Board governance, intellectual capital and firm performance

Abstract

The purpose of the study was to establish the relationship between board governance, intellectual capital and firm performance and the mediating effect of board role performance on board governance and firm financial performance in the selected Ugandan business firms with a view to establishing a coherent model directed at improving firm performance. As a corollary, the study examined factors relevant for effective board governance, intellectual capital and board role performance in Uganda. The study was cross sectional and quantitative and followed a positivist view of testing pre-specified hypotheses. The study used a respondent sample of 128 service firms operating in Kampala whose directors or managers were the unit of enquiry. Using Structural Equation Modelling with Analysis of Moment Structures for statistical modelling, findings in respect of the main objective indicated that in total, board governance, intellectual capital and board role performance accounted for 23 percent of the variance in services sector firms’ performance. The results also indicated that board role performance is a significant mediator of board governance and firm performance and also intellectual capital and firm performance. This study posted a finding that intellectual capital mediates the relationship between board governance and firm performance. The current study supported a multi-theoretic approach to the explanation of service firms’ performance in Uganda. The study also lent considerable support for the application of behavioural perspectives to firm performance in addition to the traditional control paradigm of agency theory. In the end, this study uncovered the antecedents (observed variables/leading variables) of board governance, intellectual capital and board role performance. Thus the study confirmed board governance, intellectual capital and board role performance factor structure of observed variables and the latent variables - providing models of effective board governance, board role performance and intellectual capital. These models can then be used to provide a trajectory for improving firm performance in services sector firms. Moreover, the importance of interaction effects of board governance and intellectual capital to firm performance was underscored in this study. Thus literature explaining firm performance via board governance only and ignoring the synergistic/complementary effects of both predictors has often missed this important reality. The study contributes to academic research by producing empirical evidence to support theories relevant to the explanation of firm performance. The identified role of intellectual in enhancing board role performance and also firm performance offers specific ways to manage and leverage intellectual capital by the board. For services firms in Uganda, board governance is the major overriding factor for firm performance and, intellectual capital and board role performance intervene for performance improvements. Effective board governance can easily assist the service sector firms by infusing better board communication processes, meetings’ processes and better performance of board roles or activities. This study shows that delivering acceptable firm performance is a function of effective board governance, efficient intellectual capital and effective performance of board’s tasks. It is expected that further studies will theorize the elaborate process from board governance toward intellectual capital to firm performance, as suggested by the investigation of this study.