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Boards of directors, charged with improving company performance and responsiveness to shareholders, are coming under increasing scrutiny in the wake of corporate scandals. In the engineering and construction (E & C) industry as well as others, board makeup is a much-discussed topic.
A popular expectation is that increasing the number of independent directors will improve outcomes. However, this assumption isn't borne out in practice. Almost all the several dozen studies on board independence found that it has no correlation with company performance. In fact, one study, which examined approximately 1,000 traded companies from the end of 1990 through 1993, found that the companies that performed the worst were those whose boards had the greatest proportion of outside directors when the period began.
These findings don't necessarily mean that greater board independence caused poor performance. In fact, the reverse may be true: companies that are performing particularly poorly often increase the number of outside directors in the hope of restoring investor confidence. The companies' subsequent performance might not show improvement because the outside directors do not counteract the policies that led to poor results in the first place.
Other studies have confirmed that good corporate governance is associated with better performance. One comprehensive analysis of such studies focused on 24 different ways in which companies restrict shareholder rights-for example, through keeping shareholder proposals out of proxy materials, too much board continuity, and so-called poison pill defenses aimed at immunizing management leadership from a hostile takeover. The researchers found that during the late 90s, companies with the fewest restrictions significantly outperformed companies with the most restrictions.
All these studies corroborate our field observations that it isn't the addition of outside directors to the board of directors that improves performance, but the willingness of these directors to challenge the prevailing corporate culture and make the firm more responsive to the market place and stakeholders.