Corporate Boards and Company Performance: review of research in light of recent reforms

• Published date: 01 September 2007
• Author: David Hecht,George S. Benson,David Finegold
• DOI: http://doi.org/10.1111/j.1467-8683.2007.00602.x
• Date: 01 September 2007

Corporate Boards and Company

Performance: review of research in

light of recent reforms

David Finegold*, George S. Benson and David Hecht

Recent US corporate governance reforms introduced extensive regulations and guidelines for

public corporations, particularly corporate boards. This article evaluates the extent to which

empirical research on corporate boards and f‌irm performance supports these reforms. Building

on the meta-analysis conducted by Zahra and Pearce (1989), we review 105 studies published

between 1989 and 2005. We f‌ind most of the practices mandated by the Sarbanes-Oxley Act of

2002, and the regulations issued by the New York Stock Exchange (NYSE) and the NASDAQ,

had not been subject to prior study. Where board characteristics have been studied, we f‌ind

limited guidance for policymakers on identifying governance practices that result in more

effective f‌irm performance. In an effort to increase the relevance of future research on boards

and f‌irm performance, we provide a framework on corporate boards.

Keywords: Corporate performance, evaluation of the board, board of directors

Introduction

This article summarises the key elements of

recent U.S. corporate governance reforms

and analyses whether there is support for

these reforms in the last 16 years of empirical

research on corporate boards and f‌irm perfor-

mance. This timeframe was chosen to cover the

research since the last comprehensive review

on this topic, conducted by Zahra and Pearce

in 1989. We not only update their review of the

literature, but also extend it to cover areas not

covered in their original review: director

compensation and ownership and the impact

of shareholder activism. We also extend the

review to cover the growing international

body of research on board characteristics and

f‌irm performance.

We included studies that met three criteria:

they 1) featured statistical tests of the

relationship between corporate boards of

company performance; 2), were published in

the main peer-reviewed journals that deal

with corporate governance, and 3) appeared

after 1989. The main company performance

variables used in the literature are f‌inancial

and/or stock market measures, but in

keeping with the thrust of recent reforms

we included studies that measured f‌inancial

reporting, fraud, or bankruptcy as outcome

measures.

We identif‌ied 105 studies that met these

three criteria. Theoretical papers, qualitative

research, and empirical studies that did not

include performance may be referred to in the

text, but are not considered part of the core

sample.

We f‌ind that despite a large volume of cor-

porate governance research across many aca-

demic disciplines in the last 16 years, most of

the practices mandated by the Sarbanes-Oxley

Act of 2002, and the regulations issued by the

New York Stock Exchange (NYSE) and the

NASDAQ, had not been subject to prior study,

although a few have recently received atten-

tion. And for those board characteristics that

have been studied there is, at best, weak guid-

ance for policymakers on what governance

practices will lead to more effective f‌irm per-

formance. We conclude with a framework to

try to increase the relevance of future research

on boards and f‌irm performance.

*Address for correspondence:

Keck Graduate Institute for

the Applied Life Sciences, 535

Watson Dr., Claremont,

CA 91711, USA. E-mail:

david_f‌inegold@kgi.edu; Tel:

909-607-9651

CORPORATE BOARDS AND COMPANY PERFORMANCE 865

Volume 15 Number 5 September 2007

© 2007 TheAuthors

Journal compilation © 2007 BlackwellPublishing Ltd, 9600 Garsington Road,

Oxford, OX4 2DQ, UK and 350 Main St,Malden, MA, 02148, USA