1 BOARD COMPOSITION AND FIRM PERFORMANCE IN SPANISH NON-LISTED FIRMS Blanca Arosa de la Torre blanca.arosa@ehu.es Txomin Iturralde Jainaga txomin.iturralde@ehu.es Amaia Maseda García amaia.maseda@ehu.es Universidad País Vasco ABSTRACT: In the context of ownership concentration, the aim of this study is to analyse the usefulness of the board of directors as an internal control mechanism and, in the case of family firms, also consider the generational effect. We examined the relation between firm performance and outside directors in SME non-listed family and non-family firms. Our findings show the existence of a negative impact of outside directors on firm performance in family firms, and the clear difference in behaviour between family firms run by the first generation and those that are run by subsequent generations. KEY WORDS: Outsider directors, generation, non-listed firms, family firms 1.- INTRODUCTION Within the management research area, corporate governance is one of the topics receiving increased attention. Specifically, corporate board structure and its impact on firm behaviour is one of the most debated issues in literature today. There are many studies that analyse the board of directors from different perspectives. Some of them analyse the determinants of board composition (Fiegener et al., 2000; Voordeckers et al., 2007; Jaskiewicz and Klein, 2007; Bammens et al., 2008). Minichilli et al. (2009) studied the antecedents of board tasks performance, developing and empirically testing a theoretical model on the impact of board characteristics on board task performance for a sample of 2000 largest Italian industrial companies. Other studies analyse the effect of board composition on firm performance but, in general, the empirical evidence is not conclusive. Some empirical findings regarding board composition towards performance finds that outside directors could improve board effectiveness and firm performance. For instance, Weisbach (1988), McKnight and Mira (2003) and Anderson and Reeb (2004) find a positive and significant relationship between outsiders’ proportion and firm value. However, others like Baysinger and Butler (1985), Hermalin and Weisbach (1991), and Agrawal and Knoeber (1996) find a negative relationship between the proportion of outside directors and firm performance. Dalton et al. (1998), De Andres et al. (2005) and Jackling and Johl (2009) find no relation between the two variables. Differences in findings have in part been attributable to the differences in the theoretical bases of investigation and different measure of firm performance (Jackling and Johl, 2009). However there is little research on the effect of the role of outside directors on firm performance in family SMEs and those who do have often uncritically adapted concepts and theories developed for large corporations without adjusting the situation to differences in for example ownership involvement, and the general lack of internal resources that often characterize these ventures (Huse, 2000; Daily et al, 2002). There consequently seems to be deficiencies in our knowledge of the role and contribution of outside directors in SMEs (Gabrielson and Huse, 2005). Boards of directors are a central institution in the internal governance of a company. In addition to strategic direction, they provide a key monitoring function in dealing with agency problems in the firm (Fama, 1980; Jensen, 1993). In a diffuse ownership context, the monitoring function must focus on reducing the agency problem between disperse shareholders and management (Hermalin and Weisbach, 2001). However, in the context of companies with high ownership concentration, the agency conflict in the firm is between controlling