A New Perspective On Boad Composition and FP in An Emerging Market

Corporate Governance: The international journal of business in society
A new perspective on board composition and firm performance in an emerging market

Rashid Ameer, Fairuz Ramli, Husein Zakaria,
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A new perspective on board composition
and firm performance in an emerging
market
Rashid Ameer, Fairuz Ramli and Husein Zakaria
Rashid Ameer, Fairuz Ramli Abstract

and Husein Zakaria are Purpose – This paper seeks to examine the relationship between board composition and firm
based at the Universiti performance using a board-level aggregation variable.
Teknologi Mara, Shah Alam, Design/methodology/approach – This study uses linear regression to analyze the relationship
Malaysia. between board role typology and firm performance using a panel data set of 277 non-financial listed
Malaysian firms over the period 2002-2007.
Findings – The empirical results show that firm-boards with a high representation of outside and foreign
directors are associated with better performance compared to those firm-boards that have a majority of
insider executive and affiliated non-executive directors.
Research limitations/implications – The findings seem to imply that in widely owned firms a higher
proportion of outsiders on the board reduces under-investment and agency problems, which has
significant economic implications.
Originality/value – This is the first study to use a board-level aggregation variable to demonstrate the
impact of boards’ resourcefulness on firm performance.
Keywords Boards of Directors, Social capital, Human capital, Business performance, Malaysia
Paper type Research paper
1. Introduction
Outside directors are believed to be more effective monitors of management on behalf of
shareholders because they are perceived to be independent. No doubt each board member
has a fiduciary responsibility to serve the best interests of investors, but individual board
members influence the firm in different ways as a result of their human and social capital
accumulations and endowments (see Davenport, 1990; Lin, 1982). Corporate board
diversity anywhere in the world can be assessed on a continuum, where at one end an
insider-dominated board might be thought of as a homogeneous top management team,
while at the other extreme an outsider-dominated board would be the functional equivalent of
a heterogeneous top management team (Daily and Schwenk, 1996)[1]. As pressure from the
institutional investors to hire outside directors is gaining momentum it has become more
crucial to understand the importance of outside directors. This study is a step toward
understanding the impact of board diversity on firms’ performance.
Using a multidisciplinary framework, this paper derives a typology of boards and tests its
impact on firms’ performance. Our work is line with that of Pfeffer (1972), which indicates that
outside directors are heterogeneous, and with that of Hillman et al. (2000), who suggest a
classification of outside directors. We develop a new typology of firm boards that takes into
Received: 8 July 2009 account human capital, social capital and resource-based factors underpinning the
Revised: 18 August 2009
Accepted: 11 September 2009 selection of the board of directors. We argue that this typology is well suited to the study of
corporate governance in firms in emerging markets because of labour market frictions; it can
The authors are thankful to an
unidentified referee(s) for their
explain the differences in firms’ performance due to boards’ human capital sufficiency and
useful comments. ability to meet business challenges. We posit that previous studies that have used the ratio of
DOI 10.1108/14720701011085607 VOL. 10 NO. 5 2010, pp. 647-661, Q Emerald Group Publishing Limited, ISSN 1472-0701 j CORPORATE GOVERNANCE j PAGE 647
outside directors to board size are appropriate in understanding the agency role (see
Hillman et al., 2000), but are less valuable in understanding resource dependence and its
impact on firms’ performance. We use the board as a unit of analysis and develop a
classification of boards, thus making a new contribution to the emerging markets literature.
We apply this typology to 227 Malaysian firms over the period 2002-2007. Our findings show
that firm boards with a high representation of outside and foreign directors are associated
with better performance compared to those firm boards that have a majority of insider
executive and affiliated non-executive directors. Our findings seem to imply that in widely
owned firms, a higher proportion of outsiders on the board may reduce under-investment
and agency problems compared to insider- and affiliated director-dominated boards.
2. Review of the literature

Agency theory emphasises the role of the board in monitoring the behaviour and
performance of executives (Fama and Jensen, 1983; Jensen and Meckling, 1976).
According to agency theory, a few insiders provide valuable information that assists in
monitoring the affairs of the firm and the CEO. Without such insider information, outside
directors are disadvantaged because of the information asymmetry of the CEO. However,
according to stewardship theory, if such insiders do not work for the overall wealth
maximisation goal of the corporation, agency problems arise, resulting in the need for an
outside governance mechanism. Both agency and stewardship theories take a position that
the selection of directors is not a complex process. On the other hand, social and human
capital theories suggest that personal investments in human and social capital legitimate the
individual as a potential director. As directorship opportunities arise, matching and
alignment occurs between individuals and firms. Over time, successful matching and
alignment may afford an individual the opportunity for additional appointments.
An alignment model of outside directorship is shown in Figure 1.
The survival of an organisation is dependent upon how it deals with sources of uncertainty or
dependency. Therefore, having directors who are able to reduce uncertainties is important.
Each director has a unique set of human and social capital assets such as education,
expertise, skills, access, and an individualised set of contacts. According to resource-based
theory, these unique bundles of assets and capabilities serve firms in different ways.
Through their member networks with other organisations directors assist the firm in obtaining
key resources such as capital. In this way, there is a balance between the interests of the firm
and those of the individuals. In particular, the same human and or social capital attributes
that sorted individuals into positions within the corporate hierarchy will be useful in obtaining
outside directorships, and accordingly will predict that an executive career at the home firm
is influential in obtaining an outside directorship.
Figure 1 An alignment model of outside directorship
Investments in Human
and Social Capital
Individual No Directorships
First Directorship
Alignment
Multiple Driectorships
Prestigious Directorships
Firm
Prestige
Environment
Resource Dependence
Power Relationships
Source: Lester (2003)
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PAGE 648 CORPORATE GOVERNANCE VOL. 10 NO. 5 2010
Indeed, Kroll et al. (2008) argue that director vigilance without relevant experience is unlikely
to ensure board effectiveness. Boards containing vigilant directors as well as directors with
appropriate knowledge gained through experience are useful advisers to top managers.
Although outside directors are believed to be independent and the most effective monitors
of firm management, research suggests that their independence remains questionable.
Those with a personal or professional affiliation to the CEO (commonly referred to as ‘‘grey’’)
are suspected of being less effective than those without such relationships (Davis, 1991).
Similarly, if an outside director was hired during the tenure of the current CEO, it might
engender social exchange and feelings of reciprocity (Wade et al., 1990) towards hiring the
CEO as a director after his retirement.
3. Description of data and analysis approach

