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Home > Corporate Governance Best Practice > Corporate Board Structures

Corporate Governance Best Practice

Corporate Board Structures

by Vidhan Goyal

Executive Summary

  • Firms choose their board structures based on a value-maximizing process.

  • Large and outsider-dominated boards are optimal for complex firms (such as large firms, firms with multiple business segments, and complex operational and financial structures). Conversely, small and insider-dominated boards are optimal for small, young, and high-growth firms.

  • CEOs who also hold the title of chairman appear to have greater influence on the board. In firms with combined titles, boards do not dismiss poorly performing CEOs at the same rate as they do in firms with CEO and chairman titles vested in different individuals.

  • Politically connected directors add substantial value to the firms. They matter more in firms in which politics plays an important role, such as firms where sales to government, exports, and lobbying are greater.

  • Women in the boardroom have a positive impact on how firms are governed. Women have fewer attendance problems, and they improve the attendance behavior of male directors.


The job of the board is to control the managerial succession process (involving hiring, assessing, promoting, and if required, dismissing the CEO), and to provide high-level counsel to top management.

There is a widespread skepticism of the effectiveness of boards. Recent accounting scandals at firms such as Enron, WorldCom, and Parmalat have resulted in intense scrutiny of the function of boards. Critics point out that corporate boards have failed primarily because of poor board structures. Top management and board members are tied together though a web of personal and business connections, compromising a board’s ability to monitor firms. Michael Jensen puts it more bluntly by stating that, in large US corporations, “even the outside directors basically see themselves as employees of the CEO… And this means that, in American companies, the CEO effectively has no boss.”1

Many scholars, regulators, legislators, and investors are, therefore, calling for a reform of corporate boards. The codes of conduct for good corporate governance frequently recommend that boards should be small, and comprised largely of independent directors.2 TIAA-CREF, one of the largest pension funds, will only invest in firms that have boards consisting of a majority of outside directors. CalPERS, another large pension fund, recommends that the CEO should be the only inside director on the board. The Sarbanes-Oxley Act of 2002 mandates that audit committees of boards should consist entirely of outside directors. The stock exchanges, such as the NYSE and the NASDAQ, require listed firms to use a majority of outside directors. These intense institutional, regulatory, and legislative pressures are indeed working. YiLin Wu, for example, shows that after firms are publicly named for poor governance by CalPERS, the number of inside board members declines, and board sizes shrink.3 Governance activists have also been calling for boards to elect their directors annually, to separate the CEO and chairman positions, and for greater diversity on boards.

This article reviews the literature that inquires into whether differences in board structures affects the way in which boards conduct themselves, and whether boards affect firm performance. Board sizes and board compositions differ across firms. Many firms continue to operate with large boards and boards with high insider representation. Boards are often elected on staggered terms, and it is common in large corporations to have the CEO and chairman positions vested in the same individual. If these board structures are suboptimal, as the critics of existing board structures claim, they why do they persist? Should we compel all firms to conform to a single model of board structure?

The emerging academic evidence suggests that the conventional wisdom on board structures is misguided. Recent work suggests that boards are organized according to a value-maximizing calculus. This work carefully highlights the tradeoffs associated with different board structures, and shows that the observable variation in board structures reflects careful attention to these tradeoffs. Firms choose the board structures that suit their circumstances.

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Further reading


  • Harvard Business Review on Corporate Governance. Boston, MA: Harvard Business School Press, 2000.
  • Macey, Jonathan R. Corporate Governance: Promises Kept, Promises Broken. Princeton, NJ: Princeton University Press, 2008.
  • Monks, Robert A. G., and Nell Minow. Corporate Governance. Chichester, UK: Wiley, 2008.


  • Ahn, S., V. K. Goyal, and K. Shrestha. “The differential effects of classified boards on firm value.” Working paper, National University of Singapore, HKUST, and Nanyang Technological University, 2009.
  • Boone, A. L., L. C. Field, J. M. Karpoff, and C. G. Raheja. “The determinants of corporate board size and composition: An empirical analysis.” Journal of Financial Economics. 85 (2007): 66–101.
  • Coles, J. L., N. D. Daniel, and L. Naveen. “Boards: Does one size fit all?”, Journal of Financial Economics 87 (2008): 329–356.
  • Goyal, V. K., and C. W. Park. “Board leadership structure and CEO turnover.” Journal of Corporate Finance 8 (2002): 49–66.
  • Jensen, M. C. “The modern industrial revolution, exit and the failure of internal control systems.” Journal of Finance 48 (1993): 831–880.
  • Lehn, K., S. Patro, and M. Zhao. “Determinants of the size and structure of corporate boards: 1935–2000.” Financial Management (forthcoming).


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