Why Do Boards Differ? Because Owners Do!

We argue that the choice and composition of the Board of Directors is determined by the constituents of the ownership types within a firm. We categorize ownership in three distinct types-individual, corporate and institutional. We hypothesize and empirically link each ownership type to a type of Board Director. The board of directors is considered to be an important component of governance of a firm. The commonly accepted precept in management theory is that the board represents and safeguards the interests of the dispersed shareholders, thereby enhancing firm value. However, there seems to be no consensus on whether governance by the Board of directors has a beneficial impact on firm performance, or even about what might be the appropriate composition or functionality of the board of directors. Recent meta-analyses (Daily, Dalton, & Cannella, 2003) assert that there seems to be no evidence of any relationship between, board characteristics and firm performance. Of late some researchers also question the dispersed ownership model. These issues of board, ownership, and corporate governance effectiveness might have been limited to only being a matter of intellectual curiosity, but for the fact that practitioners and regulators are leading implementations of 'ideal' board mechanisms and composition without sufficient evidence or even academic validity of the underlying concepts (Dalton, 2004). The fallacy of such a course of action can be judged by the spate of recent corporate governance scandals where these practitioner-designed mechanisms failed to forestall the very incidents that they were purported to prevent. Enron and Worldcom have been the largest ever bankruptcies in corporate America, and both these corporations had board compositions assessed to be effective by industry standards, i.e. with a high representation of independent outside directors, right up to their downfall. Thus in the quest for understanding how to build a sustainable enterprise, we ask and attempt to address a fundamental question, namely who or what factors influence the choice of the board composition and functionality. We believe this is a necessary first step before we attempt to understand board effectiveness or related issues of corporate governance. To address such a broad question, we take a holistic view and include the findings from different management disciplines to develop a theoretically grounded 'ownership as a configuration' model for firms, and argue that ownership is a configuration composed of different types of owners, who differing in their risk assessment, are driven by separate imperatives (Miller, 1987), and …