(The original famous paper, byy Sanjai Bhagat and Bernard Black*)
ABSTRACT –We survey the evidence on the relationship between board composition and firm performance. Boards of directors of American public companies that have a majority of independent directors behave differently, in a number of ways, than boards without such a majority. Some of these differences appear to increase firm value; others may decreasefirm value. Overall, within the range of board compositions present today in large public companies, there is no convincing evidence that greater board independence correlates with greater firm profitability or faster growth. In particular, there is no empirical support for current proposals that firms should have supermajority-independent boards with only one or two inside directors. To the contrary, there is some evidence that firms with supermajority-independent boards are less profitable than other firms. This suggests thatit may be useful for firms to have a moderate number of inside directors (say three to fiveon an average-sized eleven member board). We offer some possible explanations for these results, based on board dynamics, the informational advantages possessed by inside (and,often, affiliated) directors, and the value of interaction between different types of directorswho bring different strengths to the board.
* Respectively, Professor of Finance, University of Colorado at Boulder; Professor of Law, Stanford Law