The Moderating Effect of Board Independence on CEO Tenure and Firm Performance

Abstract

This study investigates the moderating effect of board independence on the relationship between CEO tenure and firm performance. The purpose of this research is to explore whether firms led by female CEOs perform differently than those led by male CEOs, and how the level of board independence influences this dynamic. The research adopts a quantitative methodology, utilizing a panel data set of publicly listed firms from 2014 to 2023 across eleven (11) industries. Regression analysis is employed to assess firm performance, measured by Tobin's Q while controlling for variables such as audit quality, firm size, and leverage. Board independence is quantified by the percentage of independent directors on the board. The findings reveal that all the variables are significant in terms of Tobin's Q, but this effect is significantly moderated by board independence. Specifically, in firms with higher levels of board independence, the positive impact of CEOs tenure on firm performance is amplified. These results suggest that board independence plays a critical role in maximizing the potential benefits of tenure in leadership. The implications of this study extend to both corporate governance practices and tenure diversity initiatives. Firms should not only aim to increase tenure diversity in executive roles but also focus on enhancing board independence to unlock the full potential of diverse leadership. Policymakers and regulators may also consider the findings when framing guidelines for board composition and tenure representation in leadership. Limitations of the study include the use of archival data, which may not fully capture the nuances of board dynamics, and the potential for omitted variable bias due to unobserved firm characteristics. Additionally, the study is geographically limited to publicly listed firms in a single country, which may limit the generalizability of the findings. This research contributes original insights by combining two streams of literature-tenure diversity and corporate governance-offering a nuanced understanding of how board independence can influence the CEO tenure-firm performance relationship.

Keywords: JEL Classification: C23, C58, C87, M21, M24, M48 Audit quality, board independence, CEO tenure, firm performance, firm size, leverage