-performance. A bad performance leads to an increase in board size, which in turn, hampers performance. Guidelines are provided for future studies to include different variables to see which board composition is suitable for different companies at different stages of life cycle.