We assembled data on boards and profiles of directors from the annual reports of listed
non-financial firms. The final data consist of observations concerning firm-boards and
directors. Besides information about the boards, we downloaded financial data to develop
performance measures using Thomson Worldscope. The sample is composed of firms from
2002 to 2007. The frequency of all variables is annual, and the values are measured at the
end of each fiscal year.
In this paper, we first segregate board composition according to director types to get
percentages of insider, non-independent and independent directors and then, using these
percentages, we develop a board typology. We define as an inside director any director who
has a substantial block holding of at least 5 per cent at the end of each year’s shareholding in
the firm. Such insiders are related to the founding family and exercise significant power. It is
argued that this power directly affects ex ante choice of non-executive directors; therefore,
an insider-dominated board often exercises coercive power or exhibits ‘‘bullying’’ behaviour
(see Filatotchev and Bishop, 2002). Although Davis (1993) argues that losses due to
divergent interests between management and shareholders may be curbed by imposing a
control structure such as block holding, an undesirable outcome of this might give block
holders too much power to steer the company off its strategic target. Indeed, Halme and
Huse (1998) argue that a board of directors might operate as the ‘‘super ego’’ of a
corporation.
In the Malaysian setting, this situation becomes more complicated because the three levels
of command – i.e. owners, board and top management – are often composed of the same
individuals, or at least individuals from the same family. We apply an actor-oriented view,
using the language of the strategist and the strategic arena (Nordquist and Melin, 2001, p.
96). The strategist in our case is a director who plays a crucial role in decision-making and
someone who has a considerable impact on the firm’s strategy. The strategic arena is where
the actors meet and interact. In our case, substantial shareholders often interact through
informal sessions in informal strategic arenas to convince others to take their side in AGMs,
as the following example illustrates:
In a recent boardroom battle at Paragon Union Bhd, 16 shareholders with a combined 39.58
million shares or 60.67 per cent stake, have requisitioned for an EGM to remove the managing
director and three other directors. Of the 16 seeking the EGM, the largest shareholder holds 31.94
million shares via his interest in Asia Avenue Sdn Bhd while the others hold 3.42 million shares,
1.76 million shares and 1.5 million shares respectively. All the directors were appointed in 2008. In
place of the four, the shareholders are seeking to appoint two new directors with immediate effect
(Hoo, 2009).
We define a director as a non-independent director if that director is a former employee of

the company or any of its associated companies under any designation (including executive
director, CEO, chairman, or member of any committee). In the literature, such directors are
also referred to as ‘‘grey directors’’ (see Yermack, 1996, 2004) or ‘‘non-independent
non-executive directors’’ as per Rule 9 of the Bursa Malaysia listing requirements. This
category also includes a CEO/CFO/chairman/director who sits on the boards of other firms
besides his ‘‘home firm’’ (also referred to as cross-directorship). Their existence on more
than one board makes them less independent as they will become more sympathetic with
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VOL. 10 NO. 5 2010 CORPORATE GOVERNANCE PAGE 649
others in similar situations. Shultz (2001) calls this the ‘‘kindred spirit’’ phenomenon. Since
Bursa Malaysia permits a director to hold up to 25 directorships at one time, of which ten may
be in publicly listed companies and 15 in unlisted companies. In most Malaysian firms,
non-independent directors are often re-elected at the AGM, which seems to be in line with
the resource-dependence perspective. The following example illustrates such
appointments:
Star Publications (M) Bhd redesignated Datuk Oh Chong Peng, from non-independent
non-executive director to independent director. This was after he stepped down as a director in
Huaren Holdings Sdn Bhd, the investment arm of the MCA that controls 40.4 per cent of Star. But
the fact that Oh had joined the board of Star since 1987 and has a close relationship with the MCA
leadership had some observers questioning the merit of his redesignation as an independent
director of the newspaper publishing company (Bainbridge, 2002).
We define an outside director as an independent director in two ways:

