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Impact of Board of Directors on the Firm’s Operating Performance

Keywords: Corporate Governance, Organization Operating Performance, Return on Assets (ROA), Research Paper Example, Research Paper Topic, Thesis Statement Example, Thesis Paper Example.

Thesis Statement:

“The Impact of Board of Directors Composition on the Firm’s Operating Performance”


Corporate governance (CG) and board management has acknowledged much responsiveness in the existing reviews in many parts of the world particularly after numerous corporate failures and scandals of some leading companies in the globe. Despite constricted regulatory structure, Operative Board administration continues to decline across the world organizations because of lack of specialized governance and management malpractices.

This research utilizes the existing financial predicament as a quasi-experiment to scrutinize the extent which the corporate boards influence the performance of companies. The aim of this review is to examine the connection between the structures of members of the board’s performance of the company. Precisely, board independence and board size consideration and expectation from large and small boards and extremely independent boards in measuring the maximum performance.

Performance indicators applied includes the return on equity (ROE), return on assets (ROA), and Tobin’s Q. The investigation discovered an insignificant suggestion on a U-shaped connection between ROA, and board size and a reversed U-shaped link with Tobin’s Q and ROE. Conversely, they both had no statistically significant in drawing conclusions.

Application of a typical multiple regression model established to check the impact of board conformation on performance of the companies listed as top in the country. Independent sample t-test was also used determine whether there was significant performance between executives and non-executives.

The research established a proposition that boards that have a higher proportion of independent director have possessed a developed standard of ROE, however, the outcomes examining the consequence on Tobin’s Q and ROA had no statistically significant.

Impact of Board of Directors on the Firm’s Operating Performance

Chapter 1


Background to the Study

In the current market environment that is dynamic and increasingly competitive, managerial practices are the central factors that influence the financial and operational performance of different firms. Corporate governance stands at the core of decision making in any organisation (Ferreira, 2015). Corporate governance represents a system for direction and control of a company.

One of the forms of internal control mechanisms in corporate management is the board of directors, as the board is usually in charge of formulating strategies for the company and the appointment, supervision and remuneration of top managers. On behalf of a company’s shareholders, the board is charged with management oversight (Tulung and Amdani, 2018).

An oversight function that is effective must be assumed by the board of directors in a bid to protect shareholders’ interests, as agency theorists argue.

The board’s effectiveness influences its ability to carry out its monitoring duties. Factors like the composition of the board, its size, quality, the chief executive officer’s duality, the diversity of the board, its culture and information asymmetries all influence the board’s effectiveness (Azeez, 2015).

To stakeholders in general and particularly shareholders, one of the issues that are of utmost importance is operating performance. On the one hand, it is usually a source of financing that is key to current economic activities.

This would, in turn, go a long way in helping maintain a going concern and would also go a long way in increasing the business’ value. On the other hand, it is also the basis for the distribution of dividends, which would, in turn, attract more investors, together with their funds (Ararat et al., 2015).

Corporate governance is an area of business that is of vital importance, which most times is ignored and undervalued. For corporate governance, the board of directors is the key mechanism especially in those large corporations (Trickier and Trickier, 2015).

A superior board composition has the capability of enhancing the decision making of a firm and even potentially improve its capability of creating wealth with sufficient levels of corporate accountability.


The relationship between the performance of firms and the composition of boards is a topic that is continuously and widely discussed around the world. Uncertainty exists on whether there is a negative or positive causality between elements of this specific relationship.

This is because previous studies have received contradicting findings (Veklenko, 2016); hence, an additional investigation of this subject matter will be necessary. Acquiring such evidence will provide an opportunity for firms to reap the significance of having a strategic board in place.

Furthermore, the potential motivation for carrying out this study is to provide a clear understanding on whether the operation performance of a firm is affected by the size of the board, the independence of a board, the gender diversity of a board and lastly, the CEO duality.

This will provide a significant insight into the vital considerations to be considered when nominating directors into a board.


It is still ambiguous whether there exists a negative or positive causality among these specific elements because contradictory results have been received in different studies.

Existing literature does not appear to have reached conclusions on what elements of the composition of boards exactly influence the performance of a firm directly. This research is motivated by the need to understand the influence of the different elements.

There are two characteristics of boards this research mainly focuses: independence of the board and the size of the board. The numbers of board members that are efficient for different boards vary in different studies. While some studies recommend that boards should have a large number of people (Kogan and Wallach, 1966; Sah and Stiglitz, 1991), there are others that hold the view that fewer board members would be more preferable (Yermack, 1996). Mixed results were identified in other studies (Coles, Daniel and Naveen, 2008).

