The role of directors: unravelling the effects of boards on corporate outcomes

The purpose of this paper is to analyse whether the theoretical relationship between the board composition and the cost of capital (CC) is mediated by risk disclosure (RD) practices.

Partial least squares techniques are used, and a sample of all the companies belonging to manufacturing industry listed on Standard and Poor’s 500 for the year 2009 is studied. In relation to board composition, several recommendations issued by US governance codes are considered: board independence, board size, CEO duality, gender diversity, ethnic diversity, and financial expertise. Content analysis techniques are employed to measure RDs.

The results show that boards that follow governance codes recommendations lead to a reduction in the CC through the disclosure of information on risks.

These results provide encouraging opportunities for future research about the real role of the board of directors and suggest the need for the analysis of the participation of directors in firm strategy to better understand the effect of boards on the corporate outcome.

This evidence must help regulators and owners to set up adequate corporate governance mechanisms regarding the composition of boards. This evidence also presents direct implications for managers, who can better understand the value-relevance of RDs.

This paper provides new insight into the literature, which highlights that the effect of boards of directors on firm outcomes must be mediated by the involvement of boards in specific strategies.