1. A director who has no shareholdings and no current or potential business ties with the firm
and who represents any of the five major institutional investors in Malaysia. If any one of its
directors is also a director of another company, we consider him an independent director.
2. A director who is a foreign national registered on the board (Douma et al., 2006).
We argue that by having a foreign investor appointed as a member on a board can produce
changes. For instance, if foreign investors sit on the audit committee, they might bring with
them different cultural and ethical values and norms (see Sullivan, 1994) that might produce
changes in the corporate internal controls and ethical practices of the firm. Furthermore,
Pass (2004) extends his approval of such action because as members of such committees,
foreign directors can monitor executive actions and question executive decisions more
objectively than other outside directors.
Using the percentage of inside, non-independent and outside directors, a board with $50 per
cent of insider directors is classified as bullies; a board with $50 per cent of non-independent
directors is classified as buddies; a board with $50 per cent of independent directors is
classified as believers; and a board with $50 per cent of independent directors and foreign
directors is classified as the best. There is a possibility that a firm’s board does not consist of
any insiders (six firms), and the board is equally distributed (50 per cent/50 per cent) between
non-independent and independent directors, in which case it might be difficult to classify such
a board. In such cases, we look at the position of the non-independent directors outside the
firm: if non-independent directors hold Chairman and CEO, CFO, or Managing Director
positions, then we classify such boards as buddies and not believers, even though there is 50
per cent/50 per cent equal distribution. In other cases, such as when there is only one insider
(ten firms), and the rest of the board is equally split between non-independent directors and
independent directors, we look at the work-related experience of the non-independent
directors: if such work experience is not related to banking, but a public auditorship or
statesman role, we classify such boards as believers and not buddies. Finally, in other cases,
such as when a firm has no non-independent directors (eight firms), and the rest of the board
is equally split between insider and independent directors, we look at the work-related
experience of the independent directors: if such work experience is not related to finance, but
a public auditorship and statesman role, we classify such boards as believers and not bullies.
However, in some cases, where there are more independent directors who have
finance-related work experience on a board and no public accountability position such as
statesmanship or public auditorship (two firms), we classify such a board as buddies and not
believers. Figure 2 summarizes our board role typology.
To answer the main research question, i.e. ‘‘Does firm performance depend on board
composition?’’, following common practice in the literature we used the Tobin_ Q ratio as a
measure of firm performance, defined as the sum of the market value of common equity and
total debt divided by total assets. We use one-year lagged board and ownership variables to
control for endogeneity issues, as discussed in Choi et al. (2007). Besides board composition,
firm performance also depends on other factors, such as profitability, access to capital
markets, age, and size, as well as industry environment. We use return on assets as a proxy
j j
Figure 2 Role typology of boards
Percentage of insider
≥50% Bullies
directors
Percentage of non-
≥50% Buddies
independent directors
Percentage of
≥50% Believers
independent directors
Percentage of independent/
≥50% Best of All
foreign directors
measure for a firm’s profitability, denoted by PROF, which is defined as the ratio of earnings
before interest, tax, depreciation and amortisation to total assets; debt ratio, denoted by DA, is
defined as the total long-term debt to total assets ratio; BSIZE is the total size of the board;
AGE, is the log of the years for which a firm has been in operation; and SIZE is the log of the
total sales. Dummy variables are used for unobserved industry effects, and we also include
year dummies to control for any macroeconomic effects. Thus, we control for all these
influences in our final estimation model, which is defined in equation (1) as follows:
TOBIN_Q i;t ¼ b0 þ b1 BUDDIESi;t21 þ b2 BELIEVERSi;t21 þ b3 BESTi;t21

