Abstract

This paper uses technical efficiency to measure the performance impact of internal corporate governance
mechanisms. Specifically, it analyzes how the size, leadership and composition of the board of directors together
with external shareholders can be structured to enhance a firm’s technical efficiency. The study utilizes an
unbalanced pool of manufacturing firms in sixteen countries and offers support that active large external
shareholders’ who commit credible signals to minority investors of firms that have an insider-dominated or
balanced small board with a unified leadership can lead to enhanced technical efficiency. The results also
provide evidence of the convergence of American and European corporate governance practices. External
shareholders are also encouraged to elect an outsider-dominated board when insiders underperform, and not on
blind normative advice.

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