Corporate Governance: the relationship between Board of Directors and Firm Performance. Empirical evidence of Italian listed companies

Corporate governance is an international topic which is studied in depth in several research fields, such as accounting, management, finance, economics, etc. The 20th century witnessed massive growth in corporate governance issues in terms of theories, practices and empirical research. Thus, corporate governance, including the board of directors, has become one of the central issues in the running of company, due to worldwide and rapid change in environmental conditions and the current economic, financial and social context which is changeable, dynamic and globalized. Indeed, the board of directors of a firm, i.e. the governing body of every corporate entity, is ultimately accountable for company decisions and its performance. The board of directors, which is a fundamental asset of the firm and one of the pillars of corporate governance, is responsible to owners, members, and other legitimate stakeholders in terms of decisions, strategies and firm performance. This research analyses the effect of some corporate governance variables on performance by extending such variables and performance measures of previous studies. Thus, the object of the present research is corporate governance, and in particular the board of directors, its mechanisms and processes related with firm performance. The purpose of this research is to measure and quantify the relationship between the board of directors and performance of Italian firm listed on STAR segment (Italian Stock Exchange). Most studies in corporate governance analyse this relationship, but the majority are concerned with Anglo-American countries, emerging and developing markets and some European countries. Italy seems to have been left out of this research although it is an interesting case. Indeed, Italian corporate governance model presents some features in common with two archetypes existing in literature, i.e. Anglo-Saxon and German-Japanese models. However, the Italian model has some distinctive characteristics which are different from the two main corporate governance models. In particular, little research has been conducted in Italy to measure the relationship between board of directors mechanism and performance in listed companies by using single variables tested in an econometric model. This research is thus explanatory and has adopted positive methodology; its aim is to better understand whether agency theory which is the predominant approach in literature, is confirmed in the Italian context. We adopt agency theoretical approach of corporate governance by focusing on the relationship between board mechanism and corporate performance. The board mechanisms we study are consistent with prior research, namely board size, board composition (i.e. independent, non-executive, executive directors), CEO duality, Audit committee and Big Four (1). There is no relevant research which focuses on the relation Big Four-firm performance. On the other hand, firm performance is measured by Tobin's Q (market value) and ROE (accounting measure); moreover a set of control variables are introduced. Testing our econometric model on a population of Italian firms listed on STAR Segment (Italian Stock Exchange), we find some interesting results. In short, not all our empirical hypotheses are verified, for example we do not find that an increase of independent and non-executives directors leads to an improvement on firm performance, as agency theory states. Furthermore, CEO duality is not the worst leadership that a firm might adopt as agency approach maintains. It follows that agency theory is probably not able to explain the complexity of the relationship between the board of directors and firm performance. This means that there is oversimplified vision of the company related to complexity of the environment in which the firm operates and to intricate mechanisms including procedures within the firm (Daily et al., 2003b). Agency theory provides unduly simplistic assumptions which do not reflect the real environment, leading to a failure of empirical findings to support its basic principles (Daily et al., 2003b). Finally, given the complexity of board mechanisms, empirical results which do not support agency assumptions and the increased variety of interests, it follows that our findings may be interpreted through a relatively new theoretical lens, i.e. multiple agency theory (Arthurs et al., 2008). The latter seeks to go beyond the simplistic assumptions of agency theory, to dismantle fortress of that overwhelming approach and to open the black box of the board processes (Daily et al., 2003). -- (1) Big Four are the largest international audit firms; in particular they are Deloitte, PriceWaterHouseCooper, Ernst&Young, and KPMG.