þ b4 FAMILYi;t21 þ b5 FOREIGNi;t21 þ b6 INSTITi;t21
ð1Þ
þ b7 PROFi;t21 þ b8 DAi;t þ b9 BSIZEi;t21 þ b10 AGEi;t
þ b11 SIZEi;t þ INDi;t þ d t þ 1i;t :
4. Basic results
Table I shows the trend in the composition of Malaysian firms’ boards according to the
proportion of inside, grey and outside independent directors on the board and using our
firm-boards typology of bullies, buddies, believers, and the best[2]. There has been a marginal
increase (decrease) in the percentage of outside (inside) directors on the firms’ boards over the
years studied. Under our typology, most of the firm-boards are classified under the bullies
category, suggesting a substantial presence of insiders on the boards in our sample. Thus, our
sample exhibits characteristics of relative board independence rather than those of truly
monitoring boards that are dominated by outside directors as suggested by Choi et al. (2007).
We also test for the difference in the composition of the firms’ boards between majority
family-owned and widely owned firms[3] (see Table II). The results show that starting in the
year 2004, family-owned firms have fewer independent outside directors than widely owned
firms; before and after that date there has been no significant difference between these two
types of ownership structures over the sample period. On the other hand, with reference to
our typology of firm-boards, we find that across these two types of ownership structure there
are significant differences in the percentage of believers over the period 2003-2007, and of
buddies in 2003 and 2007. From this preliminary trend analysis, it can be concluded that
Bursa Malaysia regulations appear to have somewhat succeeded in making boards
‘‘balanced’’, with both insiders and outsiders on the boards of Malaysian firms.
j j
j
j
Table I Composition of firms’ boards over time (2002-2007)
Directors (%) Firm board typology Ownership
All firms Insiders Grey outsiders Outsiders Foreign outsiders Buddies Bullies Believers Best Family Institutional Foreign n
2002 49.29 11.44 38.81 0.46 21.66 62.45 14.80 1.09 22.08 34.32 8.09 277
2003 44.95 15.08 39.61 0.36 30.69 52.35 16.25 0.71 22.85 34.44 7.88 277
2004 44.56 14.27 40.73 0.44 27.44 53.79 18.77 0.04 22.86 33.80 8.44 277
2005 44.11 13.67 41.74 0.48 24.55 51.99 22.38 1.08 22.27 32.97 9.15 277
2006 43.89 12.79 42.69 0.64 22.02 49.46 27.44 1.08 21.74 33.23 9.19 277
2007 43.81 12.26 43.31 0.62 21.30 49.82 28.16 0.72 21.76 32.60 9.92 277
Note: This table reports the trends in the composition of firms’ boards according to director types (inside, grey outside, independent outside and foreign outside) and the board typology
and ownership are defined in the text. All board variables and ownership variables are measured at the end of the fiscal year. The table shows the mean values for individual years.
Substantial family ownership means that more than 50 percent ownership of firms’ common shares is represented by the founders and family members; whereas widely held firms are
those where family ownership is less than 5 percent of the firm’s common shares. The sample includes 277 firms and 1,663 firm-years from 2002 to 2007
Table II Test-statistics for the differences between family-owned and widely owned firm structures
Directors (t-test) Boards (x 2-test) Ownership
All firms Insiders Grey outsiders Independent outsiders Foreign outsiders Bullies Buddies Believers Best Family Institutional Foreign n
2002 1.1675 0.2280 0.9781 0.1870 0.0020 0.7798 0.6530 0.7750 – – – 277
2003 0.0241 0.7275 20.9540 20.5312 0.0520 3.9520* 4.8621** 0.0909 – – – 277
2004 0.9823 20.7832 22.2198* 20.5040 3.0222 0.3154 6.2430** 0.0012 – – – 277
2005 1.1724 20.5251 21.4678 20.7856 1.0240 0.7440 4.5850* 0.2200 – – – 277
2006 0.0452 0.7051 0.8731 21.1140 0.7521 0.9821 3.1340** 0.3302 – – – 277
2007 0.8954 0.9354 21.4281 21.1090 3.2109 2.4790** 10.9110** 0.3690 – – – 277
Notes: This table reports the values of the t-statistics and x 2-statistics for the difference between substantial family-owned and widely owned firms according to the director types and
firm-board typology. All board variables and ownership variables are measured at the end of the fiscal year. Substantial family ownership means that more than 50 per cent ownership of
firms’ common shares is represented by the founders and family members, whereas widely held firms are those where family ownership is less than 5 per cent of the firm’s common
j
shares. The sample includes 277 firms and 1,663 firm-years from 2002 to 2007; * and ** show significance at the 5 and 1 percent levels of significance, respectively
j
Table III shows information on the professional backgrounds of the directors. On average, 44
per cent and 40 per cent of all directors also hold a position on the audit and remuneration
committees, respectively. The average board size of 8.14 members is smaller than the nine
members reported for UK firms (Conyon, 1994) but larger than the 6.75 members for South
Korean firms reported by Choi et al. (2007). For most firms, it can be argued that non-financial
expertise might be more important than financial expertise because more than half (55.93 per
cent) of the directors do not have financial expertise, whereas, on the other hand, among the
professional categories there are public accountants (10 per cent), bankers (9 per cent) and
external auditors (2 per cent), while among the non-professional categories such as
statesmen and politicians, there are only 3 per cent who hold director positions.
As a preliminary step before presenting our estimation results, the Pearson correlation
coefficients are calculated (see Table IV). These show that institutional and foreign
ownership have a significant positive correlation with the Tobin_Q ratio at 1 per cent.
Furthermore, proportions of outside independent and foreign directors are also correlated
positively with the Tobin_Q ratio, whereas, as expected, the proportion of inside directors is
negatively correlated with the Tobin_Q ratio at 1 per cent.
5. Empirical results
5.1 Firm board typology effect
Table V shows the estimation results of the firm-board typology separately (see columns I-III)
and collectively for all firm-board types (column IV). As hypothesized, our results show
significant positive coefficients on the firm-board typology measures of believers and best,
Table III Descriptive statistics

Mean Median SD Minimum Maximum
Panel A: Directors’ committee affiliations

Board size (number) 8.1406 8.0000 2.1036 4.0000 16.0000
Audit committee membership (number) 3.4635 3.0000 0.8667 1.0000 7.0000
Audit committee member (%) 44.1398 42.8116 12.0000 0.0000 87.5000
Remuneration committee membership (number) 2.3412 1.9202 0.7658 1.0000 4.0000
Remuneration committee member (%) 40.2290 39.0010 13.9802 0.5000 89.0391
Other committee member (%) 15.6500 11.9010 9.3452 2.0000 7.0000
Panel B: Directors’ outside positions
Chairman (%) 12.8732 12.5210 4.9302 0.0000 50.0000
CEO (%) 9.6212 11.3211 6.4723 0.0000 25.0000
CFO (%) 2.4812 0.0000 5.8432 0.0000 33.0000
CAO (%) 1.3245 0.0000 1.2760 0.0000 12.5000
FIN_DIR (%) 3.8822 0.0000 7.1111 0.0000 33.3333
MANAGING DIRECTOR (%) 7.1611 0.0000 10.80 0.0000 50.0000
Panel C: Professional work-related experience of directors
PUB_ACCT (%) 10.2610 11.1100 10.0212 0.0000 42.8600
EXT_AUD (%) 2.5234 0.0000 2.0421 0.0000 20.0000
STATESMEN (%) 2.9622 0.0000 6.8421 0.0000 40.0000
BANKER (%) 9.2600 0.0000 11.8900 0.0000 66.6667
NON-FINANCE (%) 55.9300 0.5714 0.1914 0.0000 1.0000
OTHERS (%) 6.0101 0.0000 9.0903 0.0000 44.4444
Notes: This table shows the descriptive statistics of the composition of firm-boards (Panel A). We define Board Size as the total number of
directors on the board of a firm; Audit committee and Remuneration committee denote the directors’ affiliation with audit and
remunerations committees, and ‘‘Other committee’’ includes Employees Share Options (ESO), Investment, Shari’ah, and Advisory
committees. Panel B shows the descriptive statistics of the board by outside position. It shows the percentage of directors who hold
Chairman, CEO, CFO, CAO (Chief Audit Officer), and FIN_DIR (financial director) positions in management teams of other firms. In Panel
C the directors’ work-related experience is grouped under professional categories of PUB_ACCT (public accountant), EXT_AUD
(external auditor), BANKER (e.g. commercial and investment banking service experience); and non-professional categories of
STATESMEN (e.g. members of government committees, agencies and the Ministry of Finance), and NON_FINANCE (those who do not
have finance-related work experience such as engineering and other natural sciences), and ‘‘OTHERS’’ (directors who have work
experiences in other finance and non-finance fields)
j j
Table IV Correlation coefficients

