Board Composition, Corporate Performance, and the Cadbury Committee Recommendation

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Abstract
During the 1990s and beyond, countries around the world have witnessed calls and/or mandates for more outside directors on publicly-traded companies' boards even though extant studies find no significant correlation between outside directors and corporate performance. We examine the connection between changes in board composition and corporate performance in the UK over the interval 1989-1996, a period that surrounds publication of the Cadbury Report calling for at least three outside directors for publicly-traded corporations. We find that companies that added directors to conform with this standard exhibited a significant improvement in operating performance both in absolute terms and relative to various peer-group benchmarks. We also find a statistically significant increase in stock prices around announcements that outside directors were added in conformance with this recommendation. We do not endorse mandated board structures, but the evidence appears to be that such a mandate was associated with an improvement in performance in UK companies.