Outside Director Composition and Corporate Performance

The purpose of this study has been to investigate the following questions: Do outside board directors provide real benefits to firms' performance? If yes, as the literature of finance, organization theory, and strategic management suggests, the why haven't empirical studies found conclusive evidence of real benefits? And how can these real benefits be detected? Integrating concepts from agency to theory, resource dependence theory, and stakeholder theory, a model was developed which predicted positive relationships between outside director types and three corporate performance dimensions. Four hypotheses derived from the model were empirically tested by using time-series and industry adjusted data from multiple sources by applying several multivariate statistical techniques. The nonrandom sample consisted for 123 Fortune 500 firms representing 23 industries.

The results showed that there were no relationships between: 1) the proportion of principal outsiders and firms' financial performance; 2) the proportion of business outsiders and firms' business performance; 3) the proportion of public outsiders and firms' social performance; and 4) outside director composition and firms' performance. A major conclusion was that board composition variables based on directors' principal occupation and stock ownership were inadequate predictors of corporate performance. The results of the study suggest that board researchers should search for more meaningful criteria to classify directors in future corporate governance effectiveness studies.