Impact of competent board structure on financial performance

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Abstract

Effective corporate governance practices are considered crucial for the success of transforming and developing economies. This research delves into the importance of a competent board structure in improving firm performance and mitigating financial crises. The study employs quantitative research methods, focusing on firm performance measured through return on assets and Tobin’s Q. The independent variable of the study is board competence, with a sample comprising two hundred companies listed on the Pakistan Stock Exchange (PSX). Panel data spanning a decade from 2012 to 2021 is analysed using techniques such as the Hausman test, fixed effect model, and random effect model to test hypotheses. To address multicollinearity and heteroscedasticity, the study incorporates the variance inflation factor (VIF) and the heteroscedasticity test. The findings suggest that an optimal board structure, characterised by competence, enables effective strategy implementation, thereby providing organisations with a competitive edge. Independent directors, devoid of personal affiliations or biases, can exercise impartial judgment and demonstrate competence. While academic qualifications are often prioritised in the selection of board members, they do not always ensure superior performance.

Keywords: Board Competence, Board Independence, Financial Performance

Authors’ individual contributions: Conceptualization — A.S.K.; Methodology — A.W.K.; Validation — A.W.K.; Formal Analysis — A.W.K.; Investigation — A.W.K.; Resources — A.S.K.; Writing — Original Draft — A.W.K.; Writing — Review & Editing — A.S.K.; Funding Acquisition — A.S.K.

Declaration of conflicting interests: The Authors declare that there is no conflict of interest.

JEL Classification: G32, B23, M12

Received: 24.04.2024
Accepted: 06.08.2024
Published online: 09.08.2024

How to cite this paper: Khan, A. W., & Khan, A. S. (2024). Impact of competent board structure on financial performance. Corporate Board: Role, Duties and Composition, 20(2), 42–49. https://doi.org/10.22495/cbv20i2art5