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"The relationship between the ownership structure and the role of the board"

Kurt A. Desender

 

First Author :

Kurt A. Desender
V.K. Zimmerman Center for International Education & Research in Accounting
University of Illinois at Urbana-Champaign
515 E. Gregory Drive, #2037
Champaign, IL 61820
USA

Desender@illinois.edu

 
 
Abstract :
 
Research Question/Issue: This paper develops a theoretical model to better understand how the priorities of the board of directors are influenced by the ownership structure and how that affects firm performance. Most corporate governance research focuses on a universal link between corporate governance practices (e.g., board structure, shareholder activism) and performance outcomes, but neglects how the specific context of each company and diverse environments lead to variations in the effectiveness of different governance practices.

Research Findings/Insights: This study suggest that the ownership structure has an important influence on the priorities set by the board, and that these priorities will determine the optimal composition of the board of directors. In contrast to a board prioritizing monitoring, where directors with financial experience and a duality are important, a board prioritizing the provision of resources could benefit from directors with different characteristics, the presence of the CEO on the board of directors and a larger board size.

Theoretical/Academic Implications: Understanding the influence of the board of directors on firm performance requires greater sensitivity to how corporate governance affects different aspects of effectiveness for different stakeholders and in different contexts. The insights on the interaction between the ownership structure and board composition can shed new light onto the contradictory empirical results of past research that has tried to link board composition or structure to firm performance directly. In an effort to increase the relevance of future research on boards and firm performance, we provide a framework on the interaction between ownership, corporate boards and firm performance.

Practitioner/Policy Implications: In light of scandals and perceived advantages in reforming governance systems, debates have emerged over the appropriateness of implementing corporate governance recommendations mainly based on an Anglo-Saxon context characterized by dispersed ownership where markets for corporate control, legal regulation, and contractual incentives are key governance mechanisms. This paper adds to the literature that argues in favor of the need to adapt corporate governance policies to the local contexts of firms.
 
 
JEL Classification : G3 , G32 , G34
 
 
Keywords :
 
board of directors, firm performance, monitoring, ownership structure, resource provision
 
 
Manuscript Received : 2009
Manuscript Published : 2009
 
 
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