Board effectiveness: Evidence from firm risk

This paper investigates whether firms with more effective boards have lower firm risk. We show a strong negative relationship between board effectiveness (BSCI ratings) and firm risk. Furthermore, we show that several individual components of board effectiveness are negative and statistically related to firm risk. In particular, board independence, board structure, board system and board decision-making lead to lower firm risk. Our findings have implications for firms' costs of capital that is, effective boards are likely to result in a reduction of agency costs due to the separation of ownership and control and in turn, a reduction in the overall cost of capital for firms.