Board Composition
Board composition is the mix of executive directors (e.g., CEO) and non-executive directors on a
company's board. Non-executive directors are often recruited outside and, in most cases, lack
direct financial interest in the company—those are typically referred to as independent
directors. They are typically hired based on their good qualifications, experience, and
professional backgrounds, which can facilitate them to make board decisions and thus create
firm value (Fields & Keys, 2003). Independent directors are often considered the most sought-
after in strategic planning and risk management (Farrar, 2005).
The corporate governance literature has long debated whether the presence of outside
directors improves firm performance. Since they are primarily concerned with bottom-line
outcomes, outside directors are likely to be more watchful. For instance, they may replace a
CEO after poor performance to safeguard their own reputation (Finkelstein & Hambrick, 1996,
p. 225), more objectively evaluate management, and become involved in inappropriate
situations (Kesner et al., 1986). They are also said to help decrease information asymmetry
(Ozawa, 2006, p. 104). Research also shows that boards with a higher proportion of outside
directors and of smaller size are more effective in making acquisition decisions, executive
remuneration, and CEO succession (Hermalin & Weisbach, 2003). Without them, insider-
dominated boards will not only concentrate too much power but also miss out on external
expertise that is crucial for effective monitoring (Dalton & Daily, 1999).
However, the representation of outside independent directors as a commonly used measure of
board vigilance to promote shareholder interests is sometimes controversial. Although directors
hire and fire the managers and executive but in practice they are nominated by the
management. It is argued that the outside director candidates are known by CEO or other inside
directors. The new outside board members who are proposed by inside board members may
have relationship with them. Further, most effective directors are insiders as they have more
information of the firm than the outsiders and thus outside directors must rely on them to make
a decision (Finkelstein and Hambrick, 1996, p 225); “inside directors lives in the company they
govern, they better understand the business than outside directors and so can make better
decisions” (Nicholson and Kiel, 2007, p 588). Many outside directors may not be competent to
perform their assigned tasks as many of them are part-timers and they do not have inside
information of the firm (Brennan, 2006). Such information asymmetry may reduce the control
role of the outside directors in the firm.
Empirical studies add to this skepticism. Flanagan (1982) found that 80% of outside director
candidates in U.S. firms were already known to the CEO or other board members. Some
researchers (e.g., Patton & Baker, 1987; Jensen, 1993) contend that outside directors are often
aligned with management rather than shareholders, functioning as “creatures of the CEO.”
Others (e.g., Brickley et al., 1994) counter that concerns about personal reputation and litigation
risk may push them to act in the interests of shareholders. Still, their formal authority is limited
—they typically lack direct command power and tend to step in mainly during crises (Dayton,
1984; McNulty & Pettigrew, 1996). For example, although WorldCom’s board had a majority of
non-executive directors, it failed to prevent the firm’s collapse (Kaplan & Kiron, 2004). Adding to
the complexity, there is no universally agreed definition of what constitutes an “independent”
director (Brennan & McDermott, 2004, p. 326). Generally, they are neither employees of the
company nor individuals with personal or business ties to it (Hulbert, 2003). Yet, concerns
remain that many independent directors serve on too many boards, and with no age limits,
their effectiveness may decline over time (Core et al., 1999).
Leadership Diversity
Leadership diversity is now an established cornerstone of good corporate governance.
Leadership diversity refers to the existence of varied demographic, professional, and experiential
backgrounds among executives and board members — for example, gender, age, education, and
professional experience. It brings richness to the board's collective knowledge, encourages
multiple perspectives, and discourages groupthink, leading to more thoughtful and well-balanced
decisions (Adams & Ferreira, 2009; Erhardt, Werbel, & Shrader, 2003; Carter et al., 2010).
Among all aspects of diversity, gender diversity has attracted the most scholarly and regulatory
attention. Women directors often bring with them different leadership styles that emphasize risk
awareness, ethical responsibility, and stakeholder engagement. Scholars have consistently found
that boards with more women are linked to better monitoring, attendance, and compliance
attention — all of which bolster governance quality (Adams & Ferreira, 2009; Post & Byron,
2015).
Empirical evidence across a number of countries supports a positive link between women's
representation and firm performance, particularly when women hold influential board positions.
Post and Byron's (2015) meta-analysis demonstrates that gender-diverse boards are associated
with higher accounting returns and better market valuation, particularly in countries with strong
investor protection. Similarly, Terjesen, Couto, and Francisco (2016) find that women directors
are associated with increased firm value across a number of international markets.
One of the principal conclusions of research is the critical mass effect — the beneficial impacts
of gender diversity are best realized when there are a minimum of three women on the board so
that they can be influential in discussion and decision-making (Joecks et al., 2013). Tokenism of
one female director is typically not enough to make a difference. Studies of Asian economies
provide further evidence. Liu, Wei, and Xie (2014) found that firms in China with women
directors have higher profitability and market value, especially when women participate in key
committees. Evidence from India and Malaysia shows similar patterns, with positive
relationships between gender diversity, Tobin's Q, and return on assets (Jurkus et al., 2011;
Abdullah, 2014).
In Bangladesh, where male members and family owners control boards, women's representation
is relatively low. Regulatory reforms, such as the Bangladesh Securities and Exchange
Commission's (BSEC) 2018 Corporate Governance Code, have convinced firms to adopt
diversity. Available studies indicate that women directors result in better compliance, disclosure,
and stronger CSR initiatives, which are essential to strengthen investor confidence in an
emerging economy (Haque & Ntim, 2018). Aside from gender, experiential and skills diversity
— for example, directors with backgrounds in finance, law, technology, or international business
— improves strategic direction and risk management (Kim & Starks, 2016). This functional
diversity helps boards resolve regulatory challenges and capitalize on emerging opportunities.
Collectively, these findings suggest that leadership diversity improves both the monitoring role
(reducing agency costs) and advisory role (bringing in fresh ideas and networks) of boards. For
Bangladesh and other emerging economies, improving leadership diversity not only improves
decision-making by being better informed but also showcases adherence to international
governance standards, which would lead to foreign investment. For these benefits to be realized,
it is important that organizations focus not only on increasing women's numbers but also on
empowering them, assigning them key roles, and investing in their professional development.