Oman et al. (2004) and Allen (2005) underline the growing importance of corporate governance in emerging markets. Corporate governance deficiencies in emerging countries have played a crucial role in their economic crises. Emerging markets frequently have substantial physical financial infrastructure, including central banks, commercial banks, and stock exchanges. However, their financial procedures and systems, including accounting, governance, and regulation, may be less developed. Furthermore, these markets may have less efficient and liquid trading conditions than the world's most sophisticated systems. These disparities enhance uncertainty and risk, while also expanding international diversification options for investors globally (Kearney, 2012).
Tsamenyi et al. (2007) identified many issues that developing economies face.
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These include risk and uncertainty, political instability, weak legislation, excessive government intervention, and insufficient investor protection. Therefore, it is critical to develop effective corporate governance frameworks. Several recommended solutions aim to improve governance structures, including strengthening and expanding transparency in capital market systems to raise investor trust, boosting local company performance, and encouraging expansion through equity rather than debt (Reed, 2002). Other research has revealed that larger boards can be more beneficial, but smaller boards may have their own merits. According to Yermack (1996), larger boards have less coherence and less communication, which might make it difficult for board members to adequately supervise management. This causes a heightened agency problem and greater expenditures, which eventually leads to a deterioration in corporate performance. This causes a heightened agency problem and greater expenditures, which eventually leads to a deterioration in corporate performance.
As a result, in terms of the agency problem, having a large number of directors on a board can lead to free-riding concerns, which can result in increased costs and director conflicts.
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As a result, these concerns will exacerbate the agency problem, leading to lower returns and weaker business performance. Jensen (1993) says that boards of a greater size may face difficulties in monitoring the firm and may be less successful when the number of members exceeds seven or eight. According to the agency model, as the board's size increases, the issue of director freeriding becomes more significant, causing the board to be viewed as a symbolic entity rather than an active participant in the management process (Hermalin and Weisbach, 1998). In larger boards, the CEO typically has more authority over management, rather than the board simply observing and managing it. This allows managers to follow their own interests rather than aligning them with shareholders, which can result in higher agency difficulties and lower business performance (Hermalin and Weisbach, 1998). According to Kholief (2008), when the membership of the board grows, it may become more difficult for board members to reach an agreement due to the diversity of their viewpoints and ideas. As a result, larger boards make decisions more slowly and inefficiently. These behaviors may intensify the agency conflict. With less coordination and communication, board members' ability to regulate and monitor management may suffer, potentially leading to weaker corporate performance. Similarly, Ahmed et al. (2006) argue that large boards might impede the creation and adoption of new ideas, as well as consensus on opposing viewpoints. This may eventually limit the board's ability to supply managers with useful ideas and suggestions. As a result, board conflict can reduce board members' emphasis on shareholders' interests, exacerbating the agency problem. According to Cascio (2004), the optimal board size is still being debated. Simply put, there is no universal method for finding the optimal number of directors on a board. Various studies provide differing insights on the subject.
CEOs, on the other hand, frequently establish dominance on smaller boards since their powerful position permits them to overturn board decisions in favor of their own interests.
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This can cause agency issues and ultimately undermine the firm's performance (Miller, 2003). This finding lends credence to the idea of resource dependency theory, implying that having large boards can improve a firm's performance by boosting its ability to react to changing circumstances. This is accomplished through excellent communication and different opinions on the board. According to resource dependency theory, having varied and cohesive large boards can help firms perform better even under difficult market conditions. Smaller boards, on the other hand, may face difficulties in obtaining loans. Furthermore, larger boards can better manage the agency problem by effectively carrying out their strategic role, especially during times of financial instability or hardship, hence minimizing agency problems (Mintzberg, 1983). In such cases, low representation on smaller boards raises questions regarding the clarity of strategic development (Goodsteing et al., 1994; Mintzberg, 1983; Pearce and Zahra, 1992). This eventually leads to a larger agency problem, which impairs performance in organizations with smaller boards.Previous study has indicated that larger boards can result in a more diverse range of backgrounds, communication skills, experience, and external business relationships. Dalton et al. (1998) discovered that larger boards allow directors to participate in more meaningful conversations and cooperate with a varied group of highly skilled advisers.
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