Vlerick Leuven Gent Working Paper Series 2007/03 ... - Vlerick Public

Explaining the inconclusive findings in board research
Many explanations can be given for the lack of consistent findings in empirical
research on the direct relationship between the board of directors and corporate performance.
In essence, they all boil down to two issues. These are (i) a lack of clear construct definition,
and (ii) the reliance on incomplete research models.
First, the diverging findings have been attributed to the varying definitions and
operationalizations of the constructs used in empirical research. Daily et.al. (1999), for
example, identified over twenty separate ways of defining board composition. The earliest
studies distinguished inside from outside directors and board composition was measured using
three different approaches: (absolute) number of outsiders, industry inside-outside norm and
outsider/insider proportion or dominance 2 (Zahra and Pearce, 1989). Later on, researchers
increasingly wanted to capture the independence of the outside directors and have been
separating independent directors from interdependent or affiliated directors, who are
considered to be characterized by a lack of independence. In such an approach, board
composition has been operationalized by the independent/interdependent distinction or by the
proportion of affiliated directors (Dalton et.al., 1998). In addition to the complexity of
uniformly defining board composition, the measurement of performance is also subject to
considerable discussions (Venkatraman and Ramanujam, 1986; Hawawini et.al., 2003).
Although some scholars rely on market-based measures, research on boards of directors has
been dominated by accounting measures (Dalton et.al., 1998; Coles et.al., 2001).
Performance measures rooted in financial accounting are being criticized because they (i) are
subject to managerial manipulation, (ii) undervalue assets, (iii) are influenced by accounting
standards such as depreciation policies, inventory valuation and treatment of certain revenue
and expenditure items and (iv) are affected by differences in methods for consolidation of
accounts (Chakravarthy, 1986). Furthermore, a review by Johnson et al. (1996) has revealed a
list of distinct financial performance measures on which empirical research has relied,
emphasizing the fact that certain measures have additionally been adjusted to account for
industry effects or risk in a different manner. Consequently, the variety in definitions and
measures applied in empirical research makes comparison of studies difficult and may cause
the inconsistent findings.
2 Proportion was calculated by dividing the number of outside or inside directors to board size. In contrast, “dominance”
denoted the existence of a large majority of outside or inside directors on the boards, and was treated as a dichotomous
variable (outsider versus insider-controlled)
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