Roline Deken
5876338
What is the effect of corporate board characteristics in Newly Industrialized
Economy firms on firm performance? And is this effect moderated by Culture?
Supervisor: Dr. Ilir Haxhi
Student number: 5876338
Second reader: Stephan von Delft
Master in Business Studies
Abstract
Extending earlier literature on board characteristics and firm performance, this research offers an insight into how culture influence firm performance. It studies the existence of a moderating effect of culture on the relationship between board characteristics and firm performance. As culture is a very broad concept, we prefer the use of more specific measures of cultural differences to the straightforward and general concept of Cultural Distance. We thus extend previous literature by looking at the moderating effect of culture on the relationship between board characteristics and firm performance, as measured by Hofstede’s cultural dimensions (Uncertainty Avoidance, Power Distance and Masculinity). For 140 firms from the Newly Industrialized Economies (NIE) we examine the influence of culture on performance, measured in Tobin’s Q and Return on Assets.
This research contributes to the academic literature by 1) offering a better
understanding on how the different cultures influence firm performance, 2) showing that specific cultural dimensions affect performance differently and thus that not all cultural dimensions matter equally, 3) helps to extend the research on board characteristics and firm performance and 4) extending the application of UET to firm performance. In practice, this provides reason to believe that managers are able to increase performance by selecting countries on their culture. The results of this study will show the combined effect of culture and TMT characteristics and will offer scholars a better way to predict strategy and performance. Furthermore, when companies are in search of new top management team executives, the needed demographic characteristics could be aligned with the desired risk-taking behavior of a firm.
Table of Content
Tables, Figures and Abbreviations………...……..4
1. Introduction ... 5
2. Theory and Hypotheses Development ... 9
2.1 Literature Review ... 9
2.2 Corporate Governance ... 9
2.2.1. Agency Theory ... 9
2.2.2. Upper Echelon Theory ... 10
2.3 Firm Performance And Upper Echelon Theory….………..………..………14
2.4 Board Characteristics … ... 15
2.5 Moderating Effect of Culture……….……….……….…..…………18
2.6 Hypotheses Development……….……….……….………22 3. Methodology ... 29 3.1. Data Collection ... 29 3.2. Variables ... 29 3.2.1. Dependent Variable ... 29 3.2.2. Independent Variables ... 31 3.2.3. Moderating Variables ... 31 3.2.4. Control Variables ... 32 3.3. Method ... 34 4. Results………..…………...…..…..36 4.1 Descriptive Analysis..………..………...………36 4.2 Statistical Analysis..……….…..……….………41 5. Discussion..………..………...……51 5.1 Managerial Implications………..………..……53 5.2 Limitations..………..………..……54 5.3 Further Research………..………..……54 6. Conclusion………..………..……...57 7. References………..……….……….58 8. Appendix A………..……….……67 9. Appendix B………..……….………...….68 10. Appendix C………..………...………69
Tables, Figures & Abbreviations
Tables
Table 3.1 Stepwise OLS regression p.34 Table 4.1-4.3 Descriptive statistics and correlations p.38 Table 4.4-4.9 Multicollinearity Regression p.69 Table 5.1-5.6 Regressions: Return on Assets and p.45
Tobin’s Q Unstandardized Beta Coefficients
Figures
Figure 2.1: Conceptual Model p.14
Figure 2.2: Statistical Model p.29
Abbreviations
TMT = Top Management Team UET = Upper Echelon Theory
1. Introduction
The influence of Top Management Team (TMT) characteristics has been a popular topic in the field of corporate governance over the last decades. In introducing their Upper Echelon Theory (UET), Hambrick & Mason (1984), argue that executives matter and that
organizational decisions are a reflection of the TMT. In turn, the demographics of executives can influence a firm’s performance. However, it has also been argued that large organizations run themselves (Hall, 1977). These different theoretical perspectives presume a relationship between the TMT characteristics and firm’s performance. Hambrick and Mason (2007) use the example that an older executive will potentially react differently to an aggressive incentive-plan than a younger manager. The same could apply to differences in tenure, gender, education, and functional background. These cognitive bases are thus proxies of the demographic data. With this perspective the link between cognitive bases and a firm strategic decision-making is to be explained (Jensen and Zajac, 2004).
