Contingent corporate governance: a challenge to universal theories of board structure

Agency theory proposes that the role of the board of directors is to control management (Fama & Jensen 1983). A structurally independent board, one with a high percentage of non-executive directors and a chairperson who is not the CEO, has been used as a proxy for the control role. Therefore, agency theory predicts a positive relationship between independent board structure and firm performance. These predictions have not been confirmed by meta-analytic reviews (Dalton, Daily, Ellstrand, & Johnson 1998; Rhoades, Rechner, & Sundaramurthy 2000).This thesis applies structural contingency theory to provide an alternative explanation for the relationship between board structure and firm performance. Structural contingency theory (Donaldson 2001) proposes that the relationship between an organizations structure and its performance is moderated by contingencies. In this study the contingency is the salience of the boards control role. I argue that structural independence of the board has a beneficial effect on performance only if it is in fit with control salience. For example, a firm with an independently structured board that gives high prominence to the control role will perform well. On the other hand, another firm with a less independently structured board that does not see its main role as controlling management will also prosper.Survey data were analyzed to measure the control salience for 98 Australian listed companies. Archival data provided measures of board structure and firm performance. Consistent with the meta-analytic reviews, there was no association between independent board structure and firm performance. There was some evidence that high control salience resulted in high performance, but this effect was evident chiefly when performance was measured by total shareholder returns. This may indicate that the share market was responding to the symbolism of high control salience. In contrast to the symbolic main effect of control salience, the fit between the control salience and the independent structure of the board caused increased return on equity. This reflects the boards objective effect on profit when its structure is in fit with control salience