Academic journal article IUP Journal of Corporate Governance

The Nature of Corporate Board Structure and Its Impact on the Performance of USA Listed Firms

Academic journal article IUP Journal of Corporate Governance

The Nature of Corporate Board Structure and Its Impact on the Performance of USA Listed Firms

Article excerpt

Introduction

Corporate governance has been perceived as indispensable in the contemporary business setup as it empowers corporations to realize their corporate objectives, protect shareholder rights, meet legal requirements and demonstrate to a wider public how they are conducting their business. As corporations grow in size and complexity and doing business in the global arena, it has become essential for boards to uphold the highest standards of corporate governance and to perform its role effectively. Evidence reveals that noncompliance and ineffective board functioning have resulted in collapse of corporate giants around the globe. An effective board is perceived as a requirement for a sound corporate governance framework based on the view that effective boards are likely to positively influence company performance. The board of directors acts as one of the most important governance mechanisms in aligning the interests of managers and shareholders. An effective board of directors is at the heart of the governance structure of a well-functioning and well-governed corporation, acting as the ultimate internal monitor. Ideally, the board guides long-term corporate strategy, puts the key agents in place to implement it, and monitors performance against the strategy set out. Prior studies recognize that board size and composition makes a board efficient and effective towards performing its duties and responsibilities. Those studies have revealed the fact that different continents react differently in terms of the corporate governance practices (Farrar, 2001; and Bonn, 2004).

In fact, the effectiveness of board which lies in its structure and configuration, such as board size, proportion of executive and non-executive directors, board leadership structure, board diversity including gender diversity, etc., are the major issues, and that is why in most of the codes and principles of corporate governance, and board attributes have been taken into account as one of the most important provisions of corporate governance legislation across the globe.

Undoubtedly, most of the discussions on corporate governance originate from the US (Sheridan and Kendall, 1992). The US is often seen as being an exemplary case of the shareholder-oriented or market-based model of corporate governance, and described in terms of several interrelated issues: activist institutional investors, an open market for corporate control, independent outside directors on the board, and gatekeepers who monitor the process of market disclosure. Ownership of corporations is dispersed, but involves high engagement from institutional investors, such as pension funds. Corporate boards are in general small, have a high proportion of outside or independent members, and utilize committees to improve board processes.

The internal and external aspects of corporate governance are linked through the monitoring of gatekeepers, such as audit firms that certify the flow of information from managers to capital markets. And the market for corporate control exerts a final discipline on poorly performing firms, who face a heightened risk of takeover. These different elements are also thought to have strong institutional complementarities, operating as a positive and mutually reinforcing system of effective corporate governance. These characteristics of the US model are widely quoted as best practices or even a global standard for good corporate governance. In the years since the financial reporting scandals and the Sarbanes-Oxley Act of 2002, and in particular following the financial crisis and the Dodd-Frank Act of 2010, boards of directors have faced greater burdens and more intense scrutiny of their activities and performance. However, scandals surrounding Enron generated criticism and induced substantial changes through the Sarbanes-Oxley (SOX) legislation. For example, SOX increased directors' workload and risk (reducing the supply), and increased demand by mandating that firms have more outside directors. …

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