The IUP Journal of Corporate Governance
Board Composition and Firm Performance: The Case of FTSE All Shares

Article Details
Pub. Date : Jan, 2020
Product Name : The IUP Journal of Corporate Governance
Product Type : Article
Product Code : IJCG10120
Author Name :Imad Chbib, Mike Page
Availability : YES
Subject/Domain : Management
Download Format : PDF Format
No. of Pages : 21

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Abstract

This paper investigates the impact of the composition of board of directors on firm performance using UK FTSE All-Shares non-financial firms for the period before and during the latest global financial crisis. The main hypotheses tested were whether board composition, namely, board size and board independence, has an impact on firm performance, using Tobin's Q (TQ) and Return on Assets (ROA). Univariate and multivariate (including 2SLS regression) were carried out to test these hypotheses. The results suggested a high positive association between board size and TQ, and insignificant association between board size and ROA, while some evidence was found for the impact of an independent board on firm performance. The results also found a negative association between blockholdings and performance during the financial crisis in 2008, whilst an insignificant relationship was observed before 2008. The paper contributes to prior research by providing year by year analysis to the relationship between board composition and performance prior to and during the financial crisis and considering the impact of large shareholders (in particular institutional shareholders) on mitigating agency costs.


Description

The demise of Enron in the US in late December 2001 and the global financial crisis that began with the collapse of another American corporate giant, Lehman Brothers, in September 2008, have fueled the debate on the need for more effective corporate governance mechanisms to promote good practice and ensure effective boards of directors. This led to the publication of the new UK Corporate Governance Code (the Code), which focused on the internal mechanisms of corporate governance to ensure effective management of companies' resources. Recommendations of the Code include having a sufficient number of non-executive directors, implementing effective remuneration policies that can be aligned to companies' performance, transparency and accountability, and promoting an effective relationship between the board of directors and the shareholders. Studies have suggested many mechanisms, both internal and external, to reduce the cost of the conflict between the principal and the agent. This paper seeks to examine the association between board composition, in particular board size and board independence, and firm performance.

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