Boards of Directors: Utilizing Empirical Evidence in Developing Practical Prescriptions
| Author | Catherine M. Dalton,Dan R. Dalton |
| Date | 01 March 2005 |
| DOI | http://doi.org/10.1111/j.1467-8551.2005.00450.x |
| Published date | 01 March 2005 |
Boards of Directors: Utilizing Empirical
Evidence in Developing Practical
Prescriptions
Catherine M. Dalton and Dan R. Dalton
Kelley School of Business, Indiana University, Bloomington, IN 47405-1701, USA
E-mail: cdalton@indiana.edu [C. M. Dalton]; dalton@indiana.edu [D. R. Dalton]
Boards of directors and corporate governance, more generally, continue to capture the
attention of practitioners and scholars alike. There are now several reports, such as the
Higgs Review, that offer both descriptions of past board structures and practices, and
prescriptions for effective corporate governance practices going forward. This paper
provides an overview of a series of research in which we have been involved that
investigated the relationships between board structures (i.e. board composition, board
leadership structure, board size and board member equity ownership) and firm financial
performance. The paper demonstrates that not all current corporate governance ‘best
practices’ are supported by empirical investigation. It also offer views on two means for
installing independence in corporate boardrooms that hold considerable promise –
installation of a lead independent director and reliance on an independent board of
directors budget. Ultimately, however, no amount of structural prescription will
guarantee effective boards of directors. Effective boards will install effective boardroom
processes and be guided by individuals with the highest integrity and character.
Introduction
We are delighted to be included in this special
issue on corporate governance. For us, corporate
governance is a topic that resonates strongly. In
addition to our research collaboration, which has
resulted in well over 100 articles within the
domain of corporate governance, we have,
between us, service on eight corporate boards of
directors, including membership on Audit, Com-
pensation, Executive, Governance, Investment,
and Trust committees, as well as service as
Chairperson of a Corporate Governance and
Nominating Committee. As a consequence, we
bring to this conversation our perspective based
on empirical guidance, as well as our perspective
based on experience in the corporate boardroom.
Clearly, director independence continues to
serve as the metaphorical lightning rod in
corporate governance debates. Emphasis on
independence was elevated to a new level follow-
ing the collapse of Enron Corporation, and
related corporate failures such as Adelphia
Communications, Hollinger International, Par-
malat, Tyco International and Qwest Commu-
nications. In each case, ineffective corporate
governance was suggested as a contributing
factor in the respective corporate failures.
One of the more direct responses to these
events was the Review of the Role and Effective-
ness of Non-Executive Directors, more commonly
known as the Higgs Report, issued in the UK,
and the passage of the Sarbanes-Oxley Act of
2002 in the USA. Themes common to both the
Higgs Report and the Sarbanes-Oxley Act are
independence in board composition and struc-
ture. As Roberts, McNulty and Stiles have noted
in this Special Issue, however, structural inde-
pendence must be accompanied by effective
board processes. To this end, in the following
we provide an overview of our research on the
relationships of board composition, leadership
British Journal of Management, Vol. 16, S91–S97 (2005)
DOI: 10.1111/j.1467-8551.2005.00450.x
r2005 British Academy of Management
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