The Board Committee Chair Effect: How Much Does It Contribute to Firm Performance?

Abstract

Boards of directors rely on committees to perform important specialized monitoring and advising tasks. While there is general consensus that committees and their chairs influence board outcomes and, thus, firm performance, we know little about the magnitude of these effects on firm performance. Using variance decomposition, we show that audit, compensation, and nominating committee chairs explain a significant portion of variance in firm financial performance. Some of the performance variance attributed to committee chairs comes from the increased explanatory power of adding an important level of strategic leaders. However, most of the committee chair effect seems to stem from performance variance that prior research may have inaccurately attributed to firm executives and other influences. For example, our results show that committee chairs, collectively, have a stronger influence on firm performance than board chairs, illustrating a need for more research on the critical role committee chairs play in the functioning of committees, boards, and firms. Furthermore, in additional analyses, we find that committee chair effects can differ across board leadership structures and time periods.