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According to Nicholson and Kiel (2007), board size relates to the number of directors on the board who act on behalf of shareholders. Prior empirical studies show a mixed response to the relationship between board size and firm financial performance (Aljifri & Moustafa 2007; Johl, Kaur & Cooper 2015; Katuse et al. 2013; O’Connell & Cramer 2010). Therefore, the effect of board size on the performance of a firm is a debatable issue in the research literature.

Currently, there is no one-size-fits-all approach for boards, which has caused continuing debate regarding the appropriate board size for effective functioning. An optimal board size is influenced by many factors, such as the size and complexity of the organisation, the organisation’s business operations and the diversity of the business lines of the organisation (Firth & Rui 2012). However, this has not precluded some scholars from nominating an exact size. For instance, Bhagat and Black (2001) stated that board size should comprise 11 members, while Cadbury (1992) stated that the ideal board size is between eight and 10 members, with an equal number of executive and non-executive directors. Agency theorists suggest that the optimal limit should be around eight directors (Jensen 1993).

Meanwhile, Lipton and Lorsch (1992) suggested a maximum size of 10 members, since more than 10 members will interfere with the group dynamics and hinder board performance. Based on the second CG code in the UAE, the range of the board size should

be at least three members and a maximum of 15 members. This maximum range of 15 members aligns with Brown and Caylor (2004), who recommended between six and 15 members to enhance firm financial performance, and with Fauzi and Locke (2012), who recommended between seven and 15 directors. The rationale for this range is that a small board cannot suit all companies and a large board may provide a higher quality of professional consultation and bring critical resources to the company, especially if the organisation has complex operating activities or depends substantially on external resources (Fauzi & Locke 2012).

According to Ramdani and Witteloostuijn (2010), the ‘one-size-fits-all’ design of CG, which is applied to a wide variety of enterprises in many developed and developing countries, may need to be more flexible to suit a range of different ‘best practices’, according to organisations’ needs. It is clear from the discussion above that the effect of board size on firm financial performance is not uniform across different countries. Although there is no ideal size for a board, the right size of a board is driven by how effectively the members can operate as a team and build a strong communication system between them to make the right decisions.

According to resource dependence theory, partly because of their effective linkage (Pfeffer & Salancik 1978) and diversity (Goodstein, Gautam & Boeker 1994), large boards increase the likelihood of firms’ performance by improving companies’ ability to co-opt the turbulent environment (Hambrick & D’Aveni 1992). This is in accordance with the aspect of resource dependence theory that confirms that diversity and more effective cohesion of large boards boosts firm financial performance by transcending challenging market conditions (Goodstein, Gautam & Boeker 1994). The shortfalls in linkage among smaller boards can undermine their access to credit. Moreover, large boards mitigate the agency problem by performing their strategic function more effectively, which is essential to reduce agency problems during periods of financial turbulence or distress (Mintzberg 1983). Under such circumstances, the lack of diversity in smaller boards increases uncertainty concerning strategic development (Goodstein, Gautam & Boeker 1994; Mintzberg 1983). This ultimately increases the agency problem and undermines performance in firms with smaller boards. As a result, this theory signifies the presence of a positive relationship between board size and firm financial performance. There are two different views in the extant literature on the relationship between board size and firm financial performance—one view supports a large size, while one view supports a small size.

2.4.1.1Positive Associations between Board Size and Firm Financial Performance

There is a convergence of agreement with the argument that board size is linked to firm financial performance. However, conflicting results exist regarding whether a small or large board size is more effective. In this regard, agency theorists advocate that a large board size is expected to decrease managers’ ability to dominate the board, and enables a wider perspective on the managerial issues facing the company (Zahra & Pearce 1989). This theory proposes that the board of directors acts as a representative of the various shareholders and stakeholders of the company to monitor the performance and control the activities of the managers (Fama & Jensen 1983). A larger board comprises a greater number of directors working towards achieving the interests of the stakeholders in monitoring and controlling the firm, and thereby improving the firm financial performance (Kiel & Nicholson 2003). Thus, agency theory believes that a larger board size enhances firm financial performance by achieving better monitoring through a large group of people. As a result, this theory signifies the presence of a positive relationship between board size and firm financial performance, favouring a large board size.

