Do Board Size and Independence Really Matter? An Empirical Study

Abstract

Board of directors is considered as the most basic part of effective decision making in the firms. However, the large or small board sizes are continuously in debate and no conclusive decision has yet been achieved. Likewise, research on board independence also shows contrasting results. Some studies are in favour of board independence, others focus their attention on the firm specific knowledge of executive directors. The purpose of this study is to examine the relationship of board size and firm independence with the firm performance in a sample of 609 firms of Karachi stock exchange over the period 2005-2012. This study uses the partial least squares method to determine structural links between the variables under study. The findings of the study demonstrate the fact that board size is positively related to the productivity, but negatively related to the profitability of the firms. However, board independence is positively related to the profitability and negatively related to the productivity of the firms. Overall, board of directors with two characteristics of size and independence has negative relationship with the firm performance.

Keywords: board size, board independence, partial least squares, firm performance