In addition, many scholars have found that companies with outside board members perform better (Zahra and Pearce, 1989; Lorsh and Maclver, 1989; Bharat and Black, 2002). On the contrary, other scholars argue that directors who are independent are not as effective, because their access to information is quite limited (Harris and Raviv, 2006).

Research Objectives

The main aim of this study is to investigate how the composition of boards of directors affects the operating performance of a firm.

More specifically, this study investigates the following research objectives:

  • Whether the operating performance of a firm is affected by the size of the board
  • Whether the operating performance of a firm is affected by the independence of a board
  • Whether the operating performance of the firm is affected by the gender diversity of a board
  • Whether the operating performance of the firm is affected by CEO duality

Structure of the Research

This study is structured as follows: the literature review, data and methodology, results and finally the conclusion. The literature review chapter covers the size of boards, the independence of boards, and gender diversity of members of a board and CEO duality.

The data and methodology chapter discuss the sample data, methodology, variable definitions, control variables and a conclusion.

The results chapter describes descriptive statistics, regression results and a robustness check of the results. Finally, the conclusion chapter summarises the main findings, discusses the research limitations and provides suggestions for future research.

Chapter 2

Literature Review


The main objective of this chapter is to critically evaluate the available literature.


This chapter presents a review of the literature on the relationship between board composition and the Firm’s Operating Performance. This chapter presents relevant literature of the board size, Board Independence, Gender Diversity of Board Members and CEO Duality.

Board Size

Various functions are fulfilled by the board of directors (Solomon, 2010). While non-executive directors are tasked with advising the company’s CEO on the best strategies of business and monitoring the executive management, information is also usually passed to outsiders (Jensen, 1993).

Most literature that is concerned about the effects of board size on the performance of firms argue that, compared to large boards, smaller boards are more beneficial (Wu, 2003), and this is entirely based on the commonly held belief that groups that are small in size tend to be more productive and cohesive (Pablo et al., 2005). Problems like high costs of coordination and social lofting are common in large groups and this reduces their effectiveness in terms of monitoring.

According to Lipton and Lorsch (1992), boards that have more than eight members often are the most effective, and that the ability of each of the board members to express their opinions and ideas becomes more difficult when a board exceeds the optimal size. Jensen (1993) appears to agree with this view.

He posits that boards that comprise of more than eight members are less effective in their functioning and, compared to large boards, are easier for the CEO to control.

In reference to the literature that argues that there exists a positive relationship between the performance of firms and the size of boards, large boards provide a number of advantages (Wu, 2003). It is possible to argue, from an agency perspective, that there are more opportunities in large boards large for external linkages and, therefore, resource access (Nicholson and Kiel 2003).

There is a variety of studies that argue that firms are linked to their external environments through the boards, where directors play the role of looking for resources outside the firm (Hillman et al., 2000; Klein, 1998).

Dalton et al. (1999) hold the view that large boards offer high levels of counsel and advice to CEO’s. Therefore, the first set of hypothesis test states that there exists a negative relationship between corporate operating performance and the size of the board.

Hypothesis 1: The relationship between board size and ROA is negative.

Hypothesis 2: The relationship between board size and ROE is negative.

 Board Independence

The number of directors that are independent represents the level of independence of a board overall. There is mixed evidence on the relationship between board independence and performance of firms. A positive correlation is observed by the majority of scholars, and they have reached the conclusion that those boards that have a larger number of outside directors are more effective (Zahra and Pearce, 1989; Agrawal and Knoeber, 1996; Bhagat and Black, 2002).

There are, however, studies that found no evidence of a correlation between the performance of a firm and the percentage of outside directors’ present in a firm (Mehran, 1995; Adams et al., 2010).

Agency theory can be used to explain the preference for boards that are more outsider-dominated. The behaviour of an individual is explained by the principal-agent problem, together with their inclination to serve their personal interests first (Molenkamp, 2015).

A person may take advantage of the control bestowed on them by pursuing actions that are of no benefit to the company but benefit them personally. A senior board member needs to have the positive personal characteristics of being open-minded and having integrity.

According to agency theory, these personal characteristics correspond more to an independent director’s traits. As such, outside directors would be more favourable. This is because outside directors have more independence from the management of a firm (Yasser, Entebang and Mansor, 2015).

