The Impact of Board Composition on the Financial Performance of FTSE100 Constituents

The financial performance of entities is of utmost importance to stakeholders in general and shareholders in particular as, on one hand it is a key source for financing the current economic activities, thus helping to maintain a going concern and to increase the value of the business, and on the other hand it is the basis for distributing dividends, which in turn may attract investors (and their funds). Thus, identifying and analyzing those factors that influence financial performance of entities is of great relevance both to practice and academia. While it is logical (but not undisputed) to suppose that the managerial abilities of the board of directors would have a significant impact on the entity's financial performance, it is however not clear-cut whether the board's composition would significantly influence the entity's performance. Within this study we investigated using econometric regression models the impact of 9 corporate governance characteristics regarding board composition on the contemporaneous and next year's performance (measured as ROA) using a sample comprised of the constituents of FTSE100 between 2010 and 2011. Through this research we intend to contribute to the academic literature on the unsettled issue concerning the relationship between corporate governance and corporate performance. As hypothesized and in accordance with some previous researches we found that board independence and the proportion of foreign directors in the total number of directors (as characteristics of corporate board composition) have a significant strong positive impact on firm performance (both contemporaneous and subsequent).