Abstract:
The ongoing discourse on the connection between the effective board of directors and
firm performance will remain to be an important area of research study for a very long
time. In addition, despite the vast amount of research conducted on the relationship
between individual characteristics of the board members and firm performance, there
are few studies that concentrate on the characteristics of the entire board as a single
variable. This paper investigates the empirical study of the relationship between the
effectiveness of the board of directors and the firm performance of listed companies in
Sri Lanka. The study employed a panel data approach over a five-year period from 2018
to 2022 with a sample of 100 companies listed on the Colombo Stock Exchange. It has two
latent variables: Effectiveness of the board of directors as an independent variable with
four indicators (board size, board independence, board meeting, and board gender
diversity), and firm performance of the firm as a dependent variable with two indicators
(return on assets and return on equity). Partial Least Squares Structural Equation
Modelling (PLS-SEM) was used to analyze the data. Empirical results demonstrate that
an effective board is positively associated with firm performance. The findings are crucial
for stakeholders, policymakers, and regulatory bodies to increase the efficacy of their
board of directors and boost Sri Lankan companies' performance. This study contributes
to the existing literature by investigating for the first time, using the PLS-SEM, the
relationship between the effectiveness of a board of directors and the firm performance
of Sri Lankan companies. Future studies can use the moderating variable between these
variables.