As a counter-argument for favoring directors that are independent, by their nature, they have less information available for the purposes of monitoring and furthermore, have difficulties in obtaining it.

This is largely due to the fact that there is always some level of reluctance for management to share aspects of a business that is of great importance. This concealment of information from outside board directors does not, however, have to be the case for each and every company.

According to Molenkamp (2015), directors who are independent could prove to be more valuable to those firms they serve, if they are provided with all information that is both timely and useful. Ineffectual oversight of the decisions of a firm and failure in objective monitoring of a firm’s management activities can come about as a result of a low representation of outside directors.

Today, boards tend to be more independent because companies aim to improve corporate governance mechanisms i.e. transparency and increased accountability.

Presumably, the issue of concealment of information is addressed by these companies. Boards of directors have roles of providing and monitoring resources; this influences the performance of firms directly, in theory. The function of the monitoring means regulation of managers on behalf of different shareholders.

The theory of resource dependence discusses how a board can contribute to accessing valuable resources and states that one factor that is fundamental for success is being better at gathering and subsequent exploitation of resources than competitors.

According to Mehran (1995), outside managers are in a better position to perform supervisory functions, as most of these managers are also involved in decision making in other organisations and are equipped with more professional knowledge.

This, by itself, implies that directors who are independent can be a source of intellectual resources that would contribute to performing better than competitors. Further, directors who are independent care more about their reputation and, as such, do everything within their means to improve it.

Generally, it would be more likely to expect a higher number of members who are independent on boards for the enhancement of the performance of a firm, due to their opinions, which have zero bias, experience and extensive knowledge.

The second set of hypothesis states that a positive relationship exists between corporate financial performance and the proportion of outside directors that sit on a board. The third hypothesis proposes that a positive impact on ROA comes about from greater independence of boards.

Hypothesis 3: The board independence has a positive impact on ROA.

Hypothesis 4: The board independence has a positive impact on ROE.

 Gender Diversity of Board Members

The role of gender diversity in the performance of firms is highlighted by recent research. Those boards which have greater gender diversity have lower non-attendance of board meetings.

Increased gender diversity on boards also has the potential of decreasing the performance of a firm. According to Lehobo (2011), members of groups that are homogeneous are able to frequently communicate due to the increased probability of sharing similar opinions.

A board’s gender structure has the potential of affecting a firm’s operating performance and the quality of its monitoring role. According to Campbell and Vera (2008), greater diversity in gender brings about huge economic gains. Tacheva and Huse (2006) posit that the effectiveness of a board and its dynamics are affected by women directors.

According to them, service tasks and financial control, which are board tasks, are affected negatively by the number of women directors on any board. Women board members’ impact on the effectiveness of a team differs between different tasks.

According to Lehobo (2011), a positive relationship exists between corporate profitability and diversity of gender in boardrooms. On the contrary, a negative relationship exists for the diversity of gender in the executive suite.

If a company’s board has two or more women directors, it has a higher probability of being successful than other companies on three different measures of profitability: return on equity, return on assets and return on sales. On the other hand, the same company shows lower average profitability with one or more female executives.

Nielsen and Huse (2010), in their investigation of how much women directors give their input to board decision making and how much they are strategically involved, they found out that a women director’s professional experiences have the ability to influence the strategic involvement of boards through their contributions in the making of decisions.

Calabro, Torchia and Huse (2011) hold the view that the level of innovation in a firm is enhanced by increasing the number of women on any board of directors.

Their findings further show that the relationship that exists between the level of innovation in a firm and the number of women directors is affected by the strategic tasks of a board.

According to Shaffique, Idress and Yousaf (2014), women can be able to positively impact the performance and governance of a firm if they make up at least 30% of the board. According to Joecks, Pull and Vetter (2012), the critical mass of 30% would mean the board having at least three women.

A high percentage of women on boards has the potential of bringing benefits to the entire sector, including innovative and creative skills.

An increased proportion of woman on boards can lead to better prospects for the future and a better working environment.

Darmadi (2010), however, finds the presence of women in top positions is in no way related to a firm’s improved performance.

He further reveals that those businesses that are family-controlled in Indonesia have higher shares of female board members. In contrast, Prihatiningtias (2012) holds the view that a firm’s performance is negatively as well as positively influenced by the diversity of gender.

According to Izgi and Akkas (2012), those firms in which a woman is the CEO have been observed to have higher profitability compared to firms headed by male CEO’s.

