Board Size and Financial Performance as a Driver for Social Innovation: Evidence from Italian Local State-Owned Enterprises

Abstract

This article investigates the effects of board size on financial performance and the indirect effects of this relationship on social innovation (SI). An Ordinary Least Squares (OLS) model was run on a stratified random sample of 111 Italian local state-owned enterprises (SOEs). Data refer to the year 2018. Many other prior studies have provided empirical evidence on the connection between board size and financial performance, with controversial results. In addition, none of them have investigated the context of local Italian SOEs, and none have linked this relationship with SI. This gap is significant given the growing role of Italian local SOEs in addressing public needs and promoting SI. We discovered that a larger board enhances financial performance in the sample analysed. This result finds its foundations in resource dependence theory, independence theory, and in the work of some agency theorists, and it also supports these theoretical lenses. In addition, in line with arguments on the theory of shared value, we support the view that the positive relationship between board size and financial performance incentivises SI.

1. Introduction

SOEs have grown in recent years and are expected to continue to grow since they operate in essential sectors of the economy (Robinett, 2006, p. 1). Nowadays, one of the main challenges for SOEs is represented by their corporate governance due to the awareness that social problems cannot be satisfied effectively and efficiently without robust corporate governance (Grossi et al., 2015). Social problems must be addressed through SI (Rao-Nicholson et al., 2017). The need to innovate in the public sector has a long history, which is sometimes linked to reform programmes brought in to face the introduction of new governance ideologies (Bekkers et al., 2013). SI has also become a key element for studying territorial governance processes (Andrew & Klein, 2010; Citroni, 2015; Edwards-Schachter et al., 2012; Moulaert & Swyngedouw, 2005). SI in the public sector may be considered a sustainable, efficient, and effective way to control and coordinate the companies devoted to protecting and solving social issues by adopting new solutions (Matei & Drumasu, 2015; Bogers et al., 2018). In the current context of social changes, SI must be considered not only part of corporate governance but also an imperative (Matei & Drumasu, 2015). The public sector remarks on the importance of SI and its impact on living standards, so public-sector decision-makers invest extensive resources in promoting it (Alonso-Martinèz et al., 2019; Camelo-Ordaz et al., 2025). Achieving a strong financial performance, the companies obtain more funds to invest in SI initiatives (Alonso-Martinèz et al., 2019; Camelo-Ordaz et al., 2025). In SOEs the financial performance assumes a key role in supporting governments’ decision-making (Bracci et al., 2015). Considering the number of public resources invested in SOEs’ activities and the SOEs’ social implications (Royo et al., 2019; Shaoul et al., 2012), financial performance has gained primary relevance for SOEs (Ruggiero et al., 2021). In SOEs, financial performance is considered helpful to monitor managers’ behaviours (Chen et al., 2008). In addition, it is crucial in encouraging private investors to be part of the ownership structure and ensure more efficient management (Menozzi et al., 2012). Financial performance in SOEs is important since governments also assess the suitability of investing in/disinvesting in the SOEs based on it (Bracci et al., 2015; Lapsley et al., 2015). Another much-debated issue in the academic literature (Chen et al., 2008; Hermalin & Weisbach, 2003) is the relevance of board size. The dimension of corporate boards has received much attention, given the significant business failures of large companies (Jackling & Johl, 2009). This study investigates the relationship between board size and financial performance in Italian local SOEs, specifically focusing on how enhanced financial outcomes—driven by more effective governance aspects—may enable increased engagement in SI initiatives. Similar studies have been conducted (Menozzi et al., 2012; Romano et al., 2014; Pandey & Chaturvedi Sharma, 2025). Our work differs from theirs since they did not consider the nexus between board size and financial performance, instead wondering about the indirect impact of this relationship on SI initiatives. This study investigated a stratified random sample of 111 Italian local SOEs operating in several sectors of activities and geographically distributed as the whole statistical population of Italian local SOEs. Specifically, an OLS model has been run. Our main result suggests that a larger board size positively affects financial performance, generating more potential in terms of resources to invest toward SI initiatives. The originality and contribution of this study lie in its focus on the underexplored context of Italian local SOEs. This scenario is important in delivering public services and fostering local development. The study introduces an innovative perspective by linking improved financial performance—from effective board governance—to the potential for increased investment in SI initiatives. The paper is organised as follows: Section 2 presents an overview of the Theoretical Background. Section 3 is dedicated to the Methodology Section, while Section 4 describes the Results. Section 5 shows the Discussion. Finally, Section 6 shows the Conclusions, practical evidence, and future research directions.

2. Theoretical Background

2.1. Corporate Governance in SOEs: An Overview of Definitions, Mechanisms, and the Role of the Board of Directors

The term “corporate governance” can be defined in different ways. For instance, the OECD (2004) defines it as “a set of relationship between a company’s management, its board, shareholders and other stakeholders”, remarking also that it “provides the structure through which the objective and monitoring performance are determined”. Shleifer and Vishny (1997) and La Porta et al. (2002) define it as a set of mechanisms designed to reduce agency problems that arise from the separation between ownership and control in a firm to protect the interests of all stakeholders, to improve firm performance, and to guarantee that investors get an adequate return on their investment.

