Some Empirical Literature Evidence on the Effects of Independent Directors on Firm Performance

Abstract

This work is a review of existing literature on the effectiveness of independent directors at ensuring superior firm performance. I find that the evidence in this regard are not only mixed but may also be culture-bound. While some studies, especially most of those structured and conducted in the U.S find no positive relationship between the presence of independence directors on the board and the performance of those firms, some others, especially those structured and conducted in the orient find a positive relationship.However, there is one positive relationship common to most findings and that is the fact that the presence of independent directors on boards of firms actually improves governance of those firms, notwithstanding the fact that quality of governance may not necessarily translate to high firm performance. In the case of independent directors who are executive directors of other listed companies their propensity to engage in effective monitoring may reflect the low level of monitoring that they would like to see from non-executives on their own board.This author however argues that notwithstanding the fact that research evidence has not universally and conclusively fingered independent directors to have positive effects on corporate performance, he still believes in the conventional wisdom that they really do affect corporate performance positively. In his mind, a simple majority of independent directors over the other directors may do the magic. The supermajority independent directors may so excessively check board flexibility, in the bid to produce good corporate governance, that the activities of executive directors to raise performance may become stifled. So, the presence of supermajority independent directors on the board may produce good corporate governance but not necessarily good or better firm performance.This author further suggests that researchers should also advert their mind to the possibility that corporate performance in relation to independent boards may actually be culture-bound. The fact that some results in the orient appear to be consistent on this positive correlation while those from the U.S. appear not to endorse such a relationship should necessitate another round of research to find out if culture, the environment or corporate history may be responsible for the disparity in research findings.