The Active Board of Directors and Performance of the Large Publicly Traded Corporation

Observation and reasonable assumptions lead the authors to the working hypothesis that a professional board--a board that is active and independent of management--should be associated with higher returns to investors. The authors test their hypothesis through an economic analysis of potential returns to investors defined as "economic profit"--operating earnings in excess of the costs of capital--and the authors' judgment as to the presence or absence of a professional board in a sample of 154 large publicly traded domestic corporations. The data analysis from 1991--1995 demonstrates that there have been significant increases in "economic profit" where a professional board was present. Although the results do not prove causation, corporations with active and independent boards appear to have performed much better in the 1990s than those with passive, non-independent boards.