According to research conducted by Cartyer, Simkins and Simpson (2003), a sample of six leading banks indicated that the presence of even one woman on the board improved the bank’s profitability.

Even though the impact on the performance of the size of a board is neutral, the presence and proportion of female directors positively influence the firm’s financial performance.

Hypothesis 5: There is a positive relationship between the participation of women in boards and ROE.

CEO Duality

Under CEO duality, a company’s CEO is also the chairman of the board of directors. There are two schools of thought on CEO duality. Some researchers hold the view that for companies, CEO duality is detrimental in some way because the CEO is tasked with “marking their own examination papers”.

In most instances, separation of duties leads to avoidance of CEO entrenchment, improvement of the effectiveness of board monitoring, the presence of a board chairman who can advise the CEO, and the establishment of independence between corporate management and the board of directors.

On the other hand, other researchers hold the view that, because the chairman and the CEO are the same people, this will put the company in a better position to achieve unambiguous and strong leadership, through unity of command to achieve internal efficiencies,

and through doing away with the potential for any possible conflicts between the board chair and the CEO, and finally through avoiding confusion that may come up because of having two public spokespersons who address the stakeholders of a firm (Rashid, 2013). Consistent with this argument is a positive link between financial performance and a dual leadership structure.

Azeez (2015) finds a negative market reaction to the announcement of splitting up the roles. A keener look into empirical evidence reveals that there exists a mixed and inconclusive relationship between the performance of a company and CEO duality.  Hypotheses 6 and 7 states that a negative relationship exists between corporate financial performance and CEO duality.

Hypothesis 6: CEO Duality has a negative impact on ROA.

Hypothesis 7: CEO Duality has a negative impact on ROE.


This chapter presents literature on the relationship between the size of the board, board independence, gender diversity and CEO duality, and the operating performance of firms. The manner and way in which an organization’s financial resources are used prudently to achieve an organisation’s overall corporate objective are correlated with the quality of corporate governance.

Good corporate governance can keep an organisation in business and further guarantees its future success. According to Rashid (2013), financial performance and the composition of boards influence one another; however, the effect is not immediate.

Often, it is usually assumed that board diversity is the main determining factor of the financial performance of a company. According to Rashid (2013), understanding the processes of a board is not necessary because demographic characteristics can interfere with the performance of the board of directors.

Different scholars hold the view that research studies in the future should be on the benefits and actual mechanisms that women bring about when they sit in boards and the composition of boards would prove to be fruitful extensions of their work.

Assumptions like this require justification that is supported by data. As such, board composition analysis is as important as the board structure’s quantification, and performance of a company is easier to understand when the analysis incorporates the attributes of a board.

Chapter 3

Data and Methodology


This chapter discusses how the research objective was investigated by describing the methods of data collection and analysis.


This chapter presents the data and the methodology of the relationship between board composition and the Firm’s Operating Performance. Next section discusses sample data collection, then section 3.4 discusses the methodology of the study. The methodology consisting of Variable Definitions and Control Variables.

Sample data

This study used the annual reports of different firms across Europe from 2013 to 2017. The reasoning behind choosing this time period was that it would provide the most recent data and, as such, provide results that can be used for up-to-date challenges.

Data concerned with board characteristics such as the size of boards, board composition and independence of boards were collected manually with the use of annual financial reports. Data on the ROE and ROA, number of subsidiaries, number of employees and number of subsidiaries’ variables were also retrieved from ORBIS.

 Based on the highest GDP in 2016, 10 countries were selected (International Monetary Fund, 2017). Russia and Turkey were not included as they are not part of the European Union. Inclusion would result in huge differences in mechanisms of governance.

The United Kingdom, Germany, Poland and Switzerland were also not included due to the inconsistency of data in their annual reports. Thus, Italy, Belgium, Sweden, Spain, and the Netherlands make up the countries that were included in the final sample. Table 1 shows the distribution of firms according to their countries of origin.

Sole trades and partnerships were not included in the study, as the board effects that were being studied were of interest only for corporations. Whether to include a particular company in the analysis was determined by the availability of data.

 A total of 90 companies were included in the final sample. A period of five years was used for the collection of data for each variable. The same period of five years was also used in the calculation of each company’s mean average values. This was informed by the need to reduce the risk of outliers.

In total, the number of annual reports studied for further analysis was 450. This resulted in the database (n = 90) and each variable corresponding to mean values (the sum of values in the years 2013, 2014, 2015, 2016, and 2017, divided by 5).