Grey
Outside outside Inside Foreign
Tobin_Q Family Institutional Foreign directors directors directors directors
ratio (%) (%) (%) (%) (%) Board size (%) (%) DA Age
Tobin_Q ratio 1.0000

Family (%) 2 0.0593* 1.0000
Institutional (%) 0.0457* 2 0.6652** 1.0000
Foreign (%) 0.2289** 2 0.2782** 2 0.1486** 1.0000
Outside directors (%) 0.0597** 2 0.0651** 2 0.0059 2 0.0103 1.0000
Grey outside directors (%) 0.0335 0.0307 2 0.0608** 2 0.0215 0.2506** 1.0000
Board size 2 0.0174 0.0597** 0.0978** 0.0230 2 0.2810** 2 0.2018* 1.0000
Inside directors (%) 2 0.0714** 0.0234 0.0522* 0.0018 2 0.7644** 2 0.7954** 0.3128 1.0000
Foreign directors (%) 0.0876** 2 0.0307 2 0.0569* 0.1118** 0.0786** 2 0.0053 2 0.1001** 2 0.2064** 1.0000
DA 2 0.0758** 0.0091 2 0.0559* 2 0.1021** 0.0933** 0.0244 2 0.1173** 2 0.0680** 2 0.0172 1.0000
AGE 2 0.0386 2 0.1407** 0.0958** 0.1250** 0.1089** 2 0.0323 0.0409** 2 0.0578* 0.0891** 2 0.0324 1.0000
Notes: This table reports the Pearson correlation coefficients between the firms’ performance measured using the Tobin_Q ratio, defined as the ratio of total market value of equity and
j
total debt dividend by total assets and firms’ ownership (family, institutional, foreign, as a percentage); directors composition (inside, grey outside, outside independent and foreign, as a
percentage) and control variables such as debt ratio, defined as the total debt to total assets ratio (DA) and AGE, which is the log of the years for which a firm has been in operation. All
ownership variables are measured at the end of the previous fiscal year. The sample consists of 277 firms over the period 2002-2007. * and ** show significance at the 5 and 1 percent
levels of significance, respectively
j
Table V Estimation results of the firm-board typology
Variables I II III IV
Buddies 0.2333 – – 0.1239

[0.7702] [0.4222]
Believers – 0.5838* – 0.4908
[1.7200] [1.5368]
Best – – 0.5992** 0.5841**
[2.0818] [2.0588]
Family 0.0047** 0.0048** 0.0046** 0.0047**
[2.3754] [2.4434] [2.3874] [2.4573]
Foreign 0.0184** 0.0186** 0.0190** 0.0181**
[4.5458] [4.5843] [4.8436] [4.8966]
Institutional 0.0064** 0.0065** 0.0046** 0.0066**
[3.6153] [3.6787] [2.3874] [2.4573]
PROF 2.3436** 2.3442** 2.3047** 2.2991**
[3.0318] [3.0119] [2.9981] [2.9792]
DA 0.0416 0.0367 0.0687 0.0647
[0.2202] [0.1782] [0.3315] [0.3120]
BSIZE 22.4042 22.0527 21.3166 20.9189
[21.1453] [20.9558] [20.5757] [20.3898]
AGE 20.0902 20.1153 20.1211 20.1392
[0.2022] [1.1135] [21.1324] [20.1290]
SIZE 0.1371 0.1210 0.0696 0.0545

[1.1261] [0.9706] [0.1333] [0.3998]
Industry and year dummies included Yes Yes Yes Yes

Adjusted R 2 0.1466 0.1485 0.1546 0.2154
n (number of firms) 277 277 277 277
Notes: This table reports the regression results of the following model:
Tobin_Q i;t ¼ b0 þ b1 Buddiesi;t21 þ b2 Believersi;t21 þ b3 Besti;t21 þ b4 Familyi;t21 þ b5 Foreigni;t21

þ b6 Institutionali;t21 þ b7 PROFi;t21 þ b8 DAi;t21 þ b9 BSIZEi;t21 þ b10 AGEi;t21
þ b11 SIZEi;t21 þ INDi;t þ d t þ 1i;t :
The dependent variable is the Tobin_Q ratio, defined as the sum of the market value of common shares
and total debt divided by total assets. If a board has $50 per cent of non-independent directors, we
classify it as a buddies board; if a board has $50 per cent of independent directors, we classify it as a
believers board; and if a board has $50 per cent of independent directors and foreign directors, we
classify it as the best. PROF is the ratio of earnings before interest, tax, depreciation and amortization to
total assets; DA is the long-term debt to total assets ratio; BSIZE is the natural log of directors on the
board; AGE is the log of the years for which a firm has been in operation; SIZE is the natural log of total
sales; industry and year dummies are included in all the regressions. t-statistics are shown in square
brackets; * and ** denote statistical significance at the 10 and 1 percent levels, respectively
after controlling for the firm-stylised factors. These coefficients imply that when the
proportion of independent outside directors is $50 per cent, or the total proportion of foreign
and independent outside directors is $50 per cent combined, then such boards have a
significant positive impact on the firm’s performance (see columns II and III). Besides these
firm-board typology measures, our estimation results also indicate that ownership by family,
foreign and institutional investors has a significant impact on the firm’s performance.
Apparently, foreign shareholdings have a significantly higher impact, as evidenced by the
significant positive coefficient of 0.0184 as compared to 0.0047 for family and 0.0064 for
institutional ownership variables, respectively. In sum, the estimation results reported in
Table V show evidence of the predicted relationship between our newly developed
firm-board typology measure and firm performance (see column IV).
5.2 Diversification and monopoly status impact