Earlier studies demonstrate that directors have a considerable influence upon strategic decisions (Hoskisson et al., 2002; Carpenter and Fredrickson, 2001; Finkelstein and
Hambrick, 1996; Hitt and Tyler, 1991). In the literature on firm strategic decision-making, risk-taking is an important factor and it has been research extensively (Bromiley, 1991; Wright, Ferris & Sarin, 1996; Wright, Kroll, Krug & Pettus, 2007). The tendency for risk-taking has also been linked to firm performance (Bromiley, 1991). When organizations engage in risk-taking behavior they can improve the returns to equity investors (John, Litov & Yeung, 2008). On the other hand, when organizations engage in risk-averse behavior this can lead to low returns on equity (Miller et al., 2002). However, this does not mean that firms ought to increase their risks regardless, for there is also the possibility of firms taking
excessive risks to benefit their managers at the expense of the stockholders (Tosi and Gomez-Mejia, 1994; Houston and James, 1995). Therefore, risk taking appears to be an important factor of firm strategy.
There have been numerous studies of culture on different aspects of corporate governance (Satkunasingam, Yong & Cherk, 2012; Gantenbein & Volonté, 2011; Licht, Goldschmidt & Schwartz, 2005; Licht 2004, Licht, 2001). Relating more to firm
performance, Ren, Gray and Kim (2010), have provided empirical evidence that national culture affects firm performance. Because culture determines behavior, cultural differences can cause conflicts in the understanding between two or more parties. These difficulties in understanding can affect a firm’s performance. This is because it has been found that cultural
differences cause misunderstandings in negotiating and ambiguity about the goals of the firm. Moreover, it can reduce trust and perceived performance and increase instability. On the other hand, there are also some advantages to cultural differences; it can lead to sustained
teamwork and more communication, which can improve performance (Ren, Gray & Kim, 2010). Cultural differences can thus lead to different outcomes. Therefore, to understand the effects of cultural constraints on the behavior and performance of the firm, it is expedient to focus on the country’s culture. This is because such a focus is most likely to lead to
significant findings on the effects of cultural environment on corporations (Li, Lam, & Qian, 2001). Many empirical studies have suggested that national culture has an influence on firm performance. National culture has been shown to have a greater impact than the
organizational culture on the firm (Adler, 1986). It can influence managerial decision-making, leadership style and human resource management (House, Hangers et al, 1999). All these factors influence the performance of the firm. For example, individualistic cultures may have an advantage in technological assets; while collectivistic cultures may gain from the way they organize their workforce and establish their relationships (Dunning and Bansal, 1997). With these different competitive advantages, firms may adapt with different strategies; this all has an influence on performance (Li, Lam, & Qian, 2001). When talking about
culture, Hofstede (1980,1994) is always mentioned. He argues that there are differences between the values and customs of all countries worldwide. These differences are addressed to as national cultures. According to Hofstede (1980), we can differentiate these national cultures into four dimensions: Uncertainty Avoidance, Power Distance, Masculinity and Individualism. In this study only the first three will be used.
These different theories presume a relation between TMT-characteristics as well as culture and performance. Compensation scholars have long proposed that compensation structures should be aligned with other organizational elements, but it is surprising that there have been few attempts to integrate culture with TMT characteristics, while both could potentially influence performance. One can easily see potential friction between the two, which can diminish the incentive effect of the compensation. For example, older executives will potentially react in a different way to an aggressive incentive-plan than a younger manager (Hambrick, 2007). Similarly, differences in tenure, education, and functional background could very well affect the way in which managers react to a change in the compensation structure. To encourage executives to fully use their talents, organizations should take the TMT-characteristics and preferences into account when designing
between TMT characteristics and executive compensation influences organizational performance.