Table 1. Sample Distribution of the Companies

Countries Numbers of Firms Percentage
Sweden 23 25.55%
Italy 15 16.67%
Belgium 5 0.06%
Netherlands 31 0.34%
Spain 16 0.18%
Total 90 100.00%

Out of the 90 firms, 5 of them are involved in the manufacture and processing of food, beverages and tobacco; 6 are involved in wholesale and retail trade; 12 are involved in the processing of chemicals, rubber, plastics and non-metallic products; 7 are involved in the processing of textiles, apparel and leather; 6 are involved in construction; 6 are in distribution of gas, water and electricity; 4 are involved with metals and metal products; and 13 are involved in other services (See Table 2).

Table 2. Industry Distribution of the Sample

Industry Number of Firms Percentage
Food, beverages, tobacco (TB) 5 6%
Wholesale & retail trade (WS) 6 7%
Chemicals, rubber, plastics, non-metallic products (CH) 12 13.33%
Textiles, apparel, leather (TX) 7 7.77%
Construction (CON) 6 7%
Other services (OS) 13 14.44%
Gas, water and electricity (GWE) 6 7%
Metals and metal products (MET) 4 4.44%
Information and communication (INF) 12 13.33%
Machinery, equipment, furniture, recycling (MAC) 19 21.11%
Total 90 100.00%


  • The study uses the quantitative methodology to investigate the research objectives; in particular, the following OLS regression model is used (Veklenko, 2016).
  • Performance measure = a + β1 BOARD SIZE_5YAVG + β2INDEP_5YAVG + β3WOBN_55YAVG +β4 EMPLOYEE_5YAVG + β4 SHAREHOLDERS _5YAVG + β5 SUBSIDIARIES _5YAVG + ε…. EQ1.
  • Separate investigations are carried out for each of the two performance indicators and, as such, the following models are used


  • β1= The incremental effect of board size on corresponding financial ratios ROA and ROE.
  • β2= The incremental effect of independence of boards on ROA/ROE.
  • β3= The incremental effect of a number of women on ROA/ROE.
  • β3= The incremental effect of a number of employees on ROA/ROE.
  • β4= The incremental effect of a number of shareholders on ROA/ROE.
  • β5= The effect of a number of subsidiaries.

Variable Definitions

Independent Variables: Measures of Board Composition

The total number of a board’s directors, together with the company’s CEO and the chairman of the board, make up the size of a board. In addition, all other directors, non-executive and executive, are included. Directors whose status is questionable due to their partial connections with different firms were not included in the study. Each company’s mean average board size for the five-year period was also calculated (BOARDSIZE_5YAVG).

Independence of boards is measured as a percentage of directors who are independent in boards (Cheng, 2008). There is variation in the criteria used for the determination of independence of boards across Europe. However, basic guidelines exist. Strong ties must not exist between independent directors and the firm, like being the companies’ employees, or

Being close family members to either the executives or managing directors of the company, or having any forms of business relationships with the company. They should also not represent a controlling shareholder. Just like in the case of the variable of board size, the mean average was used (BOARDSIZE_5YAVG).

The diversity of gender on boards was also used. This included the number of women on different boards regardless of the size of the board. The number of women will be treated as a dummy variable; that is, if a board does not have any women, then the value will be 0, and if the board has at least one woman, the value of one will be taken (Torchia, Calabrò and Huse, 2011).

The duality of CEOs was also used. This refers to when the CEO of a firm plays two roles: the chairman of the board of directors and the CEO.

Dependent Variables: Measure of Firm Performance

There are two ways to measure a company’s financial performance. They include market and accounting measures. In this study, the accounting measures ROE and ROA are used. These measures focus on financial measures and historical backward evaluation. The higher the level of both the ROE and ROA, the higher the performance of a company.

Return on the shareholders’ equity (ROE) and return on assets (ROA) are used to assess the performance of firms in this study. Because this study is concerned with the welfare of shareholders, ROE is considered as an appropriate measure.

The earnings of the firm are related to the assets of the shareholders by the return on shareholders’ equity (Net income / average shareholder’s equity). The ability of a company to generate profits with the investment made by the shareholders is shown by this profitability ratio.

ROA considers all those assets that the shareholders provide (net income / average shareholder’s equity), unlike ROE, which only considers those assets provided by shareholders. Because of the many different factors that may have an influence on each of the performance measures, there exists a high possibility that different results would be produced.