In SOEs, corporate governance has been recognised mainly as a mechanism designed to mitigate agency problems (Jensen & Meckling, 1976; Core et al., 1999). Calabrò et al. (2013) describe governance in SOEs as a dynamic relationship among additional players who are more involved than those in the private sector.

The board of directors serves the most critical role among all internal corporate governance mechanisms (Nakano & Nguyen, 2012). Generally, the board of directors are involved in several functions, such as the monitoring function (Fama & Jensen, 1983), the strategic decision-making, the advisory function (Jørgensen, 1999; Sullivan et al., 2006), and the provision of resources function (Pfeffer & Salancik, 1978; Zahra & Pearce, 1989). Although similar in their functioning and structure, boards of directors in SOEs often do not engage in all activities that private enterprises undertake, focusing mainly on some of them (Menozzi et al., 2012). For instance, in Italian SOEs, the main board of directors’ role is to minimise the agency problems (Jensen & Meckling, 1976) between “principals” and “agents” since the board represents the primary “tool” available to owners for controlling and monitoring management (Bradford et al., 2013).

2.2. Board Size

Board size is defined as the total number of directors sitting on the board (Kamardin, 2014). The importance of board size in the corporate governance process is well-recognised (Jensen, 1993; Liang et al., 2013). It represents a well-researched structural factor in board studies (Dalton et al., 1999). Board size may be considered an element impacting the efficacy and decision-making of the board (Kao et al., 2019). A larger board size has advantages and costs (Harris & Raviv, 2008). The resource dependence theory views directors as valuable resources for the company (Zahra & Pearce, 1989; Johnson et al., 1996); as the size of the board rises, the capability of the board to advise and monitor increases proportionately, since there are more directors to rely on. Moreover, a larger group shares information and allows a broader diversity of opinions and experiences. Conversely, large boards may perform worse due to conflicts in collective decision-making (Jensen, 1993). The benefit of having additional directors is eventually outweighed by inefficient decision-making, free riding, procedural difficulties, and coordination. A larger board becomes inefficient due to the free rider problem and poor decision-making, but a larger board, on the other hand, may be able to offer more guidance (Coles et al., 2008; Dalton et al., 1999). While there is no perfect board size for every firm, board size seems to affect firm policy choices, firm value, and risk-taking (Coles et al., 2008). Many prior empirical studies have focused on board size. For instance, Treepongkaruna et al. (2024) argued that companies with larger boards are more effective in mitigating ESG controversies. Muhammad et al. (2023) stated that smaller boards are willing to ratify risky policy choices aligned with the ownership’s interest, while larger boards are found to be less inclined to form middle-ground, moderate, and safe decisions to reduce firm risk-taking. Cersosimo (2023) affirmed that the number of public owners is positively and significantly related to board size, while the degree of direct public ownership is negatively related to board size. Lemana et al. (2025) affirmed that companies prioritising corporate social responsibility initiatives will likely experience improved financial outcomes. Many empirical studies with controversial results focused on the relationship between board size and corporate innovation. Chatjuthamard and Jiraporn (2023) pointed out that a larger board provides the firm with additional resources, expertise, and abilities, enabling it to develop an innovative culture more successfully. Heubeck and Meckl (2023) affirmed that board size influences directors’ monitoring and resource provisioning functions in the context of innovation. Pineiro-Chousa et al. (2025) stated that a larger board could hinder the success of corporate innovation strategies. Conversely, according to Ghinizzini et al. (2025), board size negatively impacts social disclosure, while Mardini (2025) affirmed that board size negatively affects corporate innovation. Roy and DasGupta (2025) argued that board size significantly negatively influences a firm’s eco-innovation practices. Based on all the above-mentioned factors, further investigation should be carried out.

