Measuring the efficacy of board governance: Empirical evidence from Italian publicly listed companies

Abstract

Recent progress in the literature shows that board efficacy might be signaled by lower firm performance variability in a firm’s income, since the board has a fiduciary duty to protect shareholder investments that may be affected when performance is variable. Our analysis is an attempt to contribute to this debate by extending it to include family firms. In particular, we detect appointments of directors to family firm boards within a sample of 483 observations (year/firm) regarding Italian publicly listed companies. Sampled family firms have one of the family members as CEO and/or chairman (in cases of non-CEO duality) of the firm’s board. The aim is to test predictions which suggest that the presence of independent (Agency Theory), on the one hand, and interlocking directors (Resource Dependence theory), on the other, have a significant impact on performance stability. Unlike agency theory, which affirms that independents are efficient, our findings suggest that the number of independents on the board of a family firm has no impact on performance stability. Instead, we find that interlocking directors can provide a significant contribution to the achieving of lower performance variability.