The UET perspective has, as of yet, not been used to explain risk profile. Because risk-taking is an important dimension of firm strategy (Wright et al., 2007; Wright et al., 1996; Bromiley, 1991), this is an important gap in the strategy literature, which this study aims to fill. Further, we will try to link previous findings between culture and performance and use a different approach than most research has used until now by looking at the influence of Hofstede's cultural dimensions individually. This will give a more detailed perspective, as culture is a broad and complex accumulation of societal history, and its customs and values (North, 1990), it is important that it is looked at in detail and we can do that by looking at the dimensions individually. In most research informal institutions have been measured through the use of the Cultural Distance measure developed by Kogut and Singh (1988). However, previous studies have shown that not all four dimensions used in this the Cultural Distance measure are of equal importance, or that they do not matter enough to explain certain differences (Haxhi & Van Ees, 2010; Brouthers & Brouthers, 2001; Steensma, Marino, Weaver & Dickson, 2000). We postulate that in international business research the Cultural Distance measure should be replaced by the more detailed individual cultural dimensions as proposed by Hofstede (1980). We will therefore look into the parts that the cultural dimensions developed by Hofstede (1980) play, when looking at firm performance. Previous literature on this relationship is scarce, which stresses the need for more research. Taking all this into account, this research will test the effect of TMT characteristics on performance and whether this effect is moderated by culture. This is summed up in the
following research question:
What is the effect of corporate board characteristics in Newly Industrialized Economy firms on firm performance? And is this effect moderated by Culture?
The purpose of this study is to alleviate the global need for a better and more detailed understanding of how businesses act and react within certain cultural environments.
This research will use quantitative studies to investigate the influence of cultural differences on firm performance. We collected the data of 140 Newly Industrialized Economies (Hong Kong, Singapore, Taiwan and South-Korea) firms on firm performance, measured as Tobin’s Q and Return on Assets. Then we collected the data of the board of directors for all the 140 firms in annual reports. These results were then analyzed to see if the
relationship was moderated by the cultural dimensions using correlation and regression analysis to investigate the effects of culture on the relationship between board characteristics and performance.
This research will contribute to the current debate in several ways. The combined effect of culture and board characteristics will be known by the results of this study. This could offer scholars a better way to predict strategic and performance outcomes and thereby deepen the existing knowledge about the relationship between culture and performance. Further, this research fills a gap in the literature by applying UET to risk-taking. Hitt and Tyler (1991) argue that management characteristics are important in explaining firm strategy. We will extend the application of UET towards firm performance. Furthermore, when
companies are in search of new top management team executives, the needed demographic characteristics could, on the basis of the relations outlined in this research, be aligned with the desired risk-taking behavior of a firm.
The remainder of this thesis is organized as follows. The next section addresses previous literature related to the relationships mentioned in the research question. Based on the literature review, hypotheses are developed in the next section. This is followed by an outline of the research methods, after which the results of this research are reported. Consequently, the results will be discussed. Finally, the last sections make suggestions for further research and conclude the paper.
2.1 Literature Review
The following section elaborates on the theoretical perspectives on firm performance. The most used theories are Agency Theory (Jensen & Meckling, 1876) and the Upper Echelon Theory (Hambrick and Mason, 1984). First, Corporate Governance in general will be discussed; afterwards the two theories will be elaborated on in the following sections. In the first section we will elaborate on the relationship between managers and shareholders. In the second section we will discuss the relationship between board characteristics and firm performance. We find an interesting gap in the literature, when examining both theories and how they relate to each other. Next, we will discuss board characteristics, after which we will elaborate on the link between board characteristics and firm performance. Finally, the
moderating variable ‘culture’ will be explained, where after the hypothesis will be developed, which will serve to answer the research question of this paper.
2.2 Corporate Governance
Corporate governance concerns ''the structure of rights and responsibilities among the parties with a stake in the firm'' (Aoki, 2001). The classical dichotomous distinction is between the shareholder and stakeholder model. On the one hand, there is the shareholder view of corporate governance, which is mainly based on the agency theory that considers the separation of ownership and control. Common characteristics of corporate governance structures that fit within shareholder theory are diffused ownership and the board of directors having a lot of control (Aguilera & Jackson, 2003). On the other hand there is the stakeholder model, which is common in continental Europe. This theory recognizes stakeholders and their relationships and argues that managerial responsibility is more than the shareholder’s interest alone. According to this model, the responsibility stretches out to other stakeholders like customers, suppliers, and employees. Common characteristics of stakeholder corporate governance models are concentrated ownership in banks, powerful large shareholders, capital markets that have relatively weak liquidity, long-term relationships of loans, strong
relationships with government and hostile take-over protection (Aguilera and Jackson, 2003). In this section two relevant theories will be elaborated: the Agency Theory (Jensen &
Meckling, 1976) and the Upper Echelon Theory (Hambrick & Mason, 1984).
