Enhancing the Board’s Monitoring Performance in SMEs

Despite an increasing research focus on the boards of directors over the past two decades, what actually molds board task performance has remained a relatively unknown ‘black box’ (Roberts et al.,2005; Zona and Zattoni, 2007). Research on board effectiveness is primarily centered on the importance of board monitoring tasks and on board independence (Anderson and Reeb, 2004). Two main premises regarding board characteristics are prevalent in previous research, namely directors’ independence from management (external and/or independent directors) and the separation of the roles of CEO and chair (Finkelstein et al, 2009). Finkelstein and Mooney (2003) highlighted the dominant focus in both corporate governance research and reforms, on the independence of board directors from the management of a firm and the effect of director independence on the board’s monitoring of the CEO. Relying on indirect measures of constructs that are difficult to observe, this focus has led board performance research to use demographic indicators of board characteristics commonly termed as ‘usual suspects’: the number of outsiders on boards, director shareholdings, board size and CEO duality. Studies that attempt to link these demographic characteristics to corporate (or board) performance have failed to provide conclusive results (Hermalin and Weisbach, 2003). Finkelstein and Mooney (2003) argue that research based on these demographics provides neither strong conclusions nor robust corporate governance practices.