The paradox of independent board members and financial return of state-owned enterprises: Case of Lithuania

Abstract

The relationship between governance measures and company performance is a widely debated topic in economics, finance, and organizational analyses with diverse outcomes in the existing scholarly body of work. This study aims to examine the relationship between the share of independent members on the board and the financial return of state-owned enterprises. Lithuania was chosen as a setting for the research because the country has been successfully implementing ambitious corporate governance reforms in the public sector and thus is recognized by the Organisation for Economic Co-operation and Development for its efforts. Within the examined dataset of 27 Lithuanian state-owned enterprises spanning 2015 to 2021, there was a notable rise in the proportion of independent board members, ascending from 13% in 2015 to 61% in 2021. However, no statistically significant correlation is discerned between the share of independent board members and financial performance indicators, specifically return on assets (r (181) = –0.020, p > 0.05) and return on equity (r (181) = –0.104, p > 0.05). The quantitative results are complemented through the administration of semi-structured interviews with a subset of board members affiliated with these enterprises. The absence of a relationship between independent board members and the financial return is explained via a more significant influence of state decisions than the effect of a board. Therefore, the appointment of independent board members alone cannot be regarded as the sole guarantor of improvement in financial returns.