Recently various scholars have investigated the relationship of the size and structure of the board with the corporate performance in different countries and industries and found them inconclusive. This paper is an attempt to highlight the relationship of the size and structure of the board on performance, and thus on governance, which was of concern to the Indian scholars way back around 300 BC. Their guidelines for deciding the board size and composition is very much relevant even today.
Effective
and efficient governance is essential for accomplishing the
goals of corporations and countries as well. The board of
directors governs the corporations, at a relatively micro
scale, and the council of ministers governs the country, at
a relatively macro scale. Scholars unanimously agree to the
importance of the role of board of directors on the corporate
performance. However, the researchers do not agree the nature
of relationship between the size of the board to corporate
performance or firm value and the relationship between the
compositions of the board to the corporate performance. The
question of `Does the Board Size Really Matter?' is thought
to be of recent origin. However, this paper attempts to highlight
that the influence of the board size and composition on the
performance was the concern of Indian scholars even before
300 BC and to rediscover the ancient Indian view and prescription
on the board size for better governance both on micro and
macro scale, as in Kautilya's Arthasastra only.
Various
studies on corporate governance have investigated the relationship
of corporate performance with the board size and structure.
It was found that the size of the board of directors influenced
the corporate performance positively, i.e., larger the board,
more effective will be the performance (Dalton et al.,
1999; Adams and Mehran, 2003; and Belkhir, 2004). Other studies
found that the size of the board influenced the corporate
performance inversely, i.e., the larger the board, less effective
will be the performance (Lipton and Lorsch, 1992; Jensen,
1993; Yermack, 1996; Eisenberg et al., 1998; Hermalin
and Weisbach, 2001; Dwivedi and Jain, 2002; Bennedsen et
al., 2004; and Mak and Kusnadi, 2002). However, Beiner
et al., (2003); and Mayur and Saravanan (2006), studied
the Indian bank sector and found that there was no relationship
between board size and performance or the relationship was
either weak or insignificant. Scholars have been studying
the determinants of the board size such as performance of
the firm (Belkhir, 2004), complexity of the organization decided
by the CEO's need for advice (Klein, 1998), complexity of
the organization caused by diversification of the firm (Rose
and Shephard, 1997), CEO's need for advice caused by diversification
of the firm and the number of segments the firm is operating
in, which in turn determine the number of `outside' directors
in the board (Hermalin and Weisbach, 1988), size of external
contracting relationships determined by the size of the firm
(Pfeiffer 1972; and Booth and Deli, 1999), degree of leverage
(debt-asset ratio) (Klein, 1998; Booth and Deli, 1999; and
Anderson et al., 2003). |
