Firm Performance and Board Committee Structure

TLDR

The study investigates how board committee composition and director roles relate to firm performance, aiming to uncover significant links between performance and board structure. The results show that while overall board composition is weakly linked to performance, higher representation of inside directors on finance and investment committees is positively associated with accounting and market performance, leading to higher stock returns and ROI, supporting Fama and Jensen’s view of inside directors’ informational value.

Abstract

This article demonstrates a linkage between firm performance and board composition by examining the committee structure of boards and the directors' roles within these committees. Consistent with previous studies, I find little association between firm performance and overall board composition. However, by going into the inner workings of the board via board committee composition, I am able to find significant ties between firm performance and how boards are structured. First, a positive relation is found between the percentage of inside directors on finance and investment committees and accounting and stock market performance measures. Next, firms significantly increasing inside director representation on these two committees experience significantly higher contemporaneous stock returns and return on investments than firms decreasing the percentage of inside directors on these committees. These findings are consistent with Fama and Jensen's assertion that inside directors provide valuable information to boards about the firms' long‐term investment decisions.