Board structure: dimensionality and performance effects

This study attempts to explain the impact of board structure oncompany performance. This involves establishing the dimensionalityof board structure. Two dimensions are found: board independenceand network connections. The effect of each dimension of boardstructure on performance is then investigated. The examinationbegins with two competing theories: agency and stewardship. Usingthe agency theory model, it is hypothesised that an independentboard will control self-interested behaviour and put incentivealignment mechanisms in place and that these actions will strengthenfirm performance. In opposition to agency theory, stewardship}ptheory holds that managerial control of the firm empowers andmotivates managers to maximise company profits. Therefore,managerial control of the board leads to high company performance.There is a third theoretical framework dominant ln governanceresearch, resource dependence, which is also examined. This theoryfocuses on the board's role in co-opting external resources for theorganization. It is also tested using data on network connectionsand firm performance. The study uses a sample of 145 publiclylisted Australian companies. Data from archival sources was collectedfor the period 1992-1994. The impact of board structure isassessed using a lagged design with performance being measuredsubsequent to structure. Confidence in the direction of causalityfrom structure to performance is established with controls for priorperformance. Industry, size, risk and leverage are also controlledThe main results of the regression analyses suggest that board independencehas a negative effect on shareholder wealth and salesgrowth. Network connections have no effect. These results challengeagency and resource dependence theory and support the newerperspective, stewardship theory. Boards characterised by managerialcontrol are found to have positive effects on shareholder wealthand sales growth. However, in treating the two dimensions of boardindependence and network connections separately, a new patternappears. Board independence is moderated by network connections.The effect of board independence is contingent on high connections