Firm Productivity and Board Committee Structure

Abstract:     
This paper demonstrates a linkage between the composition of the boards of directors and firm productivity by examining the committee structures of boards for firms listed on the S&P 500. First, a vast majority of boards have set up audit, compensation and nominating committees, committees that primarily monitor and reward the behavior of senior managers. Similarly, a large number of boards have finance, investment and strategic development committees, committees whose primary functions are to evaluate and recommend long-term investment and financing decisions. Second, monitoring committees are disproportionately comprised of directors independent of management whereas productivity committees are disproportionately comprised of directors employed by the firm. Third, a positive relation is found between the percentage of outsiders on monitoring committees and factors associated with the benefits of monitoring. These factors are the firm's outstanding debt and free cash flow. If monitoring is perceived to be an input into a firm's productivity, then this result suggests that outside directors increase productivity through better monitoring. Fourth, a positive relation is also found between the percentage of insiders on productivity committees and measures of firm productivity. These measures include return on assets, productivity off capital expenditures and stock market returns.

JEL Classification: G3

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