The Active Board of Directors and Improved Performance of the Large Publicly-Traded Corporation

Our working hypothesis is that a professional board which is independent of management should tip the scales in favor of higher returns to investors. Although this hypothesis is amply supported by observation and reasonable assumptions, no detailed analysis of corporate relative performance has been undertaken. Here we define returns to investors as the achievement of "economic profit," ie., operating earnings in excess of the costs of capital, and we posit the presence/absence of a professional board for each corporation in a reasonably comprehensive sample of large corporations. An empirical study based on such reasonable studies and 1991- 1995 data demonstrates that the added returns to investors associated with the presence of a professional board are positive and significant. Corporations with active and independent boards appear to have performed much better in the 1990s than those with passive boards.