 Control Variables

Control variables are usually essential in that they account for the impact of other factors that are related to a firm’s performance in set periods could be present. A number of employees were taken as a control variable (EMPLOYEE). Each company’s mean average for the period of five years was also collected (EMPLOYEE_AVG). Some argue that the number of employees can be a measure of the size of a firm.

However, it is worth noting that the size of a firm is not correctly determined by the number of employees as argued by other studies. A good example is that most large companies use machines that are able to perform large-scale operations and, as such, they do not have many employees.

The number of shareholders is another control variable (SHAREHOLDERS). Shareholder satisfaction is seen as the most important goal of corporations according to the “shareholder’s view” (Jensen, 1993). As such, the manager’s primary role is to maximize the returns of the shareholders.

The size of firms influences the number of shareholders. This is because large firms tend to have much more media coverage. As such, they have more shareholders. For further analysis, a mean average of five-year data was calculated for the shareholders variable (SHAREHOLDERS_SYAVG).

The number of subsidiaries is the last control variable (SUBSIDIARIES). When it comes to the management of subsidiaries, agency problems have an effect. Following strategies, they prefer, local managers may act in their own interests, which is a significant way contradicts the plans and overall strategy of the firm (Muller, 2017).

It is presumed that small numbers of subsidiaries bring about strategic alignment and, as such, better joint performance. In addition, many subsidiaries would require more advanced managerial capabilities and more complex decision making, which could be detrimental to the performance of firms at times.

Chapter 4


The purpose of this study is to assess the impact of the board`s composition on the Firm’s Operating Performance. This is achieved by doing an in-depth analysis of board characteristics in terms of gender, the total number of a board’s directors, board independence and CEO duality on the profitability of firms.


Table 3 presents the collected sample’s variables’ descriptive statistics. The average size of boards is 6.4 to 22.124 members; the mean is 11.428 (median 9.824) and the standard deviation is 3.215.

The independence of boards’ ranges from 10.67% to 88%, with the mean being 44.28% (median of 48.464%), and the standard deviation is 15.680%.

A normal distribution is indicated by these descriptive statistics and there is no major skewness detected. However, the performance measures that are used in the analysis show different results. There is a positive value in the mean average of the ROA within the analyses’ sample (median = 8.962; mean = -0.480).

Within a sample, however, ROE showed a negative mean average (mean = 2.021: median = 3.684). From this result, it is evident that the companies included in the sample had widely distributed performance over the five-year period.

Table 3. Descriptive Statistics

Variables N Minimum Maximum Mean Median Std. Deviation
Return on equity (ROE) 90 -49.240 39.401 2.021 3.684 10.808
Return on assets (ROA) 90 -1644.343 58.242 -0.480 8.962 32.055
Independence 90 12.211% 90.000 44.280 48.464 15.680
Gender composition 90 5.824 20.240 12.624 11.300
Board size 90 6.400 22.124 11.428 9.824 3.215
Board size squared 90 40.960 489.471 114.429 90.420 74.304
Number of employees 90 74.680 211268.600 16124.240 2240.400 34600.170
Number of subsidiaries 90 .000 1864.000 106.924 26.000 37.803
Number if shareholders 90 .000 160.00 48.024 38.000 278.729

Correlation results are represented in Table 4. The generated values of correlation that are included in the model are relatively low i.e. the results are mostly lower than the set threshold of 0.70 (Cohen, Cohen, West & Aiken, 2013). The values were high in two different cases.

In particular, the dependent variables ROE and ROA are high and this is due to financial similarity this, however, has no impacts on the results of regression, because the testing of these two variables is done independently.

In addition, squaring of board size and board and independence gives high values of correlation, which could be predicted and, as such, is expected. It is thus possible to analyse those variables that are included in the analysis in a combined manner.

Table 4. Correlation Results

  ROA ROE Board size Board size squared Indep. % Gender diversity N. of Empl. N of Shareholders. N of Subsidy
ROE .724*** 1
Board Size .188 .151 1
Board Size Squared -.230* -.174 -.271* 1
Indep. % -.204 -.183 -.263* .978** 1
Gender diversity .267* .295*** .240* -.189 -.153 1
N. of Employ. .064 -.019 -.038 .522** .561** 0.54 1
N of Sharehold. .093 .104 -.127 .611** .605** .177 .508** 1
N. of Subsid. -.008 -.326** -.097 .481** .524** -.033 .623** .376** 1
N of Cases 90
** Correlation is significant at the 0.01 level (2-tailed).

*Correlation is significant at the 0.05 level (2-tailed).

