What Factors Drive Director Perceptions of Their Board's Effectiveness?

Abstract

We use a survey of directors to collect data on their ratings of board effectiveness as well as board internal dynamics and key processes. Controlling for many of the governance metrics examined by prior research, we find that directors’ ratings of their boards’ effectiveness are positively related to measures of board internal dynamics (such as relations with the CEO and senior management, and its ability to perform well as a team), director engagement (reflected in meeting preparedness), and the breadth of the board’s experiences. Tests for a subset of firms that are identified in the survey show that boards rated as ineffective have a higher likelihood of losses one year after the survey, consistent with effective governance enhancing the management of risk.

Keywords: board of directors, corporate governance, risk management

JEL Classification: G39