The board of directors is an important organizational institution, whose purpose is to reduce the agency problem inherited by the management of a firm. However, because of various accounting frauds and failures in corporate governance in the
history of larger corporations, there is increasing public attention regarding the effectiveness of a board and how a perfect board should be designed to increase their oversight quality. Because of these many researchers investigated this topic.
This paper reviews recent academic research regarding the characteristics of a perfect board of directors. Firstly, the paper analyses different board characteristics, then it investigates the importance of the composition and size of the audit committee.
Table of Contents
1. Abstract
2. Introduction
3. Board Size
4. Composition of the board: Outsiders vs. Insiders
5. Composition of the board: Busy boards and performance of the firm
6. Audit committee
i. Independence
ii. Size
iii. Experts
7. Conclusion
8. References
Objectives and Topics
This paper examines the key characteristics that define an effective board of directors by reviewing recent academic literature. The primary objective is to evaluate how board size, composition, and the specific structure of audit committees influence corporate oversight, firm performance, and agency costs.
- Optimal board size relative to firm complexity.
- Impact of board composition (outsiders vs. insiders) on monitoring.
- Effects of "busy" board members on corporate governance.
- Role and independence requirements of audit committees.
- Influence of financial expertise on board effectiveness.
Excerpt from the Book
3. Board Size
The first characteristic in our examination is the size of the board and the impact on the performance of the firm. Several academic articles state that in general, a smaller board size leads to superior firm performance, due to coordination problems and directors free-riding in larger boards (Lipton & Lorsch, 1992). However, this issue is too complex to derive a general rule for the size of the board. Coles et al. (2008) mention that it is important to differentiate a company based on its complexity. Their findings suggest that either very small or very large boards are ideal, which means specifically complex firms need a larger board with more outside directors to match with their great advising requirements. This is also supported by Dalton et al. (1999) who suggest that a larger board also offers more experience and knowledge, therefore they can understand the complex business processes of larger firms and can monitor them better. However, small firms perform better with a small board as the agency problems within a board are minimized, this implies that the firm value increases by a reduction of the board size for small firms (Yermack, 1996).
Summary of Chapters
1. Abstract: Provides a high-level overview of key findings regarding board size, the role of independent directors, and the significance of specialized audit committees.
2. Introduction: Outlines the importance of the board of directors as a mechanism to mitigate agency problems and defines the scope of the literature review.
3. Board Size: Discusses the trade-offs between smaller boards for efficiency and larger boards for complex advisory needs.
4. Composition of the board: Outsiders vs. Insiders: Analyzes how the proportion of outside directors impacts monitoring quality and the prevention of CEO entrenchment.
5. Composition of the board: Busy boards and performance of the firm: Examines the negative consequences of board members holding too many directorships on firm performance and oversight.
6. Audit committee: Details the importance of independence, appropriate size, and financial expertise within the audit committee for effective financial reporting.
7. Conclusion: Synthesizes the main arguments, emphasizing that there is no universal solution and that board structure must be tailored to firm-specific requirements.
8. References: Provides the comprehensive list of academic sources used to support the review.
Keywords
Board of directors, corporate governance, board size, audit committee, agency problem, independent directors, firm performance, busy boards, financial expertise, outside directors, oversight quality, monitoring, corporate oversight, board composition, stakeholder management.
Frequently Asked Questions
What is the core focus of this research?
The research focuses on identifying which specific board characteristics contribute to an optimal board of directors that effectively minimizes agency problems within a corporation.
What are the primary themes discussed?
The paper covers board size, the ratio of insiders to outsiders, the impact of "busy" directors on monitoring, and the specific functions of the audit committee.
What is the main research question?
The study aims to determine the structural and compositional characteristics of a board that lead to superior financial performance and robust corporate oversight.
Which methodology is applied?
The paper employs a comprehensive review and analysis of recent academic literature and empirical research regarding corporate governance mechanisms.
What does the main body explore?
It investigates how board size, director independence, and the presence of financial experts influence decision-making, CEO monitoring, and firm value.
Which keywords best describe this paper?
Key terms include corporate governance, board of directors, audit committee, board size, and agency costs.
How do "busy" boards affect a company?
The literature suggests that if a board consists of a high number of busy directors, monitoring effectiveness decreases, often leading to poor oversight and reduced firm value.
Why is the audit committee considered vital?
The audit committee is critical because it oversees the financial reporting process and ensures quality through independence and the inclusion of financial experts.
Is a larger board always worse?
Not necessarily; while smaller boards are often more efficient, larger boards can provide better advisory support and knowledge for complex, R&D-intensive firms.
- Arbeit zitieren
- Felix Pütz (Autor:in), 2020, Which Characteristics Determine a Perfect Board of Directors? A Review of the Economic Literature, München, GRIN Verlag, https://www.hausarbeiten.de/document/1119129
