Board Governance and Corporate Performance
Journal of Business Finance & Accounting (Vol. 45, 1-2, Forthcoming)
48 Pages Posted: 27 Nov 2017 Last revised: 30 Nov 2017
Date Written: August 15, 2017
We examine the link between the monitoring capacity of the board and corporate performance of UK listed firms. We also investigate how firms use the flexibility offered by the voluntary governance regime to make governance choices. We find a strong positive association between the board governance index we construct and firm operating performance. Our results imply that adherence to the board-related recommendations of the UK Corporate Governance Code strengthens the board's monitoring capacity, potentially helping mitigate agency problems, but that investors do not value it correspondingly. Moreover, in contrast to prior UK findings suggesting efficient adoption of Code recommendations, we find that firms at times use the Code flexibility opportunistically, aiming to decrease the monitoring capacity of the board, which is followed by subsequent underperformance. This finding questions the effectiveness of the voluntary approach to governance regulation followed in the UK and in many countries around the world.
Keywords: agency theory, board committees, board independence, board of directors, comply or explain, corporate governance, corporate governance codes, firm performance, managerial opportunism, non-executive directors
JEL Classification: G30, G34, G38
Suggested Citation: Suggested Citation