Board of director effectiveness and informal institutions: A meta-analysis

Research Summary

Board independence is central to corporate governance. Numerous theories espouse the value of the monitoring and advice provided by outside board members, and governance codes worldwide call for boards with more independent directors and for separating the roles of chief executive officer and chairman. However, neither original studies nor meta-analyses have found a substantial link between board independence and firm performance. We adopt an institutional logic perspective to argue that the relations between board independence and firm performance is moderated by the institutions of a country. Our analyses find that the strength of the informal institutions is a more important moderator than that of formal institutions. We employ country-level institutional moderators and apply meta-regression to a sample of 86 articles encompassing 40 nations. We offer suggestions for future governance research.

Managerial Summary

Board independence is widely considered to be a hallmark of good governance. However, prior research has been unable to connect independence with a firm's financial performance. We provide practical advice by demonstrating how national institutions shape the consequences of an independent board. Using a multi-country sample, we show that the effectiveness of the corporate governance practices, such as board independence, depends on the strength of the local institutions and that the strength of the informal institutions is more important in explaining the effectiveness of the board than the strengths of the formal institutions. Stronger informal institutions strengthen the board independence- firm performance relationship. We discuss the implication of our findings.