Identifying Key Determinants of Effective Boards of Directors

Abstract

Mainstream research on boards of directors has been focusing on a direct relationship between board characteristics and firm performance, but up till now the results are inconclusive. Although these studies revealed interesting and useful insights, little is known about the factors that shape board effectiveness. This paper aims to reduce this gap by exploring the variety of indicators that contribute to the effectiveness of boards. The paper derives from an interview-based investigation among 104 directors of Belgian listed companies. The findings are further elaborated with quantitative data from two written questionnaires, involving directors of non-listed companies and experts in the field of corporate governance. The results point to three major issues. First, there appears to be a gap between a limited number of structural board measures consistently found in literature and the systematic occurrence of a set of behavioural criteria of board effectiveness in the perceptions of (Belgian) directors. Second, the findings suggest that the value of independence may be overemphasized at the cost of the broader issue of diversity. Third, it appears that mainstream board research ignores to a large extent two additional conditions (the information flow and the leadership style of the chairman) under which a board of directors can make an effective contribution to the strategic direction and control of a company. Our findings suggest that the ambiguity found in current research evidence can to some extent be attributed to the ignorance of a wide range of interconnected structural (such as diversity and competence) and behavioural factors (such as trust, attitude, norms and conduct) which actually shape the effectiveness of boards in performing their roles. 5 INTRODUCTIONBoards of directors are of interest to academics, the investment community, the business world and society at large. According to Cadbury (1999) this attention is understandable, given the fact that boards of directors serve as a bridge between the shareholders, who provide capital, and management in charge of running the company. At the heart of the corporate governance debate is the view that the board of directors is the guardian of shareholders' interest (Dalton et.al., 1998). Yet, boards are being criticized for failing to meet their governance responsibilities. Major institutional investors put pressure on (incompetent) directors and have long advocated changes in the board structure (Monks and Minow, 2001). Their call has been strengthened by many corporate governance reforms resulting from major corporate failures. The reforms put great emphasis on formal issues such as board independence, board leadership structure, board size and committees (Weil, Gotshal and Manges, 2002;Van den Berghe and De Ridder, 1999). These structural measures are assumed to be important means to enhance the power of the board, protect shareholders' interest, and hence, increase shareholder wealth (Becht et.al., 2002;Westphal, 1998).The interest of the invest...

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