In this section, we test the robustness of our results above after considering the impact of
‘‘other’’ variables which might also influence firms’ performance. In our sample, there are 28
firms in which the Malaysian government has more than 5 per cent ownership, and these firms
j j
might receive special concessions from the government in getting export/import licences and
access to other sources of finance; therefore, we suspect that these factors might also have an
impact on the performance of these firms. We use a dummy variable GLC equal to 1 if a firm is
linked to the government and 0 otherwise. Furthermore, most of these firms have diversified into
related and non-related businesses over the years, and the cash flows from these businesses
might also affect the performance of the firm. We use a firm diversity variable denoted by DIV,
using a two-digit industry classification, referring to Worldscope. Finally, we control for the
research and development status of a firm, because a growth-oriented firm might have higher
market performance than a firm which does not spend on R&D or those firms which are in
saturated industries. We use a dummy variable R&D equal to 1 if a firm has reported research
and development expenses and 0 otherwise. The estimation results are shown in Table VI.
The results are shown for each firm-board typology separately in columns I-III and combined
in column IV. After controlling for the influence of the ‘‘other’’ variables as defined above, we
find that ‘‘best’’ firm-board classification has a significant positive impact on firm
performance (see column III). We find that the firms whose boards are classified as
‘‘best’’ mostly concentrate in one or two business segments compared to the firms whose
boards are classified as buddies and believers, which concentrate on more than five
businesses. Therefore, when we control for the diversification factors, best boards have
significant impact compared to buddies and believers because when firms concentrate
more on a few business segments they are more focused and able to meet business
uncertainty more effectively than firms that diversify into related and unrelated businesses.
We find that the variables R&D and DIV both have a significantly negative impact on the firm
performance at a 1 per cent level of significance. In contrast, a firm’s linkage with the
Malaysian government does not provide it with any edge over other firms, as GLC has no
significant impact on firms’ performance. Overall, these results seem to suggest that on the
boards of Malaysian listed non-financial firms where the total proportion of foreign
independent and domestic independent outside directors is $ 50 per cent, this combination
of domestic and foreign expertise and knowledge leads to better firm performance. We
believe that this new finding contributes to the literature which speaks about the impact of
external corporate governance mechanisms on firms’ performance, and provides significant
proof of the importance of independent outside boards in emerging markets.
5.3 Management control, embedded growth options and non-linear effect of ownership on
firm performance
In section 5.1, we found that family ownership has a significant positive impact on firms’
performance. In this section, we examine the interaction effect of family ownership and family
control using interaction variable of family ownership and family CEO (denoted by dummy
variable Family-CEO)[4] besides testing for non-linearity by using the squared-term for the
family, foreign and institutional ownership variables denoted by Family2, Foreign2, and
Institutional2, respectively. We include an additional explanatory variable industry-Q ratio to
take into consideration industry benchmarking as in Doidge et al. (2004). Firm growth
embedded options are proxied by the ratio of total intangible assets to total assets, denoted by
INTG. These assets represent potential future profits or sales arising from a business’s
reputation and the continuing patronage of the customers[5]. The results are shown in Table VII.
We find a significant negative coefficient on the Family-CEO and a significant positive
coefficient on the industry-Q respectively. Thus, our findings also support existence of
type-II agency problems among Malaysian family firms. The coefficient on Industry-Q is also
significantly positive supporting previous results in Doidge et al. (2004). On the other hand,
Foreign2 (Institutional2) is positive (negative) and statistically significant (non-significant). As
in the previous section, we find that only the best (buddies and believers) firm-board
classification has (does not have) a significant positive impact on firm performance (see
column III). INTG is positive and significant at 10 per cent. Finally, we split our sample
according to majority widely held and family-controlled firms to test for the robustness of our
board typology impact on firm performance, and the results show that the board typology of
best remains statistically significant (see column IV).
j j
Table VI Impact of diversification and monopoly status
Variables I II III IV
Buddies 0.0456 – – 0.0708

[0.7085] [1.0432]
Believers – 0.0381 – 0.0629
[1.4751] [0.7504]
Best – – 0.6336* 0.6387*
[2.1667] [2.1856]
Family 0.0038* 0.0039* 0.0038* 0.0039*
[1.9446] [1.9569] [1.9752] [2.0016]
Foreign 0.0175* 0.0175* 0.0169* 0.0170*
[4.2383] [4.2466] [4.3581] [4.5460]
Institutional 0.0052* 0.0052* 0.0053* 0.0054*
[2.7604] [2.7350] [2.9005] [2.9336]
PROF 2.2358* 2.2437* 2.1866* 2.1736*
[2.9589] [2.9635] [2.9286] [2.9043]
DA 0.0743 0.0809 0.1100 0.0984
[0.3295] [0.3611] [0.4878] [0.4341]
BSIZE 21.6586 21.4817 20.4186 20.2234
[20.7878] [20.6900] [20.1843] [20.0954]
AGE 0.0050 0.0020 20.0229 20.0281
[0.0457] [0.0241] [20.2020] [20.2479]
SIZE 0.0962 0.0881 0.0231 0.0150
[0.7922] [0.7135] [0.1753] [0.1114]
R&D dummy 20.3116* 20.3107* 20.2860* 20.2717*

[22.5229] [22.5424] [22.4718] [22.3698]
DIV 20.0350* 20.0354* 20.0351* 20.0356*
[22.4421] [22.4998] [2.4720] [22.5299]
GLC 0.1138 0.1167 0.1268 0.1353
[1.1917] [1.2190] [1.3210] [1.4118]
Industry and year dummies included Yes Yes Yes Yes