2.3. SI

One of the most accepted definitions of SI is a “novel solution to a social problem that is more effective, efficient, sustainable, or just than existing solutions and for which the value created accrues primarily to society as a whole rather than private individuals” (Phills et al., 2008). SI is now seen as an important element in a society’s quality of life and an essential component of firms’ strategies (Dossa & Kaeufer, 2014). In organisation theory, a burgeoning set of ideas has coalesced around the concept of “social innovation”, which has become a key focus of the area (Beckman et al., 2023; Gegenhuber & Mair, 2024). The SI discourse has also incorporated an expanded role for corporations, which some consider the only organisations with the necessary resources and innovative potential to make change at the level of “systems” (Dionisio & De Vargas, 2020). Meanwhile, the government is often seen as impeding progress, their new role in the SI landscape being to facilitate the efficient functioning of markets connected to social issues, often in partnership with for-profit firms (Rao-Nicholson et al., 2017). SI is fundamentally concerned with the construction of social “problems” and “solutions”—the objects of SI (Lawrence et al., 2014). SI is about more than balancing competing demands in the face of social and commercial goals; it is also about producing a particular version of social reality that aligns with the goals of social innovators (Tracey & Stott, 2025). Technological competence, entrepreneurial team functional heterogeneity, and public funding sources positively influence SI (Camelo-Ordaz et al., 2025). SI process can occur beyond social enterprises’ boundaries (Sottini et al., 2025). Coercive isomorphic pressures from sector-specific regulations and international bodies such as the European Union and the United Nations primarily drive SI initiatives. The company develops innovative solutions through strategic partnerships with governmental bodies, local municipalities, and cultural associations, aligning these with sustainable development goals (Sebastiao & Melchiades Soares, 2025). CEOs’ relational and moral motives enhance value co-creation and stimulate SI through shared resources and perspectives (Xiaobao et al., 2025). Transformational leadership promotes SI among hybrid enterprises, while sustainability orientation decreases it significantly (Erdiaw-Kwasie & Abunyewah, 2024). Prior studies support the view that enterprises invest more resources in SI for several reasons. First, companies that make large investments in SI are more visible and are usually subject to more significant societal pressure to show their social commitment (Aragón-Correa, 1998; S. Sharma, 2000). Second, SI can be considered as a nexus between profit and non-profit actors since investments in SI allow companies to gain more information about the problems, products, services, and technologies used by non-profit organisations (Mirvis et al., 2016), facilitate business practices with local banks and public organisations in the countries where they operate, and strengthen and create new alliances and collaborations in the social sector (To, 2016). Third, SI is “an answer to new business models” since most enterprises invest considerable resources in SI to adapt their business model to market demands (Schaltegger et al., 2012; Geissdoerfer et al., 2018).

2.4. The Connection Between Financial Performance and SI

Companies invest their financial resources (mainly firm performance) in SI, taking at least 1 year. In Italian local SOEs, higher financial performance may represent more public funds that can be invested in SI initiatives. Firms strategically allocate financial resources—primarily derived from their performance—toward SI (Alonso-Martinèz et al., 2019). Scholars underline the importance of SI in enhancing firms’ performance (Cegarra-Navarro et al., 2016; Van Beurden & Gossling, 2008). In line with arguments on the theory of shared value proposed by Kramer and Porter (2011), some authors have emphasised the importance of SI for the success of firms (Orlitzky et al., 2003). Related theoretical papers have suggested a relationship between social investments or corporate social performance and corporate financial performance (Crane et al., 2014). The importance of the link between financial performance and SI has also been supported by the SLR provided byOrlitzky et al., 2003. Enterprises need financial resources to survive when they embrace SI by making economic gains through this innovation (Senent-Bailach & Rey-Martí, 2017). In addition, SI is also beneficial for enhancing financial performance (Waddock & Graves, 1997).

2.5. The Connection Between Board Size and Financial Performance: Development of Hypothesis

From a theoretical point of view, according to the independence theory (Hillman & Dalziel, 2003), a larger board ensures a more effective advising function due to broader expertise, diversity, and connections with the external environment. Also, according to the resource dependence theory (Pfeffer, 1972; Jacobs, 1974), bigger board size is more advantageous since it ensures better decision-making and provides greater access to outside resources and several skills (Pfeffer, 1972; Zahra & Pearce, 1989; Alexander et al., 1993; Goodstein et al., 1994; Dalton et al., 1999). Conversely, according to the stewardship theory (Davis et al., 1997), a smaller board is better since a smaller group size facilitates the consensus on important decisions. Despite these contrasting views, since state ownership is associated with higher agency problems (Ben-Nasr et al., 2012), agency theory is mainly recalled in the studies referring to the Italian SOEs (Calabrò et al., 2013; Allini et al., 2016). According to the agency theory (Jensen & Meckling, 1976), the board size represents an important corporate governance variable to ensure board control over management performance and protect various stakeholders’ interests against management’s self-interests. However, agency theorists also find controversial results on the optimal board size. Indeed, some of them (Jensen, 1993; Guest, 2009) suggest that a smaller board is better to ensure a more effective monitoring mechanism, while others affirm that a larger board is more helpful to this aim (Ntim & Soobaroyen, 2013). For instance, a smaller board might also alleviate agency conflicts (Garanina & Kaikova, 2016) in SOEs (Li et al., 2021) due to more involvement, participation, and cohesiveness (De Andres et al., 2005), more efficient communication, and smaller cooperation costs (Jensen, 1993). Conversely, a larger board increases board voluntary disclosure in a context full of agency problems, such as the Italian ones (Allegrini & Greco, 2013; Elshandidy & Neri, 2015). Therefore, in line with enhancing the monitoring function, this last finding represents an alternative and innovative way to interpret the agency theorists’ view on choosing the optimal board size. Finding support using the theoretical lenses mentioned above, several prior empirical studies have already investigated how board size affects firm performance in different contexts, with controversial findings. Shah et al. (2024) reveal a robust positive correlation between larger board sizes and firm performance, indicating that companies with expanded boards exhibit improved financial performance within the Pakistani market landscape. Bui and Nguyen (2024) discovered that board size enhances the financial performance of a sample of 92 manufacturers. Using sample data from 30 large companies with large market capitalisation and great market influence listed on stock exchanges in Vietnam, Nguyen and Nguyen (2024b) argued that larger board size is significantly consistent with higher financial performance. Investigating 21 banks, Pandey and Chaturvedi Sharma (2025) stated that larger boards enhance financial performance. Aziz and Cek (2025), examining 490 listed enterprises, affirmed that board size significantly improves financial performance. Musallam (2024), studying a sample of 31 Palestinian-listed companies, identified a positive association between board size and financial performance. Analysing a sample of 216 listed non-financial family firms in Pakistan, Laique et al. (2025) discovered a positive and significant association between board size and financial performance. Maniruzzaman et al. (2024), investigating a sample of listed manufacturing firms, suggested a positive relationship between board size and firm performance. Kaur et al. (2024), using a sample of the top 500 listed Indian companies constituting the BSE500 index, identified a positive association between board size and social performance. Conversely, Khan et al. (2024), analysing a sample of 152 non-financial firms listed on the Pakistan Stock Exchange, argued that smaller boards enhance financial performance. Nguyen and Nguyen (2024a), examining a sample of 40 selected enterprises listed on the Vietnam Stock Exchange, discovered a negative relationship between board size and financial performance. Marzuki et al. (2024) identified a negative and significant association between board size and firm performance using a sample of 27 Takaful Operators in Malaysia and Indonesia. Sain and Kashiramka (2024), using a sample of 41 Indian banks (including both public sector and private sector banks), suggested a significant and negative association between board size and the bank’s performance. Finally, other studies support the view that the relationship between board size and financial performance is non-linear. For instance, R. Sharma et al. (2023), investigating a sample of 213 Indian companies, suggested that board size has an inverted U-shaped non-linear impact since, initially, firm performance enhanced while, after board size reaches a particular point, it decreases. According to Kamarudin et al. (2025), using a sample of 23,766 firm-year observations from 33 countries affirmed that board size positively impacts corporate sustainability performance; however, this relationship is non-linear.