Almatari, Alswidi and Fadzil (2014b) used Tobin’s Q to measure the financial performance of 162 non-financial companies in Oman during 2011 and 2012, which indicated that a large board size was positively associated with firm financial performance. This was because of the company having more relations to the external environment, as well as more skilled and experienced members (resources) for decision making to improve firm financial performance. Shukeri, Shin and Shaari (2012) indicated a similar finding, where a large board size was more efficient in monitoring and generating greater value for the firms. Their study used ROE to measure firm financial performance for 300 Malaysian public listed companies, randomly selected for the year of 2011.

The same positive finding was supported by De Andres and Vallelado (2008) in their study of 69 large international commercial banks over the period 1996 to 2006. The banks were chosen from six OECD countries (Canada, the US, the UK, Spain, France and Italy). The study used OLS technique to test hypotheses and found that board size in banks was related to directors’ ability to monitor and advise management, and that a large board size could prove more efficient in monitoring and advising functions and creating more value. In the extant literature on the relationship between board size and firm financial performance, aside from those discussed above, other studies have found a positive

relationship between board size and firm performance that is consistent with agency theory (Almatari, Alswidi & Fadzil 2014b; Almatari et al. 2012; Johl, Kaur & Cooper 2015; Kajola 2008; Klein 2002; Pearce Ii & Zahra 1992).

2.4.1.2Negative and Insignificant Associations between Board Size and Firm Financial Performance

Prior studies that found a negative relationship between board size and firm financial performance were undertaken by Katuse et al. (2013); Boone et al. (2007); Eisenberg, Sundgren and Wells (1998); Rashid et al. (2010); Bozec (2005); Mollah and Uddin (2007) and O’Connell and Cramer (2010). Yermack (1996) undertook an empirical study on the relationship between boards and firms’ financial performance using Tobin’s Q in a sample of 452 large US industrial corporations between 1984 and 1991. The study found that firm financial performance had a negative relationship with board size. A large board size was seen to be slow in decision making, while the directors rarely criticised the policies of top managers.

Vo and Phan (2013) undertook an empirical study in Vietnam on the relationship between CG and firms’ performance, as measured by ROA, and selected 77 listed firms over the period 2006 to 2011. The results supported the view that board size contributed negatively to the financial performance of firms in Vietnam, and indicated that board size tended to reduce financial performance. Chaudhry and Malik (2015) found the same result—that a smaller board size contributed more to the success of 30 listed companies on the Karachi Stock Exchange. The results concluded that board size has a negative effect on financial performance, and supported that a larger board of directors might face more difficulty in communicating between members, which damages firms’ performance.

Dabor et al.’s (2015) study revealed that a large board size reduced the profitability of Nigerian listed companies on the Nigerian Stock Exchange. The study used a sample of 248 companies listed on the Nigerian Stock Exchange, with ROE and ROA used as proxies for firm financial performance. The negative relationship was attributed to board members spending too much energy and time on minor problems. Further, the larger board size required major overhead costs that reduced company profit.

Sueyoshi, Goto and Omi (2010) examined 270 leading Japanese companies in manufacturing industries from 1999 to 2006. All the sample firms were listed in the first section of the Tokyo Stock Exchange. This study supported the idea that a small board

size is better than a large size in Japanese firms because it leads to quick and efficient managerial communications among members, thereby resulting in more effective board monitoring with increased firm performance. Thus, a large board size is inefficient in terms of higher spending costs, as well as creating difficulties in ensuring clear plans and regular meetings, and causing slow decision making because of the large number of members and poor communication among members.

Min-Hsien and Jia-Hui (2007) conducted another CG study in Taiwan, using 232 manufacturing firms listed on the Taiwan Stock Exchange from 1999 to 2003. This study concluded that a small board might be less encumbered with bureaucratic problems, more efficient and more able to provide better financial reporting oversight, whereas a large board has the disadvantage of high cost of coordination and delay in passing information, which could lead to weak monitoring.

Other studies found that no relationship existed between firm financial performance and board size (Aljifri & Moustafa 2007; Ghabayen 2012; Ibrahim & Samad 2011; Rouf 2011).