The Importance of Board Independence (IVOR nr. 90) 2012/4.6:4.6 Conclusion

The Importance of Board Independence (IVOR nr. 90) 2012/4.6

4.6 Conclusion

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(Consideration 4.1) The literature review of forty-eight studies in this chapter does not reach consensus on the relationship between board independence and financial company performance. Although fifteen studies find positive relationships and confirm hypotheses of the agency theory and TCE theory about a positive relationship between board independence and performance, seventeen other studies confirm the hypothesis of the stewardship theory about a negative relationship between the two variables, and sixteen other studies report mixed relationships. It cannot be concluded that the attributed importance of the agency theory and TCE theory is correct; neither can it be concluded that the opposite is true. Based on this literature review there is no undisputed relationship between independence and performance.

The research question about the consequences of independence, for which financial results are chosen in this section, cannot be answered by means of this literature review. Possible reasons for the varying results between studies are different time spans of research periods, different definitions and proxies of independence, varying subsets of companies and countries of origin, and unequal sets of other (control) variables used.

The literature review might not be able to prove the existence of a general relationship between board independence and performance, but it has identified circumstances that might explain why there are positive as well as negative effects of independence on performance. Orr et al. (2005) found, in a sample from New Zealand, that board independence is beneficial to the performance of companies with high growth opportunities, relative to companies with low growth opportunities. For competitive markets, board independence is found to be negative, according to Randøy and Jenssen (2004). In a sample of Swedish companies they found that both monitoring by the competitive market and independent directors is ‘too much of a good thing’. Board independence has been proved to have a positive influence on the performance of companies with a cost reduction strategy rather than the pursuit of a strategy of innovation (Gani and Jermias 2006). A distinction between independent directors and independent directors with sufficient time for their position as director provides an explanation for the difference in performance. Fich and Shivdasani (2006) found that board independence does indeed have a positive impact on performance as long as the directors are able to spend enough time on their job. Busy directors will ultimately cause a decrease in performance of the company. The characteristics of the independent directors are also the subject of the research by Chan and Li (2008). They found evidence for their hypothesis that expert independent directors, defined as directors with executive tasks on the board of another company, have a positive influence on performance when their percentage on the board is higher than fifty.

The next chapter performs a meta-analysis to quantitatively analyse the studies on the relationship between board independence and financial performance. The literature review is a good method to give an overview of research in this field, but it is a qualitative approach that is not a suitable instrument for giving a weighted aggregated result of all the studies. Some studies have a larger data sample and other studies have found results that suffer less from variation in outcomes, both of which have a positive effect on reliability. Meta-analytical techniques can deal with such problems of different reliability, sample size and other measurement errors. The question whether independence is indeed important due to the positive effects on the (financial) performance of companies, such as conjectured by the agency theory and TCE theory, is quantitatively approached in the next chapter.

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