The Relationship Between the Ownership Structure and Board Effectiveness

The paper develops a theoretical model to better understand how the role (control versus direction) of the board of directors is influenced by the ownership structure and how that affects the board effectiveness. Most corporate governance research focuses on a universal link between corporate governance practices and performance outcomes, but neglects how the specific context of each company and diverse environments lead to variations in the effectiveness of different governance practices. This study suggests that the effectiveness of corporate governance practices must be seen in the light of contingencies related to the ownership structure of the firm. When ownership is diffuse, the control role of the board is going to be more important because it is difficult for the dispersed shareholders to co-ordinate their monitoring activities (Davies, 2002; Aguilera, 2005). Firms with dispersed ownership may obtain higher board effectiveness if their board combines the following characteristics: a high proportion of outside board members, dual leadership, smaller board size, shorter board tenure and less directorships by its board members. Board in firms with concentrated ownership on the other hand could be more effective when the board combines the following characteristics: a balance of insiders and outsiders, single leadership structure, larger board size, longer board tenure and more directorships by its board members. In light of scandals and perceived advantages in reforming corporate governance systems, debates have emerged over the appropriateness of implementing corporate governance recommendations mainly based on an Anglo-Saxon context characterized by dispersed ownership where markets for corporate control, legal regulation, and contractual incentives are key governance mechanisms. This paper adds to the literature that argues in favor of the need to adapt corporate governance policies to the local contexts of firms