Attributes and Structure of an Effective Board of Directors: A Theoretical Investigation

The boards of directors represents the interests of shareholders and shoulder the task of monitoring managements’ actions, protecting shareholder interests, and overseeing the activities of the company. Despite the large stream of academic research on board efficacy there exists a lack of well-developed theory about the interrelationship of attributes that lead to an effective board of directors (Larcker et al. 2007; Brown et al. 2011; Roberts 2012). We argue that for a board to be effective, directors must possess, to some degree, the following four attributes: 1) be independent of management, 2) be able to carry out their duties in a competent manner, 3) be active or diligent in fulfilling their board responsibilities, and 4) possess appropriate behavioral attributes. We define an “And” relationship between board effectiveness and the four attributes and argue that a board of directors is effective if and only if each of the characteristics are present. We also introduce the concept of “safeguards” – i.e., the level of attentiveness by the board and its members to safeguard against unbecoming conduct, and analytically demonstrate its influence on the effectiveness of the board. We first develop a theoretical framework comprised of four core board constructs plus safeguards. We next employ Bayesian Logic to model the effectiveness of the board in four unique scenarios in order to examine the influence of the “And” relationship on the assessment of board effectiveness. Finally, through the use of inferential statistics we demonstrate the importance of our theoretical “And” relationship and the importance of “safeguard” when examining the board of directors.