2.2.1 Agency Theory
One of the most used theories to explain difficulties that arise when two parties have diverging interest and asymmetric information is agency theory. This theory is cited most
often in studies on the link between board characteristics and firm performance (Carter et al., 2003). Agency theory is related to the monitoring role of the board; it focuses on its task to protect the shareholders from managers who only act in their self-interest (Van der Walt and Ingley, 2003).
Governance issues arise whenever the ownership of a company is separated from its management, resulting from the divergent interests between management and owners of a firm. In 1932, Berle and Means described the modern corporation as a separation of
ownership and control. In 1976, Jensen and Meckling came up with the agency problem. This problem elaborated on the fact that the owners of a firm do not control it and the manager of the firm, does not own the firm. This situation can lead to complications; because managers only receive a small part of the value they create, they might not work their full potential. They even benefit from non-working activities. According to Bebchuck et al (2002),
managers are even likely to make decisions that maximize their own profit, which can lead to holding their own interest over shareholders value. This can lead to not maximizing
shareholder value (Bebchuck et al., 2002). This can occur because managers only work for a firm for a couple of years and shareholders have a connection to the firm for a longer period of time. These differences in interest can lead to poor decision making, which in the end can lead to a decrease in shareholders value.
Because Agency theory focuses on determining the most efficient way to control for misalignment of interest this theory is relevant for this research. Eisenhardt (1989) also argues that the agency theory makes assumptions about people and their bounded rationality and risk-aversion.
2.2.2 Upper Echelon Theory
Hambrick and Mason (1984) were the first ones to research TMTs in the field of
organizational strategic decision making. They came up with the Upper Echelon Theory, which nowadays is a fundamental area in management research. One of the main differences with earlier research is the focus on the entire TMT, instead of focusing on the CEO (Helmich & Brown, 1972; Hambrick and Mason, 1984). Many people see the CEO as the person with the most power, but complex strategic decisions are actually often made by the entire TMT. That is the reason why it is important that interpersonal processes and group dynamics have to be taken into account (Jackson, 1992) and looking at the CEO only is not complete. Researching the entire TMT will thus increase the strength of the this theory (Hambrick & Mason, 1984).
According to the Upper Echelon Theory, “organizational outcomes, both strategies and effectiveness, are viewed as reflections of the values and cognitive bases of powerful actors in the organization” (Hambrick & Mason, 1984, p. 193). Hambrick and Mason (1984) argue that managers have a bounded rationality; they cannot oversee the organization as a whole and therefore will focus on a specific topic. This view builds on earlier work from theorists of the Carnegie School, who argued that complex decisions are often the outcome of behavioral factors rather than rational ones (Finkelstein and Hambrick, 1990). According to them, when the decisions become more complex, it is more likely that they will be influenced by behavioral factors. Therefore, Hambrick and Mason (1984) argue that top executives matter and their strategic decisions are a reflection of the TMT. March and Simon (1958) have the same argument, they argue that people have limited and different knowledge about future events, alternatives and consequences. This is caused due to the bounded rationality of human being, different aspiration levels, personal values, preferences and conflicting goals in a specific situation (March and Simon, 1958). When decision-making become too complex, it will be more likely that this will be influenced by behavioral factors. Consequently, this theory will be most appropriate in major decision-making or highly strategic decisions making. These sorts of decisions are often taken at the top of the firm.
However, there are also studies that argue the contrary. These studies state that top managers are of less importance in an organization and that their decisions are not a reflection of their values and knowledge. This view states that environmental forces are important, large organizations run themselves and strategic changes are caused by events (Hall, 1977; Lieberson & O'Connor's, 1972). This perspective is therefore more based on an outside-in view, where we mean that the industry influence the firm. Whereas the view that argues that top managers do have an influence on decision-making is more an inside-out perspective.