Based on all the above-mentioned, it seems to be appropriate to formulate the two alternatives following research hypotheses:

H_1a: 

Board size is positively associated with firm performance in Italian local SOEs;

H_1b: 

Board size is negatively associated with firm performance in Italian local SOEs;

H_1c: 

A non-linear association exists between board size and financial performance in Italian local SOEs.

3. Methodology

The analysis conducted in the following adopts a quantitative research design since it analyses variables measured numerically and investigated with a range of statistical techniques. We considered a stratified random sample of Italian SOEs extracted through some elaborations on the database related to 2018 named “Open Data Partecipazioni PA”, available on the official website of the Italian Ministry of Economy and Finance (MEF)’s Department of Economy. We decide to focus on the year 2018 to avoid bias arising from COVID-19.

3.1. The Characteristics of the Statistical Population Object of Investigation

The following tables provide an overview of the whole statistical population of Italian SOEs from which our stratified random sample was selected.

Table 1. The census of the “entità a partecipazione pubblica” (Source: Italian MEF).

Description	Number	Distribution (%)
“Società a partecipazione pubblica”:	6069	67.2
(a) located in Italy	6.021	6.7
(b) located in the aforeign countries	48	0.5
Other legal entities different from “società a partecipazione pubblica”	2961	0.5
(a) located in Italy	2.961	0.5
(b) located in other foreign countries	0	0.5
Total	9030	0.5

shows that in 9030 entities, at least one public administration holds equity. Among them, 6069 entities are constituted as companies, while the remaining 2961 have a different legal form.

Table 2. The census of Italian “Società a partecipazione pubblica” (Source: Italian MEF).

Legal Form	Number	Distribution (%)
limited companies	2806	46.6
joint-stock companies	1772	29.4
cooperative companies	954	15.8
consortium companies	487	8.1
partnership companies	2	0.0
Total	6021	100.0

shows how one or more public administrations hold equity in 6021 Italian SOEs. Among them, 2806 companies are limited liability companies, while 1772 companies are joint-stock companies. In addition, 487 entities are consortium companies, while 954 companies are cooperatives. In the end, only 2 companies are partnership companies.

Table 3. Territorial distribution of the Italian “società a partecipazione pubblica” (Source: Italian MEF).

Geographical Distribution	Number	Distribution (%)
North West	1531	25.4
Piedmont	385	6.4
Valle d’Aosta	69	1.1
Lombardy	884	14.7
Liguria	193	3.2
North East	1581	26.3
Bolzano (Autonomous Province)	220	3.7
Trento (Autonomous Province)	216	3,6
Veneto	445	7.4
Friuli-Venezia Giulia	170	2.8
Emilia Romagna	530	8.8
Centre	1342	22.3
Tuscany	500	8.3
Umbria	148	2.5
Marche	259	4.3
Lazio	435	7.2
Southern	1121	18.6
Abruzzo	203	3.4
Molise	52	0.9
Campania	346	5.7
Puglia	302	5.0
Basilicata	66	1.1
Calabria	152	2.5
Islands	446	7.4
Sicily	293	4.9
Sardinia	153	2.5
Total	6021	100.0

shows that 3112 companies are located in the north of Italy, 1342 companies are sited in the centre of Italy, 1121 companies are located in the south of Italy, and 446 companies are located in Sicily or Sardinia.

