Is ‘Excess’ Board Independence Good for Firm Performance? An Empirical Investigation of Non-Financial Listed Firms in Saudi Arabia
, basmah altuwaijri, Lakshmi Kalyanaraman . 2016
Abstract
We investigate the relationship between board independence and firm performance. We hypothesize that while the presence of independent directors helps improve firm performance, excess independent directors on the board will not contribute to firm performance. We test our hypotheses on data drawn from non-financial firms listed on Saudi Arabian stock exchange applying panel data regression with fixed effects model. We find that board independence, ratio of independent directors to board size, has a positive link with firm performance while excess board independence, defined as a dummy variable measuring the number of independent directors in excess of regulatory minimum, is found to have no statistically significant relationship with firm performance. Our findings have important implications for the management of listed firms as more than 50% of the firm-year observations from 6 out sectors studied have excess board independence. We conclude that in order to enjoy the benefits of the presence of independent directors on the board, the firm should keep it at the regulatory minimum.