 Regression Results

Table 5 represents the results of the following linear regression. The relationship of board size towards ROA is U-shaped. A negative main effect would be expected when making conclusions that the relationship that exists is curvilinear. A U-shaped effect would be indicated by a positive squared board size coefficient.

The results of the regression indicate that board size’s main effect has a negative coefficient and the coefficient of the squared board size is positive. The curvilinear effect of board size on ROA was explored in the first model (see model 1, Table 5). The main effect of board size has an expected negative coefficient (b = -3.15), as per the results of the regression.

The coefficient of the squared board size is positive (b = 0.72). Even though, for both board size and board size squared, the results are not significant, (P≥ .10), a U-shaped effect is seen from the results. It is, therefore, not possible to confirm Hypothesis 1 and thus it has to be rejected.

The regressions results show that the main effect of board size has a positive coefficient (b = 1.172), which is contrary to the expected direction. Further, the coefficient of the squared board size is negative (b = -.132).

Even though the results are also not significant (p ≥ .10), they point out that the effect of board size on ROE is U-shaped. As such, it is not possible to confirm Hypothesis 2, therefore the hypothesis is rejected. The result, however, lacks consistency with other observations made in the past (Claessens, Djankov & Lang, 2000).

Hypothesis 3 and 4 propose that a positive impact on ROA comes about from independence of boards. The effect of independence of boards on ROA is investigated by the first model (see Model 1, Table 5).

Board independence has an expected positive coefficient (b = .076) as shown by the regression results. This is significant (p is 0.083) and, as such, Hypothesis 3 is confirmed. The fourth hypothesis proposed that the effect of large board independence on ROE is positive (see Model 2, Table 4).

An expected positive statistically significant effect is shown by the results (b = .411; p ≤ .10), which is an implication that, at a level of 10%, Hypothesis 5 is confirmed. There is consistency between this result and the findings of Mizruchi (1983).

Mixed results were identified concerning the control variables. According to the first model’s regression results (See Model 1, Table 5), the effect of a number of employees on ROA is negative and is minor (p ≥ .10).

Further, the number of shareholders indicates a positive effect on ROA that is significant statistically at a 10% level (b = .080; p ≤ .10). The number of subsidiaries has an effect that is minimal on ROE (b = -.052; p ≤ .01).

The effect of a number of employees on ROA is not major (b = .000) and is significant at a level of 10%. The effect of a number of shareholders on ROE is also positive (b = .192). The result is, however, not significant (p ≥ .10). The effect of a number of subsidiaries on ROE is statistically significant negatively (b = -.052; p ≥ .10).

In regards to the variance that is explained, in the first model 10.9% of variability that is adjusted in the ROA score, is due to the level of board size, board size squared, independence of boards, number of employees, number of subsidiaries and number of shareholders combined (R2 adjusted = .109).

Hypothesis 6 proposed that CEO Duality has a negative impact on ROA, while Hypothesis 7 proposed that CEO Duality has a negative impact on ROE. A regression analysis was conducted to determine whether CEO duality has any effect on firms` profitability. CEO duality was found to have an independent, negative relationship with subsequent performance.

Table 5. Regression Results

ROA (Model 1) ROE (Model 2)

Board size

Board size squared

Independence %

Number of employees

Number of shareholders

Number of subsidiaries

R square (DJ.)

N of cases


































*** Statistical significance at 1% level

** Statistical significance at 5% level

* Statistical significance at 10% level

 Chapter 5


 Research Objectives

Corporate governance is a topic that evolves continuously. Different countries have different institutional mechanisms and corporate governance standards. Companies also have different structures, which are influenced by management and institutions. There exists no consensus on which structure of corporate governance works best.

The board of directors is usually responsible for important decisions that touch on the current management of a company, as well as its future development and direction. The board of directors must make decisions that are of high quality, and can influence the productivity of a company and its ability to generate profits (Thomsen and Conyon, 2012).

Main Findings

The first research objective of this study is related with the impact of the size of a board on the profitability of a firm. The results findings suggest that smaller boards are more preferable. This could be justified by the flexibility of smaller boards and faster decision making (Yermack, 1996).

There are more remarks and opinions to be considered, however; as such, larger boards have more thought-out decisions. There were scholars who found evidence that better performance comes about as a result of boards being large (Lanser, R. 1969).

There are, however, shortcomings detected for both large and small boards. This includes unjustified risk-taking and slow responses for the large board, and a smaller likelihood of accepting good projects for a small board.