Table 4. Sector of Activities of Italian “società a partecipazione pubblica” (Source: Italian MEF).

Sector of Activities	Number	Distribution (%)
Professional, scientific and technical activities	1278	21.2
Water supply, sewerage, waste management and remediation activities	725	12.0
Transport and warehousing	601	10.0
Rental, travel agencies, business support services	580	9.6
Supply of electricity, gas, steam and air conditioning	535	8.9
Wholesale and retail trade, repair of motor vehicles and motorbikes	350	5.8
Buildings	323	5.4
Manufacturing activities	280	4.7
Financial and insurance assets	219	3.6
Artistic, sporting, entertainment and leisure activities	212	3.5
Real estate activities	209	3.5
Information and communication services	165	2.7
Health and social care	132	2.2
Education	113	1.9
Other service activities	104	1.7
Accommodation and food service activities	95	1.6
Agriculture, forestry and fisheries	69	1.1
Public administration and defence, social insurance	25	0.4
Extraction of minerals from quarries and mines	6	0.1
Extraterritorial organisations and bodies	0	0.0
Total	6.021	100.0

shows the distribution of Italian SOEs based on the industry in which they operate. It emerges that SOEs are mainly involved in the following three industries: professional, scientific, and technical activities (1278 SOEs); water supply, sewerage, waste management, and remediation activities (725 SOEs); and transport and warehousing (601 SOEs).

3.2. Sample Selected and Data Collection

The sample consists of 111 Italian state-owned enterprises (SOEs), selected through stratified random sampling from the entire statistical population of Italian SOEs in 2018. The stratification criterion was the geographical distribution of SOEs, ensuring that the sample reflects the same regional proportions as the full statistical population (see the comparison between Table 3 and

Table 5. Territorial distribution of the sample selected (Source: Authors’ elaboration).

Geographical Distribution of the Sample Selected	Number	Distribution (%)
North West	28	25.4
Piedmont	7	6.4
Valle d’Aosta	1	1.1
Lombardy	16	14.7
Liguria	4	3.2
North East	29	26.3
Bolzano (Autonomous Province)	4	3.7
Trento (Autonomous Province)	4	3.6
Veneto	8	7.4
Friuli-Venezia Giulia	3	2.8
Emilia Romagna	10	8.8
Centre	25	22.3
Tuscany	9	8.3
Umbria	3	2.5
Marche	5	4.3
Lazio	8	7.2
Southern	21	18.6
Abruzzo	4	3.4
Molise	1	0.9
Campania	6	5.7
Puglia	6	5.0
Basilicata	1	1.1
Calabria	3	2.5
Islands	8	7.4
Sicily	5	4.9
Sardinia	3	2.5
Total	111	100.0

).

Table 5 shows how 57 SOEs (equal to a little more than 50% of the total) are sited in the north of Italy, while 25 (equal to a little more than 22%) are located in the centre of Italy. Moreover, 21 SOEs (equal to almost 19% of the total) are located in southern Italy, while 8 (equal to almost 8%) are in Sardinia or Sicily.

3.3. Statistical Model Specification and Description of Statistical Variables

This study employs an Ordinary Least Square (OLS) model to test the impact of board size on financial performance in the stratified random sample. The OLS model assumes the following function:

ROI = β_0 + β_1 b_size + 〖β_2 〖CEO〗_dual + β〗_3 b_gender + β_4 b_interl + β_5 work + β_6 south + β_7 middle + β_8 islands + β_9 own + β_10 water + β_11 transp + β_12 energy + ε

(1)

Table 6. List of variables and definitions (Source: Authors’ elaboration).

Variable	Description
ROI	Financial performance is used to evaluate the profitability of an investment
b_size	Total number of directors
CEO_dual	Variable equal to 1 if the CEO is also chairperson, and 0 otherwise
b_interlock	Ratio of board members serving in the governance roles of other companies
b_gender	The ratio of female directors to the total number of board members
Work	Total number of salaried employees
South	Variable equal to 1 if the SOE is located in Southern Italy, and 0 otherwise
Middle	Variable equal to 1 if the SOE is located in the Centre of Italy, and 0 otherwise
Islands	Variable equal to 1 if the SOE is located in Sardinia or Sicily, and 0 otherwise
Own	Variable equal to 1 if the SOE is partially privately owned, and 0 otherwise
Transp	Variable equal to 1 if the SOE operate in the transport sector, and 0 otherwise
Energy	Variable equal to 1 if the SOE operate in the energy sector, and 0 otherwise
Water	Variable equal to 1 if the SOE operate in the water sector, and 0 otherwise

