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The Uncertain Relationship Between Board Composition and Firm Performance

Sanjai Bhagat
University of Colorado at Boulder - Department of Finance

Bernard S. Black
University of Texas at Austin - School of Law; McCombs School of Business, University of Texas at Austin; European Corporate Governance Institute (ECGI); Northwestern University - School of Law; Northwestern University - Kellogg School of Management



As published in Business Lawyer, Vol. 54, pp. 921-963, 1999.

Abstract:     
We survey the evidence on the relationship between board composition and firm performance. Boards of directors of American public companies that have a majority of independent directors behave differently, in a number of ways, than boards without such a majority. Some of these differences appear to increase firm value; others may decrease firm value. Overall, within the range of board compositions present today in large public companies, there is no convincing evidence that greater board independence correlates with greater firm profitability or faster growth. In particular, there is no empirical support for current proposals that firms should have "supermajority-independent boards" with only one or two inside directors. To the contrary, there is some evidence that firms with supermajority-independent boards are less profitable than other firms. This suggests that it may be useful for firms to have a moderate number of inside directors (say three to five on an average-sized eleven member board). We offer some possible explanations for these results, based on board dynamics, the informational advantages possessed by inside (and, often, affiliated) directors, and the value of interaction between different types of directors who bring different strengths to the board.

Note: An earlier version of this article was announced as Stanford Law School, Olin Law and Economics Working Paper No. 175; and Columbia Law School, Law and Economics Working Paper No. 137.

JEL Classifications: G32, G34

Accepted Paper Series

Date posted: October 17, 1997 ; Last revised: June 22, 2000

Suggested Citation

Bhagat, Sanjai and Black, Bernard S., The Uncertain Relationship Between Board Composition and Firm Performance. As published in Business Lawyer, Vol. 54, pp. 921-963, 1999.. Available at SSRN: http://ssrn.com/abstract=11417 or doi:10.2139/ssrn.11417


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Contact Information

Bernard S. Black (Contact Author)
University of Texas at Austin - School of Law ( email )
Austin, TX 78705
United States
512-471-4632 (Phone)
McCombs School of Business, University of Texas at Austin
Austin, TX 78712
United States
European Corporate Governance Institute (ECGI)
Brussels Belgium
Northwestern University - School of Law
375 E. Chicago Ave
Chicago, IL 60611
United States
Northwestern University - Kellogg School of Management
2001 Sheridan Road
Evanston, IL 60208
United States
Sanjai Bhagat
University of Colorado at Boulder - Department of Finance ( email )
Campus Box 419
Boulder, CO 80309
United States
303-492-7821 (Phone)
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