The mediating effect of board of directors functions on the relationship between intellectual capital and firm performance

Abstract

Many factors influence a firm’s performance and among these factors, intellectual capital (IC) is the most important determinant of a firm’s performance. Besides IC, corporate governance (CG) elements, especially the board of directors’ functions (BoDF) are other significant predictors of the firm’s performance. Contemporary literature, however, remains scant on the assimilation of BoDF with IC and its components: human capital (HC), structural capital (SC), relational capital (RC) and spiritual capital (SpC) to determine firm performance. This study has filled the gap in the related literature by developing a framework which examines the mediating effects of BoDF on the relationship between IC and different dimensions of a firm’s performance. The study has also identified effective BoDF as the mediator that collaborates the different dimensions and investigated the effect of IC on the overall, financial and non-financial performances. To accomplish the objectives, this study applied quantitative methodology and questionnaires were distributed to 314 top managers of high IC Iranian firms. Fitness of the measurement model and structural equation modelling (SEM) were tested. To examine the hypothesis, simple regression, hierarchical regression and Sobel test were applied. The results indicated a partial mediation role of BoDF in the relationship between IC and firm performance. The findings also indicated that IC and its components are positively linked to BoDF which is positively linked to the overall, non- financial and financial performances. IC and its components are also positively linked to the overall performance. Based on the results, BoDF mediates HC, SC and RC on the overall performance but it does not mediate SpC in the firm’s overall performance. The study has shown the importance of IC in improving a firm’s performance, and the role of BoDF as one of the important variables in Iranian firms which affects the relationship between IC and three dimensions of a firms' performance.