shows the list of variables and a definition for each. The model’s dependent variable is represented by the Return on Investments (ROI) for the year 2018. These data have been exported to the AIDA software (version AIDA64), which extrapolates them directly from the annual financial reports. The variable $b_{size}$ represents the explanatory variable of this study. It has been measured as the total number of directors sitting on the board, following other prior studies such as that performed by Anderson et al. (2004). The control variables of this study are represented by ${CEO}_{dual}, b_{gender}, b_{interl}$, $work$, $south$, $middle$, $islands, own$, water, transp, and energy. The ${CEO}_{dual}$ is a dummy variable that takes value one if the CEO exists, and the individual that assumes this role is also the chairman of the SOE and 0 otherwise, following other prior studies such as those by Qiao et al. (2017) and Jia (2020). The variable $b_{gender}$ was measured as the percentage of women directors to total directors, following other studies by Monteduro et al. (2011). The variable $b_{interval}$ has been measured as the ratio between the number of directors affiliated with other organisations to total directors on the board, following the definition provided by Mizruchi (1996). All the above data has been elaborated starting from data available in the section “Esponenti, manager, revisori & sindaci” on AIDA software. The variable $work$ represents the total number of salaried employees following other prior studies such as those by Monteduro et al. (2011). These data have been retrieved in the “Size and group information” section available on AIDA software, which collects them directly from the annual financial report. The dummy variables $south$, $middle$, and $islands$ have been used to investigate the effects of the geographical distribution of each SOE. In this regard, we created four dummy variables: (a) north1, which takes value one for each SOE sited in the north of Italy and 0 otherwise, (b) middle, which assumes value 1 for each SOE located in the centre of Italy and 0 otherwise; (c) south, which takes value 1 for each SOE sited in the south of Italy and 0 otherwise; and (d) islands, which assumes value 1 for each SOE sited in Sardinia or Sicily and 0 otherwise. $Own$ is a dummy variable that takes a value of 1 for each SOE that is also participated in by private investors or indirectly by public owners and 0 in the case of total direct public ownership. This information was obtained with an Excel elaboration on data of direct public ownership held by each public administration for the SOEs selected, according to the information included in the “Open data Partecipazioni PA” available on the official website of the Department of Economy, and which referred to the year 2018. Finally, concerning variables measuring industry2, it has created three dummy variables: (a) $water$, which takes a value of 1 for each SOE that operates in the water industry and 0 otherwise; (b) $transp$, which takes a value of 1 for each SOE that operates in the transport industry and 0 otherwise; (c) $energy$, which takes a value of 1 for each SOE that operate in the energy industry and 0 otherwise; and (d) others which takes a value of 1 for each SOE that operates in a different industry than water, transport, and energy, and 0 otherwise.

4. Results

4.1. The Presentation of Variables and the Descriptive Statistics

Table 7. The median values of the board size (Source: Authors’ elaboration).

Median Value of all Italian “Società a Partecipazione Pubblica”	The Median Value of the 111 Italian “Società a Partecipazione Pubblica” Selected
3	3

shows the descriptive statistics. The ROI index ranges from a minimum of −23.91 to a maximum of 28.11. The mean equals 5.35, with a standard deviation equal to 8.08, while the median value equals 3.27. b_size ranks from the case of a sole director to a maximum of a board composed of 5 members, while the median value equals 3. The median position of the CEO_dual variable is equal to 0 (CEO non-duality), with a standard deviation equal to 0.30. In addition, only 0.10 percent of the 111 SOEs consider the characteristics of CEO duality. The mean value of b_gender is equal to 0.20, ranging from a minimum of 0 (the absence of women directors) to a maximum of 1 (all board directors are females). Moreover, the median value is 0.33, and the standard deviation is 0.22. The mean of b_interlock is equal to 0.52, ranging from a minimum of 0 (the absence of an interlocking directorate in the boards) to a maximum of 1 (all directors in the boards have at least one other apical role in other organisations), while the median value is 0.50 and the standard deviation is 0.41.

Table 7 shows that the median board size value of all Italian statistical populations of Italian SOEs and the median board size of the sample selected in this study are coincidental.

Table 8. Main descriptive statistics (Source: Gretl’s results).

Variables	Mean	Median	St. dev.	Minimum	Maximum
ROI	5.35	3.27	8.08	−23.91	28.11
Valprod	26,879,792.51	8,973,234.00	50,196,478.67	0.00	314,822,910.00
EBITDA	3,780,851.65	994,795.00	10,753,495.54	−17,666,149.00	87,065,890.00
b_size	2.35	3.00	1.47	1.00	5.00
CEO_dual	0.10	0.00	0.30	0.00	1.00
b_gender	0.20	0.33	0.22	0.00	1.00
b_interl	0.52	0.50	0.41	0.00	1.00
Work	189.60	56.00	438.60	0.00	2961.00
South	0.19	0.00	0.39	0.00	1.00
Middle	0.22	0.00	0.42	0.00	1.00
Islands	0.07	0.00	0.26	0.00	1.00
North	0.52	1.00	0.50	0.00	1.00
Own	0.31	0.00	0.46	0.00	1.00
Energy	0.05	0.00	0.21	0.00	1.00
Water	0.09	0.00	0.29	0.00	1.00
Transp	0.07	0.00	0.26	0.00	1.00
Others	0.79	1.00	0.41	0.00	1.00

