CORPORATE BOARD EFFECTIVENESS: EVIDENCE FROM SRI LANKAN LISTED NON-FINANCIAL COMPANIES

Abstract

The boards of companies have been broadly described as the centrality of corporate governance. With the notable incidents of corporate scandals around national and international contexts have made authorities to re-focus again on effectiveness of the board of directors. The adoption frequency of behavioural approach, where the focus on actual board behaviour in terms of board operations and decision-making processes to understand the board effectiveness has a limited number of studies in existing literature. Thus, based on these observations, the main purpose of this study was to identify the overall level of board effectiveness by utilizing both demographic and behavioural characteristics via a comprehensive index in measuring the concept. Based on an comprehensive literature survey and expert opinions, the constructed index consists of main elements namely, board independence, board size, board human capital, CEO duality, board shareholding, board diversity, audit committee (existence, size, independence), remuneration committee existence, nomination committee existence, board expertise, board commitment, board cohesiveness, meeting practices, board power, board control role, advisory role and strategic role. Then, adopting a quantitative survey research strategy, the data collection was carried out from board members and senior decision makers represented top 100 publicly quoted non-financial companies registered under Colombo Stock Exchange, Sri Lanka by means of a self-administered structured questionnaire and annual reports. The results indicate that the level of board effectiveness is 3.41 (mean value) out of a scale of 5 in Sri Lankan listed non-financial companies is statistically significantly higher to the neutral value of 2.5. The study fills the existing research gap and to understand the elements of overall effectiveness of the governing board by taking into account agency theory, stewardship theory, stakeholder theory and resource dependency theory along with board effectiveness models (Nicholson and Kiel model 2004, Levrau and Van den Berghe model 2007, Ike model 2012, Zahra and Pearce model 1989, Forbes and Milliken model 1999). Moreover, the study has an immense practical value for the board members and senior decision makers in evaluating the concept by standing on such broader measures which covers the overall effectiveness in terms of the composition, processes and actual behaviour.