Corporate Governance, Board of Directors, and Firm Performance

• DOI: http://doi.org/10.1111/corg.12032
• Author: Alessandro Zattoni,Praveen Kumar
• Published date: 01 July 2013
• Date: 01 July 2013

Editorial

Corporate Governance, Board of Directors, and

Firm Performance

Praveen Kumar and Alessandro Zattoni

The relation of corporate governance (CG) and f‌irm per-

formance, where performance is interpreted broadly to

include not only economic prof‌its but also best manage-

ment practices, is a central issue confronting CG scholars.

In particular, the structure and effectiveness of corporate

boards continues to draw intense scrutiny, in part because

of the tension between their legal role and their actual per-

formance. In most countries, boards of directors serve as

the legal representatives of shareholders, and have the f‌idu-

ciary responsibility to monitor management (e.g., Black,

2000; Van Den Berghe & Levrau, 2004). Meanwhile, board

responsibility is generally interpreted to include not only

the monitoring role of boards but also the expectation that

boards will provide knowledge, advice, and business net-

works to aid management in improving f‌irm performance

(Harris & Raviv, 2008; Pugliese, Bezemer, Zattoni, Huse,

Van der Bosch, & Volberda, 2009; Zahra & Pearce, 1989),

and will effectively represent shareholders in designing

management compensation (Kumar & Sivaramakrishnan,

2008). However, following a wave of high prof‌ile corporate

scandals globally in the last two decades, the determinants

of f‌irm performance and the role of boards and national

governance characteristics remain intense areas of CG

research.

In this issue, we have contributions that address various

aspects of these topics both at the level of the f‌irm and at the

level of national governance characteristics. The f‌irst paper,

by Mather et al., examines the relation of director character-

istics, such as reputation and f‌inancial expertise, to the

quality of managerial earnings forecasts (MEFs). Higher

quality MEFs, for example those that are more accurate and

specif‌ic or are less contaminated with bias, clearly improve

transparency and reduce agency costs, i.e., are consistent

with notions of best management practices or superior f‌irm

performance. Using some unique aspects of Australiansecu-

rities laws that mandate “continuous” disclosure of price-

sensitive information, the paper examines the association

between board characteristics and the quality of MEFs. They

f‌ind that the relation of positive board characteristics, such

as independence, good reputation, and f‌inancial expertise,

to higher quality MEFs is moderated by the growth oppor-

tunities available to the f‌irm. Previous research on this topic

had been unable to f‌ind a clear and positive association

between board independence and higher quality MEFs;

indeed, some studies found a negative association between

superior board characteristics and MEF quality. However,

the signif‌icant innovation in the study by Mather et al. is that

it examines the inf‌luence of f‌irms’ investment opportunities

on the incentives of the board. It is a common assumption in

the agency literature that f‌irms with higher growth options

are more subject to agency costs from adverse selection and

moral hazard. The authors hypothesize that independent,

reputable, and expert directors will recognize the higher

value of information transparency in high growth option

f‌irms, and will therefore be more diligent in mitigating the

agency costs by ensuring the quality of MEFs.An analysis of

archival data supports their hypothesis. The signif‌icance of

this study is that it shows clearly the importance of consid-

ering the incentives of the board and how these are relatedto

other non-governance-related characteristics.

In a related vein, the second paper, by Farrell et al., exam-

ines the inf‌luence of both governance and non-governance

related f‌irm-level characteristics on decisions by manage-

ment to strategically “manage earnings” through share

repurchases. In contrast to high-quality MEFs, these earn-

ings management-related activities obfuscate the true

economic picture of the f‌irm and increase asymmetric infor-

mation. Using a large sample of 2,225 (unique) US f‌irms

suspected of earnings management over a ten-year period

from 1997 to 2006, these authors f‌ind that growth f‌irms are

less likely to use share repurchases for earnings manage-

ment purposes. The hypothesis here is that growth f‌irms

have better investment opportunities and, therefore, lower

amounts of excess cash available for use in strategic earnings

management activities. Moreover, because the f‌irm’s board

must approve share repurchase programs, the quality of

corporate governance is implicated in the propensity to

engage in earnings management, other things held f‌ixed.

311

Corporate Governance: An International Review, 2013, 21(4): 311–313

© 2013 John Wiley & Sons Ltd

doi:10.1111/corg.12032