The Influence of Board Structure on Firm Performance

Abstract

This study examines the influence of board structure on firm performance. The results not only provide strong empirical evidence, which is in contrast with the common notions that small board size is better and that board composition is uncorrelated with firm performance, but also explain the internal tradeoff within the board—a matter that is not settled in literature. We argue and find that complicated and simple firms have dramatically different needs for performance-enhancing board structure. Although large boards suffer from cumbersome communication and decision-making problems, they benefit firms via providing more advisory functions. The benefits outweigh the costs in the complicated firms. Furthermore, excessively independent boards may cause over-monitoring problem, which undermine board effectiveness.