An assumption was made that, in the long term, those boards that did not have as many board members would be able to make up for possible large losses by having more gains, while stable results for performance would be observed throughout the entire period. Companies with large and small boards were expected to have similar levels of performance over the five-year period.

An assumption was also made that, while the impact of the advantages of small and large boards would not be felt by medium-sized boards, they, however, would have the advantages of both.

In summary, Hypotheses 1 and 2 stated that the results of the research were expected to show a U-shaped relationship between the performance of firms and the size of boards.

The second research objective is related with the impact of independence of boards on firms’ profitability. High board independence was found to have a positive effect on the profitability of firms.

Those firms that have more independent boards are more profitable.  Just like with board size, studies carried out in the past were not able to determine the effect of the presence of directors who are independent on the performance of firms.

A majority of such studies reached conclusions that the high performance of firms came about as a result of high ratios of board members who were independent (Agrawal and Knoeber, 1996; Bharat and Black, 2002). Other researchers found results that were contradictory (Adams and Ferrira, 2007; Harris and Raviv, 2008). According to the agency theory, those directors who are not independent are not very likely to act in their own interests and more likely to act in the interests of the company.

This is because they do not have any possible advantages financially, apart from remuneration that is both variable and related to their making of certain decisions. Further, they never actually have complete information about the business of a company. A proposal for a positive relationship between the performance of firms and independence of boards was proposed by hypotheses 3 and 4.

The third research objective of this study is related to the effect of gender diversity on the profitability of firms. The results findings suggest that increasing the number of women in any board has the potential of improving the financial performance of the firm and, as such, also improving the ROA.

Addition of women on board promises a pool of members that is talented with varying competencies, capabilities and skills. As such, more women should be employed on the boards of different firms.

Data spanning a duration of five years (2013 – 2017) of 90 companies picked from select European countries was studied so that an investigation on the relationship between the performance of firms and composition of boards, making up a database of information from 450 annual reports in total.

Board size was the first independent variable and it was expressed as the total number of members of the board of directors. Through the five-year period, changes in the sizes of different boards were observed. Board independence was the second independent variable.

It implies a percentage of those directors who are independent in that they have no ties with the business of the company or the major shareholders of the company, as well as being neither recent nor current employees of the firm.

The number of employees in a company was the control variable. This measure, on the one hand, reflects the size of the company and, on the other, can potentially give an estimate of the capabilities of a firm. A number of subsidiaries and number of shareholders were other control variables that were used.

The fourth research objective of this study was related to the effect of CEO Duality on the profitability of firms. The results findings suggest that CEO duality has no relationship with the profitability of firms, the relationship is negative.

As such, these findings do not support the current trends of separating the CEO`s position with that of the chairman. Even though there exists a correlation between duality and lower subsequent performance, the effect is rather weak and insignificant statistically (Rasid, 2013).

Policy Implications

The value of this study to managers is notable, especially those managers who have intentions of optimizing their policies of corporate governance and the structure of boards. The composition of boards must successfully help to cope with those tasks that have been assigned to boards.

In accordance with this finding, managers should examine their existing boards of directors and come up with mechanisms that would aid in increasing the independence of the boards and number of female members in boards over periods of time that are internally determined, based on the goals of strategic development.

Research Limitations

In order to achieve these study research objectives, some limitations will be endured. These include lack of the researcher’s ability to control extraneous factors in the management of different organisations, such as general industry trends.

Secondly, the board of directors’ composition is one of the most essential determinants that as can have an impact on the firm’s operating performance. A board character consists of several aspects such as the directors’ overall experience, their tenure as well as their background.

Measuring these aspects through mathematics is not easy, yet also, there is no available information. Therefore, the notion of this study will be limited to the number of directors in a board, the independence of a board, the gender diversity of a board, the CEO duality. Other boards’ composition characters will not be considered.


In order to collect adequate data, I suggest that data be collected over a longer period of time such as 2 years or more instead of carrying out the study within a limited time frame. In doing so, the researcher will collect adequate information on the research topic while reducing any effect of market development as well as other negative aspects that might come up in the study area.

Another suggestion will be to limit the scope of the study to a more specific industry. Belkhir (2009), in a study on a specified industry, banking industry, obtained different findings (an inverse relationship between the number of directors in a board and firms operation performance) as compared to other previous studies in the same subject area. Also, other industries that have not been adequately studied such as funding companies, utility industry as well as auditing firms can also be considered.

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