Board Capital and Firm Growth-Options: A Study of Their Impact on Auditors' and Investors' Assessments of Board Effectiveness, Firm Performance and Risk

Abstract

Boards of directors are considered to be the lynchpin of corporate governance in Australia (Gillan, 2006) and the roles boards play have been subject to considerable scrutiny and research. It is accepted that boards play multiple roles in governing corporations (Johnson, Daily, & Ellstrand, 1996; Nicholson & Kiel, 2007). However, there is a concern that the current regulatory emphasis on the monitoring and control role does not always lead to optimum corporate governance outcomes (Cohen, Krishnamoorthy, & Wright, 2008; MacAvoy & Millstein, 2004) and that firm performance may be degraded. This research avoids the specific focus on particular board roles and definitions and takes a more holistic view of boards through an examination of board capital. Board capital, which comprises the human capital (Becker, 1964) and the social capital (Burt, 1992; Nahapiet & Ghoshal, 1998) of the directors, culminates in a board’s capability to perform across all its various roles. In addition, a firm’s future growth-options (Pindyck, 1998) are examined as these have been shown to influence a firm’s governance mechanisms (Hutchinson & Gul, 2004) and outcomes particularly through their interaction with board capital.