Corporate Governance & Organization Life Cycle: The Changing Role ...

Over the past 20 years, much has been written about the direct relationship between board composition and firm performance. Indeed, the quest for empirical proof to measure the impact of this relationship has been discussed in many articles (Bhagat & Black, 1999; Forbes & Milliken, 1999; Huse, 2000; Johnson, Daily, & Ellstrand, 1996; Nicholson & Kiel, 2007; Peng, 2004; Pettigrew, 1992; Van den Berghe & Levrau, 2004; Zahra & Pearce, 1989). However, the final results of this research have been inconclusive (Bhagat & Black; Daily & Johnson, 1997; Dalton, Daily, Ellstrand, & Johnson, 1998; Kaplan, 1997; Patterson, 2000). This has been partly due to differences in operationalizing board composition (Daily, Johnson, & Dalton, 1999) and also partly due to the fact that various definitions of the term performance have been used, including financial performance, firm performance, and market performance. More fundamentally, however, it has been because a firm’s performance, no matter how narrowly this word was defined, was the end result of a large number of factors, of which board composition was only one.²

Early in the research for this study, a question about the relationship between board composition and organization³performance drew an unambiguous response from a prominent board member⁴of a large multinational company. This former CEO and current head of the board’s audit committee stated in the interview that the link between board composition and firm performance was not significant and that during the process to select board members the goal of improving firm performance was rarely, if ever, cited as the reason for an appointment. An analogy can be drawn between his observation and the selection of top managers in the other key areas of an organization. When a CEO appoints a senior manager to head a specific function or department, such as finance or marketing, the selection criteria are linked to improving the performance of this specific function or department. Organizational performance may be improved when the best managers are appointed to each function or department, but overall improvement is not guaranteed, nor is this the immediate goal of the appointment. By the same logic, the immediate objective in board selection is to improve the board’s performance, not that of the organization.