shows the main descriptive statistics of the stratified random sample of 111 Italian SOEs. Regarding the control variables, the work variable ranges from the case of 0 salaried employees to a maximum of 2.196 salaried employees. On average, the number of salaried employees is 190, with a standard deviation of 438.60 and a median value of 56 salaried employees. As for what concerns variables referring to geographical distribution, the descriptive statistics mainly validate the descriptive distribution provided in Table 5. Concerning the variable own, the minimum value equals 0 (total direct public ownership) and the maximum value equals 1 (not total direct public ownership). The 31% of the 111 SOEs examined are not characterised by total direct public ownership. Finally, for what concerns the industry of activity, the mean values suggest that the SOEs that operate in the transport industry are represented by 7 percent of the total, the SOEs that operate in the energy industry are represented by 5 percent of the total, 9 percent of the total represents the SOEs that operate in the water industry, and the residual 79 percent of the SOEs operate in other different industries.

4.2. Multicollinearity Test

A multicollinearity analysis has been conducted to check the perfect multicollinearity among the explanatory variables (Rashid & Islam, 2013). The multicollinearity issues can be tested using (VIF) values. As a general rule, there is no multicollinearity if the VIF value of each variable is less than 10.

Table 9. Test of Multicollinearity—Variance Inflation Factors (Source: Gretl results).

Variables	Variance Inflation Factors (VIP)
b_size	2.273
CEO_dual	1.230
b_gender	2.176
b_interl	1.157
Work	1.362
South	1.309
Middle	1.173
Islands	1.214
Own	1.371
Energy	1.064
Water	1.252
Transp	1.346

shows how there is no correlation between independent variables3.

4.3. Heteroscedasticity Test

The Breusch–Pagan test for heteroscedasticity in

Table 10. Heteroskedasticity Test (Source: Gretl results).

Heteroskedasticity	Chi-square (12)	Prob > Chi-square
ROI	15.960710	0.193042

shows that the data did not present elements of heteroscedasticity. Anyway, an OLS model robust to heteroscedasticity has been run and presented in the following sub-section.

4.4. Regression Results and Analysis

An Ordinary Least Square (OLS) multiple regression was run, and

Table 11. OLS results (Source: Gretl results).

	ROI
Indip. Var.	Coefficient	p-Value
Intercept	−3.21081	8.56 × 10⁻² *
b_size	2.66784	1.31 × 10⁻⁵ ***
CEO_dual	−1.78538	4.60 × 10⁻¹
b_gender	4.63960	1.94 × 10⁻¹
b_interl	0.31651	8.17 × 10⁻¹
Work	0.00205	7.90 × 10⁻² *
Middle	1.02195	5.04 × 10⁻¹
South	1.73055	3.05 × 10⁻¹
Islands	0.23894	9.42 × 10⁻¹
Own	2.09844	1.60 × 10⁻¹
Energy	4.37371	1.18 × 10⁻¹
Transp	−2.28737	2.98 × 10⁻¹
Water	−3.14657	1.38 × 10⁻¹
R-square adjusted	0.295949
F-statistic	6.452203
p-value	2.46 × 108

Statistical significance: * p < 0.05, *** p < 0.001.

shows the findings. The OLS regression results indicate that the explanatory variable b_size has a positive and statistically significant effect on financial performance, as measured by ROI. Specifically, the estimated coefficient is +1.31 × 10⁻⁵ with a tiny p-value (***), suggesting that an increase in board size is associated with improved financial outcomes. The model yields an R-squared of approximately 0.30, indicating that board size alone explains a substantial portion of the variability in financial performance. Therefore, based on the regression results, H_1a is strongly supported, as the positive and statistically significant coefficient for board size confirms its positive association with financial performance in Italian SOEs. Conversely, H_1b and H_1c are rejected, given the lack of evidence for a negative or non-linear relationship between board size and financial performance.

