BOARD COMPOSITION FROM A STRATEGIC CONTINGENCY PERSPECTIVE

TLDR

Corporate success depends on the interplay of environment, strategy, and past performance, each acting as a strategic contingency. The study investigated how a firm’s environment, strategy, and past performance relate to board size and outside director representation. The authors analyzed data from 119 Fortune 500 industrial firms during 1983‑1989. Canonical analysis revealed that environmental uncertainty, external growth, diversification, leverage use, and poor past performance predict larger boards and more outside directors, and that such board composition is positively linked to future financial performance.

Abstract

ABSTRACT This study examined the association between corporations’environments, strategies, and past performance and the composition of their boards of directors as measured by size and outside director representation. The environment, strategy and past performance were viewed as posing a strategic contingency; each of these sets could determine the success or failure of the company. Data on 119 Fortune 500 industrial companies for the 1983‐9 period were used. Canonical analysis showed that increased uncertainty of a firm's environment, use of external growth and diversification; reliance on leverage as a means of finance, and poor past financial performance were associated with large board size and increased outside representation in subsequent years. Most important, board composition was positively associated with future measurements of corporate financial performance.