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Introduction
A board of directors (BOD) has a critical role in publicly traded firms and its responsibilities include hiring a qualified corporate executive officer (CEO) and evaluating the overall direction and strategies of the firm (Boland and Hofstrand, 2009). Recently, the BOD of McDonald’s Corp. announced the retirement of Don Thompson, the CEO at the time, in response to its sales slump. The decision addressed the lack of diversity on the company’s top management team (Dean and Gasparro, 2015), which may have been one of the factors that made McDonald’s slow to respond to changing market conditions (DiChristopher, 2015).
Westphal and Fredrickson (2001) investigated the impact of the BOD on the appointment of new CEOs and firms’ strategic choices. They found that the board significantly influences on corporate strategy and firm performance than top managers. Given this important role of the BOD, its composition and the relationship with firm performance have been studied from several different perspectives. Based on the agency theory, one stream of research advocates a separation of the responsibilities of management and shareholders because of their conflicting interests (Fama, 1980; Jensen and Meckling, 1976). Proponents of agency theory argue that effective boards need to be composed of a majority of outside directors, individuals who are not employed by the firm and who do not have any connection with its employees (Rhoades et al., 2000). They are better able to execute their responsibilities and thereby improve firm performance (Baysinger and Butler, 1985) because of their independence from the firm.
As opposed to this, stewardship theory argues that inside directors are more beneficial to the firm (Donaldson, 1990; Donaldson and Davis, 1994). Inside directors, individuals who are employed by the firm or who are connected to its employees, are good stewards of the interests of the firm and will work more diligently to further its success than outside directors (Baysinger and Hoskisson, 1990; Hill and Snell, 1988; Vance, 1978). Because of their superior internal information about the firm, they are more capable to help the top management team than outside directors (Baysinger and Hoskisson, 1990; Dalton et al., 1998). The link between BOD and firm performance has received considerable interest over the years, yet many studies have found mixed and inconclusive results...