Corporate Governance, Board Composition, Director Expertise, and Value : The Case of Quality Excellence

In this paper, we highlight the strategic role of the board of directors (BOD) in business excellence and its link with firm value. We empirically investigate the relationship between the composition of the BOD and the winning of a Malcolm Baldrige National Quality Award (MBNQA) or a local award explicitly based on the MBNQA criteria, a proxy for business excellence. Using a contingency approach, we examine several characteristics of the BOD, such as the number of inside directors, the number of directors who can be considered industry experts, and the number of directors with management expertise. We show that the likelihood of winning a quality award is positively associated with the number of outside directors with Ph.D. in the main object of business operations, and the number of outside directors with recent industry expertise. Subsequent residual analysis reveals that firm value is positively associated with the degree of the fit between board composition and quality management strategy. Specifically, operating income before depreciation, operating margin, Tobin's Q, and ten-day raw and market adjusted returns, are positively related to the degree of fit, while cost per dollar of sales, negatively. Thus, we, conclude that an appropriate board structure that fits the QM strategy exists, and this fit is positively associated with firm value