Impact of board structure on firm performance: evidence from an emerging economy
| Date | 02 May 2017 |
| Published date | 02 May 2017 |
| Pages | 210-228 |
| DOI | https://doi.org/10.1108/JABS-06-2015-0067 |
| Author | Qaiser Rafique Yasser,Abdullah Al Mamun,Marcus Rodrigs |
| Subject Matter | Strategy,International business |
Impact of board structure on firm
performance: evidence from an emerging
economy
Qaiser Rafique Yasser, Abdullah Al Mamun and Marcus Rodrigs
Qaiser Rafique Yasser is
based at the Faculty of
Economics and Business,
University Malaysia
Sarawak, Kuching,
Malaysia.
Abdullah Al Mamun and
Marcus Rodrigs both are
based at the Newcastle
Business School,
University of Newcastle,
Newcastle, Australia.
Abstract
Purpose –The aim of this paper is to examine the association between board demographics and firm
financial performance of Karachi Stock Exchange companies and describe the attributes of these firms
and their boards. The connection between board structure and firm performance has attracted much
attention, especially in emerging economies, yet yielded many inconsistent empirical results.
Design/methodology/approach –This study examines the relationship between board structure and
the performance of Pakistani public listed companies by using a sample of Karachi Stock Exchange 100
(KSE-100) indexed companies. This study exploits the corporate performance by accounting-based
measures (return on assets), market-based measures (Tobin’s Q), and economic profit (economic value
added).
Findings –The outcome of the study shows the positive relationship between the board size, minority
representation in board, and family director’s in-board and firm performance. The authors also find that,
instead of adding value, independent directors in Pakistan are negatively associated with firm value.
Research limitations/implications –The study is based on KSE-100 indexed companies from 2009
to 2013; however, a large sample and multiple years’ data are required.
Practical implications –The paper provides empirical evidence that board independence is not
necessary for public-listed companies in Pakistan and would be of interest to regulatory bodies,
business practitioners, and academic researchers.
Originality/value –The paper contributes to the literature on corporate governance and firm
performance by introducing a framework for identifying and analyzing moderating variables that affect
the relationship between board structure and firm performance.
Keywords Corporate governance, Board of director
Paper type Research paper
1. Introduction
It is generally accepted that corporate boards participate a fundamental role in corporate
governance, the structure of the strategic dimensions of the company and originate goals
(Agyemang et al., 2014). However, there is no consensus as to what the optimal board
structure should be (Agyemang and Castellini, 2013). There is fluid controversy on whether
the board should be composed mainly of “inside” or “outside” directors (Hermalin and
Weisbach, 2003;Nicholson and Kiel, 2007;Kaymak and Bektas, 2008). The agency
theorist argues that board independence is essential if it is monitored effectively by
management team, and insider-dominated boards, by their very nature, are not
independent of the management (Heravia et al., 2011). Besides, steward theorist argues
that inside directors are more effective because they have better knowledge of the
company and industry than outside directors and they are just as diligent as non-executive
directors, given their legal responsibility and their own vested interest in the firm (Dalton
and Dalton, 2005;Zhang and Wang, 2013).
Received 9 June 2015
Revised 10 September 2015
18 November 2015
7 February 2016
16 April 2016
Accepted 3 May 2016
PAGE 210 JOURNAL OF ASIA BUSINESS STUDIES VOL. 11 NO. 2, 2017, pp. 210-228, © Emerald Publishing Limited, ISSN 1558-7894 DOI 10.1108/JABS-06-2015-0067
The Pakistani Code of Corporate Governance (2002; 2012) defines an independent
non-executive director as “a director who is not connected with the listed company or its
promoters or directors on the basis of family relationship and who does not have any other
relationship, whether pecuniary or otherwise, with the listed company, its associated
companies, directors, executives or related parties. The test of independence emanates
from the fact whether such person can be reasonably perceived as being able to exercise
independent business judgment without being subservient to any apparent form of
interference”.
The objective of this paper is to advance the international corporate governance research
agenda by describing the corporate governance environment for Pakistan’s largest public
listed companies and to examine the board composition and firm performance and any
relationship between them, in this context. This study extends the literature on corporate
board practices and firm performance by providing evidence from an emerging economy.
In particular, this study attempts to investigate whether board structure in the form of
outside independent directors as considered in advanced systems, can influence firm
financial performance in Pakistan.
The core contribution of this study is to provide empirical evidence lending support for the
espousal of good corporate governance practices. A further contribution made by this
study is to address the question of whether board composition contributes to the corporate
performance of public listed companies. In doing this, we aim to contribute to the literature
in two ways. First, by specifically examining board composition, a setting that has been
more frequently analyzed in a context of multiple governance prescriptions. Second, by
offering more topical evidence of potential relevance to emerging economies, and to
Pakistan in particular.
The remainder of the paper is organized as follows. Section 2 presents the background
literature of this study containing one tier and two tier board structure. Section 3 elaborates
on the institutional background of corporate board practices in Pakistan. Sections 4 and 5
present theoretical and hypotheses development; however, Section 6 discusses the
methodology and definitions of variables for the analysis. Section 7 presents empirical
results. Section 8 discusses the limitations of this study and the conclusions drawn.
2. Design strategies of board organization
The concept of board composition is mostly essential to the shareholder perspective of
corporate governance (Anderson and Reeb, 2004;Agyemang et al., 2014). This
perspective is based on the assumption that the more diverse the board, the better they will
serve the interests of shareholders. The influence of management on the board of directors
can be reduced by at least three design strategies.
Yasser et al. (2014) opined that corporations can modify their board leadership structures
by securing that chief executive and chairman roles are fulfilled by different persons. An
independent board leadership structure supported, by the appointment of independent
non-executive directors to the board. However, the formal independence of corporate
boards can be supported by the appointment of non-executive directors who have not
been formerly affiliated with the organization (Adams et al., 2010). Besides, the formal
independence of boards can be facilitated by the formation of board committees and the
formal division of board roles through one or more hierarchical layers in the supervisory role
(Anderson and Reeb, 2004).
The international corporate governance debate largely builds on the assumption that these
design strategies improve the formal independence of boards (Graham et al., 2012). In
addition, design strategies give rise to differences in the way one-tier and two-tier board
models facilitate the formal independence of boards of directors. The Figure 1 illustrates
the formal board models practicing around the world.
VOL. 11 NO. 2 2017 JOURNAL OF ASIA BUSINESS STUDIES PAGE 211
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