According to Daily (1996). According to resource dependence theory, the board of directors is critical to the company's success. Making external relationships is critical for gaining access to additional resources that can help a firm succeed. To ensure the firm's success, directors must fulfill their responsibilities by providing advise or representation to other institutions (Pfeffer and Salancik, 1978). To address conflicts between the board and the CEO, Fama and Jensen (1983) recommend that the majority of board members be non-executive directors (NEDs). These persons are regarded as independent and can act as mediators in disputes amongst top executives, as well as help discover suitable successors for internal managers. According to Hermalin and Weisbach (1988), having an independent board of directors might be a powerful motivator for the directors to closely monitor the CEO's actions.
Thus, directors must maintain their independence and continue to monitor underperforming CEOs and management in order to properly replace them. According to Hermalin and Weisbach (1988), the competing interests of directors and CEOs are a substantial source of boardroom tension.
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CEOs, motivated by a desire to safeguard their positions and maximize their personal advantages, may seek influence over the board. Based on the preceding discussion, it is apparent that the makeup of the boardroom is critical for the smooth operation of a business. Executives oversee day-to-day operations, while NEDs monitor their performance. The primary study question is how to ensure that the board of directors effectively functions as an internal monitoring control mechanism. Recognizing the importance of this issue, the Jordanian Corporate Governance Code (JCGC, 2006) recommends a board size of five to thirteen members to ensure a balanced mix of knowledge and experience. It is critical to establish a clear difference between the positions of CEO and chairman, with no CEO duality. Furthermore, having one-third of the board made up of non-executive directors (NEDs) is critical. Based on the JCGC (2006) requirements, variables for this study included board size, CEO duality, and the percentage of NEDs. An efficient board successfully supervises management and is a valuable instrument for encouraging board members' commitment to business strategies that fit with shareholder interests.
Subcommittees of the Board of Directors
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According to Jiraporn et al. (2009), board committees can help corporate boards function more efficiently. Harrison (1987) defined two types of board committees: monitoring or oversight committees and management supporting or operating committees. Operating board committees advise management and the board on major business decisions. Their monitoring counterparts seek to protect shareholder interests by conducting objective and independent evaluations of business executives and affairs. According to the agency theory paradigm, one major responsibility of the board of directors is to oversee corporate activity auditing and to guarantee that senior management and directors are appropriately appointed and compensated. In keeping with the agency model, the Cadbury Report (1992) stressed the necessity of board committees in promoting more responsibility and effective financial management in businesses, as well as protecting shareholders' interests. According to Harrison (1987), forming board committees can effectively motivate corporate boards to prioritize shareholder protection and responsible behavior. The specialized functions of board committees contribute to the credibility, legitimacy, and accountability of corporate governance. As a result, the development of board committees can effectively solve the problem of information imbalance and disputes between the principal and the agent. This will ultimately lead to lower costs, higher shareholder returns, and increased business value (Weir et al., 2002). As a result, the success of board decisions is directly related to the company's overall performance and worth. By closely monitoring management, managers are more likely to make decisions that benefit the organization. Prioritizing shareholder interests will make operations more profitable and improve the value of shares. This will assist to reduce conflicts between managers and stockholders. The basic goal of shareholders is to maximize their return on investment. In the next sections, we'll look at three major mechanisms that influence business performance. These methods include board composition, CEO duality, and the participation of non-executive directors.
The practical consequences of board committees have been more evident since the early 1980s, and their utilization has increased significantly (Harrison, 1987).
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In reality, most corporate governance codes currently encourage the formation of such committees (e.g., Cadbury Report, 1992; Sarbanes-Oxley Act, 2002; UK Combined Code, 2006). These committees generally oversee nominations, compensation, and audits. However, contrary to statements in theoretical literature, these committees may have a favorable effect.While various research have been conducted on the impact of monitoring committees on financial performance, the true impacts are still unknown.Unlike operating committees, NEDs often make up the majority of monitoring board committees, making them more reliable in protecting the interests of minority shareholders (Klein, 1998; Vefeas, 1999b). Furthermore, the compact form of board committees allows for more frequent meetings, which fosters in-depth research and discussion while promoting rapid decision-making (Karamanou and Vefeas, 2005). The participation of NEDs on board committees adds essential external skills and information, allowing the main board to focus on strategic priorities (Harrison, 1987). The specialty functions of board committees help to improve the credibility, legitimacy, and accountability of corporate governance (Weir et al., 2002).
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