Adjusted R 2 0.1765 0.1764 0.1858 0.2853
n (number of firms) 277 277 277 277
Tobin_Q i;t ¼ b0 þ b1 Buddiesi;t21 þ b2 Believersi;t21 þ b3 Besti;t21 þ b4 Familyi;t21 þ b5 Foreigni;t21

þ b6 Institutionali;t21 þ b7 PROFi;t21 þ b8 DAi;t21 þ b9 BSIZEi;t21 þ b10 AGEi;t
þ b11 SIZEi;t þ b12 R&Di;t þ b13 DIVi;t þ b14 GLCi;t þ INDi;t þ d t þ 1i;t :
The dependent variable is the Tobin_Q ratio, defined as the sum of the market value of common
shares and total debt divided by total assets. If a board has $50 per cent of non-independent
directors, we classify it as a buddies board; if a board has $50 per cent of independent directors, we
classify it as a believers; and if a board has $50 per cent of independent directors and foreign
directors, we classify it as the best. PROF is the ratio of earnings before interest, tax, depreciation and
amortization to total assets; DA is the long-term debt to total assets ratio; BSIZE is the natural log of
directors on the board; AGE is the log of the years for which a firm has been in operation; SIZE is the
natural log of total sales; R&D is a dummy variable equal to 1 for firms reporting research and
development expenses and 0 otherwise; DIV is measure of firm diversity using a two-digit industry
classification; GLC is a dummy variable equal to 1 if a firm is linked to the Malaysian government and 0
otherwise; and industry and year dummies are included in all the regressions; t-statistics are shown in
the square brackets; * denotes the statistical significance at 1 percent
6. Conclusion
This paper investigates the relationship between board composition and firm performance
using a new firm-board typology. Empirical results indicate that firm-boards populated by
outside and foreign directors, referred to as believers and best boards, have a significant
and positive effect on firm performance. The results are stronger for best (complete
outsiders) compared to buddies (affiliated directors) boards. The results seem to indicate
that an injection of outsiders into insider/grey director-dominated boards could be a useful
mechanism to address agency problems. The paper also finds that institutional and foreign
equity ownership also enhances board and firm performance, which is similar to the findings
of Choi et al. (2007).
j j
Table VII Ownership, family management embedded growth options and firm performance
Variables I II III IV V
Buddies 0.0439 – – 0.0727 20.0154

[0.7067] [1.1023] [20.8541]
Believers – 0.0581 – 0.0839 0.0339*
[0.7402] [1.0214] [1.8081]
Best – – 0.6038*** 0.6081*** 0.0257***
[2.0945] [2.1122] [2.8031]
Family 0.0094 0.0090 0.0074 0.0072** 0.0160*
[1.5286] [1.4532] [1.2448] [1.3149] [1.6182]
Family-CEO – – – 20.0123***
[23.5709]
Foreign 0.0128* 0.0131* 0.0125* 0.0128* 0.0060**
[1.6482] [1.6932] [1.6598] [1.7135] [4.0469]
Institutional 0.0160*** 0.0162*** 0.0157*** 0.0161*** 0.0017**
[3.3515] [3.4170] [3.3531] [3.4525] [2.2843]
Family2 20.0009 20.0008 20.0004 20.0006 20.0007**
[20.9732] [20.8796] [20.6266] [20.6760] [21.8981]
Foreign2 0.0008 0.0008 0.0006 0.0007 0.0001***
[0.5054] [0.4789] [0.5053] [0.4807] [5.7164]
Institutional2 20.0001*** 20.0001*** 20.0001*** 20.0001*** 20.0001
[22.4411] [22.5376] [0.0000] [22.5332] [0.0054]
PROF 2.2058*** 2.2135*** 2.1618*** 2.1507*** 3.3856***
[3.0333] [3.3074] [3.0012] [2.9767] [9.5385]
DA 0.0035 0.0096 0.0431 0.0294 0.4478

[0.0160] [1.4532] [0.1937] [0.1318] [1.7221]
BSIZE 21.9250 21.6859 20.7350 20.4621 20.8576*
[20.9310] [20.7962] [20.3310] [20.2050] [21.6906]
AGE 20.0286 20.0178 20.0007 20.0080 20.0277
[20.2571] [20.1613] [20.0061] [20.0767] [21.1166]
SIZE 0.1107 0.0994 0.0406 0.0295 0.0248*
[0.9281] [0.8217] [0.3164] [0.2243] [1.7292]
R&D dummy 20.3314*** 20.3290*** 20.3079*** 20.2915*** 20.0050
[22.6592] [22.6517] [22.6118] [22.4967] [20.0497]
DIV 20.0355*** 20.0360*** 20.0352*** 20.0358*** 20.0927***
[22.5790] [22.6289] [2.5530] [22.6182] [23.6517]
INTG 0.5984* 0.5798* 0.5681* 0.5719* 0.3805***
[1.8285] [1.8432] [1.7714] [1.7789] [7.3926]
GLC 0.1195 0.1249 0.1293 0.1421 0.0239
[1.2212] [1.2790] [1.3312] [1.4683] [0.8854]
Industry-Q – – – – 0.6793***
[3.8756]
Widely owned dummy – – – – 0.1830***
[4.0830]
Adjusted R 2 0.1846 0.1848 0.1930 0.2983 0.1692
Tobin_Q i;t ¼ b0 þ b1 Buddiesi;t21 þ b2 Believersi;t21 þ b3 Besti;t21 þ b4 Familyi;t21 þ b5 Family_CEOi;t