5. Discussion

This study investigates the effect of board size on financial performance in a stratified random sample of Italian local SOEs. Consistent with recent empirical studies in other contexts (R. Sharma et al., 2023; Khan et al., 2024; Nguyen & Nguyen, 2024a, 2024b; Pandey & Chaturvedi Sharma, 2025), this topic remains highly debated among scholars. Unlike previous works, our analysis relies on a stratified random sample of 111 Italian local SOEs, with data from 2018 to avoid COVID-19 biases. Our main finding reveals a statistically significant and positive relationship between board size and financial performance, supporting hypothesis H_1a and rejecting the other two alternatives, hypotheses H_1b and H_1c. This aligns with theoretical perspectives such as the independence theory (Hillman & Dalziel, 2003), resource dependence theory (Pfeffer, 1972; Jacobs, 1974), and agency theory (Allegrini & Greco, 2013; Elshandidy & Neri, 2015). Our result contributes to supporting the view that a larger board increases advisory and monitoring capabilities by incorporating more directors with diverse resources and expertise (Zahra & Pearce, 1989; Johnson et al., 1996), outweighing potential downsides such as decision-making conflicts and coordination difficulties. In addition, we also support the view that, according to Italian local SOEs, a larger board may be able to offer more guidance (Coles et al., 2008; Dalton et al., 1999). Conversely, our result contributes to rejecting the view that a larger board generates conflicts in collective decision-making (Jensen, 1993), inefficient decision-making, free riding, procedural difficulties, and coordination difficulties. Additionally, we extend the literature by integrating the role of innovation. Specifically, our study is the first to join the concepts of board size, financial performance, and innovation. Our results support the view that larger boards facilitate the development of an innovative culture by providing additional resources and abilities (Chatjuthamard & Jiraporn, 2023) and influencing directors’ monitoring and resource provisioning functions in innovation processes (Heubeck & Meckl, 2023). Following prior studies (Matei & Drumasu, 2015; Alonso-Martinèz et al., 2019; Camelo-Ordaz et al., 2025), we believe that improving financial performance in Italian local SOEs indirectly fosters SI by increasing available financial resources, typically enabling investments in SI initiatives within a year (Alonso-Martinèz et al., 2019). Moreover, our finding contributes to arguments on the theory of shared value proposed by Kramer and Porter (2011), remarking on the crucial role of SI in the success of enterprises. Our findings also contribute to the ongoing debate on how corporate governance influences such investments, showing that larger boards can positively impact SI through enhanced financial capacity and effective governance structures. Finally, our results corroborate previous empirical evidence on the positive association between board size and financial performance in various contexts (Shah et al., 2024; Kaur et al., 2024; Bui & Nguyen, 2024; Maniruzzaman et al., 2024; Aziz & Cek, 2025; Laique et al., 2025), while contrasting with some other studies reporting negative effects or a non-linear relationship (Khan et al., 2024; Marzuki et al., 2024; R. Sharma et al., 2023; Kamarudin et al., 2025). Finally, since the number of public owners is positively related to the board size (Cersosimo, 2023), we believe that Italian local SOEs are a good context in which to enhance board size to positively affects financial performance and generate more economic resources to invest in SI initiatives.

6. Conclusions, Practical Perspectives, and Future Research Directions

This study remarks on how, in local Italian SOEs, a larger board enhances financial performance, supposing positive indirect effects on SI investments, which aligns with what the prior academic literature suggests. This result validates and finds its foundations on views of resource dependence view theory, the work of some agency theorists, independence theory, and the theory of shared value. Our findings carry crucial implications for the managers and policymakers of Italian local SOEs. Local governments could consider revising governance policies to encourage a more diverse and adequately sized board composition. This could involve integrating directors with varied expertise and backgrounds to effectively leverage their advisory and monitoring roles. Moreover, given the link between board size, financial performance, and investment in SI, managers should prioritise board configurations that balance oversight with agility to capitalise on new opportunities for SI. Training and development programmes aimed at directors could enhance their contribution to strategic innovation and sustainable growth. A larger board of directors could include SI and public governance experts, improving the organisation’s ability to integrate strategies devoted to the common good. If a larger board improves financial performance, more resources could be available to invest in SI projects, such as sustainability initiatives, social inclusion, or corporate social responsibility. Moreover, a larger board of directors could be more devoted to long-term goals and the social impacts of business activities, promoting corporate policies toward social value. In addition, SOE boards often answer the needs of multiple stakeholders, such as local communities and public institutions. Hence, a larger board could facilitate a broader dialogue with these parties, encouraging SI practices. This study presents some limitations. First, only data referring to the year 2018 have been analysed. Consequently, there is a loss of information related to observing the phenomenon for only one year. Second, the sample object of the investigation is composed of only 111 Italian SOEs. Third, although a large set of control variables were considered, other determinants of the financial performance of Italian local SOEs have surely not been considered. Finally, another limitation is the endogeneity problem, which impacts much of the board-related literature (Hermalin & Weisbach, 2003). Board composition may influence firm performance, but the latter may influence the selection of board members. Due to all these limitations, we suggest further research to corroborate the findings of this study. Specifically, we suggest the following research agenda for future scholars who want to contribute to these research areas. First, it would be helpful for future research to observe the phenomenon for more than one year. Second, it would also be helpful if future research increased the sample size since our contribution is not generalisable to the entire statistical population of Italian SOEs. Third, future researchers could conduct other analyses devoted to different study samples to understand whether the positive impact of board size on financial performance varies by regulation, market, or business model. Fourth, future studies could expand the research to international contexts, comparing public governance models in advanced and emerging economies. Fifth, future researchers could examine how a broader board encourages the adoption of SI practices. Sixth, future researchers could find innovative financing mechanisms devoted to promoting SI.