Board governance and corporate performance in the UK

Abstract

We examine the link between the monitoring capacity of the board and corporate performance of UK listed firms. We also investigate when and how firms use the flexibility offered by the voluntary governance regime to make governance choices. We find a strong positive association between the board governance index we construct and operating performance. Our results imply that adherence to the board-related recommendations of the UK Code of Corporate Governance helps mitigate agency problems, but investors do not value it correspondingly. Moreover, in contrast to prior UK findings suggesting efficient adoption of Code recommendations, we find that firms at times use Code flexibility opportunistically, which challenges the effectiveness of the voluntary approach to governance regulation.