þ b6 Foreigni;t21 þ b7 Institutionali;t21 þ b8 Family2i;t21 þ b9 Foreign2i;t21
þ b10 Institutional2i;t21 þ b11 PROFi;t21 þ b12 DAi;t21 þ b13 BSIZEi;t21 þ b14 AGEi;t
þ b15 SIZEi;t þ b16 R&Di;t þ b17 DIVi;t þ b18 GLCi;t þ b19 Industry_q
þ b20 Widely_ownedi;t ; þINDi;t þ d t þ 1i;t :
The dependent variable is the Tobin_Q ratio, defined as the sum of the market value of common shares
and total debt divided by total assets. If a board has $50 per cent of non-independent directors, we
classify it as a buddies board; if a board has $50 per cent of independent directors, we classify it as a
believers board; and if a board has $50 per cent of independent directors and foreign directors, we
classify it as the best. PROF is the ratio of earnings before interest, tax, depreciation and amortization to
total assets; DA is the long-term debt to total assets ratio; BSIZE is the natural log of directors on the
board; AGE is the log of the years for which a firm has been in operation; SIZE is the natural log of total
sales; R&D is a dummy variable equal to 1 for firms reporting research and development expenses and
0 otherwise; DIV is measure of firm diversity using a two-digit industry classification; GLC is a dummy
variable equal to 1 if a firm is linked to the Malaysian government and 0 otherwise; Widely owned is a
dummy variable equal to 1 if a family ownership is less than 5 per cent and 0 otherwise; industry and
year dummies are included in all the regressions. t-statistics are shown in the square brackets;
*, **, *** denote statistical significance at 1, 5 and 10 percent, respectively
j j
We propose that future research should pay attention to the characteristics of the individuals
who comprise firms’ boards to understand their ability to fit into various typologies of roles (as
identified in this paper) and responsibilities using appropriate quantitative research techniques.
Replication in other emerging markets will be important to generate a more comprehensive
understanding of the relationships identified in this paper. As suggested by Ramaswamy and Li
(2001), board globalisation should be integrated in the literature on corporate governance and
strategic management, given the enormous strategy implications. Future research should focus
on the link between board composition and competitive strategies.
Notes
1. Studies of board diversity and its relationship to firms’ performance have been highly inconsistent.
For instance, Vance (1978) reported that outsider-dominated boards are poorer performers, while
Kesner et al. (1986) reported that outsider-dominated boards are better performers.
2. These averages should be taken with caution because there are a number of firms that have moved
from one classification to another over the period, and therefore changes in board structure might
not be clearly reflected in these numbers.
3. Where founders and family members own more than 50 per cent of the total common shares, we
refer to it as a majority family-owned firm, and when founders and family members have less than 5
per cent of the total common shares, we refer to it as a widely owned firm. Ownership is measured at
the end of the previous fiscal year.

4. When a family has a substantive shareholding in a firm and the CEO position is also held by a family
member, then, agency problem of type I – i.e. owner-manager conflict – does not exist. However,
agency problems of type II are present: the family shareholder has greater incentive for
expropriation and monitoring, and therefore it would have a negative impact on firm performance
(Villalonga and Amit, 2006, p. 401). We should expect a negative coefficient on the interaction term
Family-CEO in support of type II agency problems.
5. R&D constitutes only a small part of intangible assets: the possession of patents, trademarks, brand
names, and special technical knowledge from previous R&D, and advertising also matters. Some of
these are reported as separate assets in the firms’ balance sheets. Furthermore, there is a negative
correlation between the INTG and R&D variables; therefore, there is no cause for concern over
multi-collinearity in the model.
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Corresponding author
Rashid Ameer can be contacted at: rashidameer@salam.uitm.edu.my
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A New Perspective On Boad Composition and FP in An Emerging Market

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A New Perspective On Boad Composition and FP in An Emerging Market

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Corporate Governance: The international journal of business in society

A new perspective on board composition and firm performance in an emerging market

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Rashid Ameer, Fairuz Ramli Abstract

2. Review of the literature

Figure 1 An alignment model of outside directorship

Source: Lester (2003)

3. Description of data and analysis approach

We define a director as a non-independent director if that director is a former employee of

We define an outside director as an independent director in two ways:

TOBIN_Q i;t ¼ b0 þ b1 BUDDIESi;t21 þ b2 BELIEVERSi;t21 þ b3 BESTi;t21

Table III Descriptive statistics

Panel A: Directors’ committee affiliations

Table IV Correlation coefficients

Tobin_Q ratio 1.0000

Buddies 0.2333 – – 0.1239

SIZE 0.1371 0.1210 0.0696 0.0545

Industry and year dummies included Yes Yes Yes Yes

Tobin_Q i;t ¼ b0 þ b1 Buddiesi;t21 þ b2 Believersi;t21 þ b3 Besti;t21 þ b4 Familyi;t21 þ b5 Foreigni;t21

5.2 Diversification and monopoly status impact

Buddies 0.0456 – – 0.0708

R&D dummy 20.3116* 20.3107* 20.2860* 20.2717*

Industry and year dummies included Yes Yes Yes Yes

Tobin_Q i;t ¼ b0 þ b1 Buddiesi;t21 þ b2 Believersi;t21 þ b3 Besti;t21 þ b4 Familyi;t21 þ b5 Foreigni;t21

Buddies 0.0439 – – 0.0727 20.0154

DA 0.0035 0.0096 0.0431 0.0294 0.4478

Tobin_Q i;t ¼ b0 þ b1 Buddiesi;t21 þ b2 Believersi;t21 þ b3 Besti;t21 þ b4 Familyi;t21 þ b5 Family_CEOi;t

the end of the previous fiscal year.

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