The Impact of Board Composition on Firms’ Critical Decisions: A Meta-Analytic Review

Abstract

To date, the results of agency theory-based research exploring the impact of board composition on firms’ critical decisions are equivocal. Through meta-analyses, this study reveals systematic relationships between board composition and six of the seven critical decisions examined. Interestingly, the results provide little support to agency theory’s predictions on the impact of board composition on critical decisions that involve a potential conflict of interest between managers and shareholders. Implications for theory and practice are discussed.

Corporate boards and the performance of Asian firms: A meta-analysis

“…Firms led by more independent boards and boards with a separate leadership structure, however, are likely to promote more leverage because it creates more value for shareholders. A recent meta-analysis on board research by Deutsch (2005) confirms a positive association between the number of outside directors and debt intensity (cf. Berger, Oefek, & Yermack, 1997 for the US).…”

“…First, our understanding of the performance effects of board attributes is simply incomplete if we do not know enough about the mechanisms that drive performance differences between Asian firms. Exploring the mediating effects of revealed strategic choices appears to be the theoretically most plausible route to answer this "how" question (Deutsch, 2005). Second, the performance effects of differential strategic choices arguably are economically more consequential in corporate governance than the distributional effects of expropriation, as the latter need not affect value creation (at least not in the short run).…”

An Organizational Approach to Comparative Corporate Governance: Costs, Contingencies, and Complementarities

“…Stewardship theory has relaxed some of the assumptions about managerial behavior found in agency theory, arguing that managers may act as stewards for the good of the organization in situations where only relatively minor conflicts of interests exist (Davis 2005;Deutsch 2005). Likewise, stakeholder theory recognizes that the effectiveness of corporate governance practices depends on a wider set of firm-related actors and their interactions (Freeman 1984).…”

“…Since the nature and salience of these resources depends on the interplay with diverse organizational environments rather than being a universal model, we argue that contingencies associated with internal and external resources are likely to influence the effectiveness of particular governance practice. In other words, the effectiveness of governance practices may depend on the firm's size or age, the phases of growth or decline in the company's development, the character of innovation in different markets and sectors, and the regulatory and institutional constraints on business activity (Hermalin and Weisbach 1998;Deutsch 2005). While a contingency perspective rejects the notion of universal best practices (Donaldson 2001), it also suggests that policy will be more effective if it takes into account the potential diversity of governance mechanisms, which deal with important contingencies.…”

“…Despite considerable research effort, the empirical findings on this causal link have been mixed and inconclusive. For example, empirical studies of the effects of board composition and ownership structure on financial performance have failed to identify any consistently significant effects (Ketchen et al 1997;Dalton et al 2003;Deutsch 2005). Critiques of agency theory have pointed out its 'under-contextualized' nature and hence its inability to accurately compare and explain the diversity of corporate governance arrangements across different institutional contexts (Aguilera and Jackson 2003).…”