Hambrick and Mason (1984) elaborate further on the latter perspective and argue that TMT characteristics of top executives do influence the decision making process. And hence have an influence on the strategic orientation and performance of the organization. They argue that top executives are not able to oversee the whole organization and environment when making decisions. This occurs because managers have a limited field of vision and therefore will focus on a specific topic. When focusing on this topic, a manager will process and interpret this through a personal filter of norms and values. Managers will make a decision based on their view of the environment (Finkelstein & Hambrick, 1990) and therefore are these decisions consequently a reflection of the character of the executive
(Hambrick & Mason, 1984). Therefore, it is important to identify which variables have an influence on the choice whether executives take information into account or not. In the study of Hambrick & Mason (1984) multiple propositions were tested to see which board
characteristics have a relation on the organizational outcome.
In their study, Hambrick & Mason (1984) argue that cognitive bases and norms are associated with their demographic characteristics. Demographic characteristics reflect the deeper cognitive values and thus can be used in Upper Echelon research. Upper Echelon research is not the first type of research to use demographic variables. This has already been done in other fields of research. Jackson (1992) argues that the use of demographic
characteristics in the field of Corporate Governance comes from evidence that a new CEO causes strategic change and reorientation. Helmich and Brown (1972) argue that multiple studies found important changes in strategy when a new CEO was appointed, which lead to a broader utilization of demographics and a focus on the linkage between demographic
variables and organizational outcomes. The board characteristics that Hambrick & Mason use in their study are age, tenure, functional experience, education, social economic background, and financial position. The use of demographic characteristics in research is far from perfect (Karake, 1995; Hambrick & Mason, 1984). Measuring values and cognitive biases in an accurate way is not optimal or even possible (Hambrick & Mason, 1984). In this field of study, it is important to have observable background data for management selection, development and competitor analysis to be useful (Hambrick & Mason, 1984). Specific background of managers are important when selecting executives. Still it is important to look at the Upper Echelon perspective (Hambrick & Mason, 1984).
Hambrick and D’Aveni (1985) tested the Upper Echelon Theory for the first time. They made a comparison on board characteristics and the performance of firms in the United States. Significant differences were found in functional experience, tenure and education. One year later Norburn (1986) tested TMT characteristics of the largest companies in different industries in the United Kingdom. This study found evidence for significant differences in TMT characteristics between industries as well as within industries. Murray (1989), studying different industries, did not find a positive relation between TMT
heterogeneity and performance in the food industry, although such a relation was found in the oil industry. Goll, Sambharya & Tucci (2001) studied U.S. companies in 1985-1986, this study found significant evidence for a positive relation between firm performance and the board characteristics age and education and a negative relation for tenure. Patzelt, zu Knyphausen-Aufse & Nikol (2008), did found support for the relation between age, tenure,
education and experience to firm performance. Furthermore, there were studies that found more general support for the Upper Echelon Theory (Finkelstein & Hambrick, 1990). Thomas & Ramaswamy (1996) discuss the need of a fit between board characteristics and strategic orientation. They argue that a firm performs better when there is a fit between the two. However, there are also studies that found mixed results. Norburn & Birley (1988) examined 150 companies in 1984 in different industries. They found strong support for the relation of functional experience and education to performance, but weak or no support for other variables. Finkelstein & Hambrick (1990) also found mixed results. Carpenter, Geletkanycz & Sanders (2004) found ambiguous evidence and Smith et al (1994) did not found support at all.
2.3 Firm Performance and the Upper Echelon Theory
Next to the theoretical underpinnings of the importance of board characteristics, empirical studies also show the importance of board characteristics. The relationship between board characteristics and firm performance has been researched extensively (Thomas and
Ramaswammy, 2001; Jackson, 1992; Finkelstein and Hambrick, 1990; Hambrick and Mason, 1984; Hall, 1977). However, the results are inconsistent. Most authors point towards the idea that the background of executives does matter in the organization (Patzelt, zu knyphausen-Aufse and Nikol, 2008; Norburn, 1986; Hambrick and Mason, 1984; March and Simon, 1958). But there is also evidence that indicates the contrary (Hall, 1977; Hannan and Freeman, 1977; Lieberson and O’Conners, 1972). Moreover, several studies have found somewhat mixed results (Finkelstein and Hambrick, 1990; Norburn and Birley, 1988). There are different reasons that explain the inconsistent results. First of all, different authors use different measures. Second, board characteristics are often generalized, although the effects of different dimensions might be different. The study of Cho & Hambrick (2006) found support for the Upper Echelon Theory, when studying the American airline industry. They found a significant interacting effect and a shift in strategy when there was a change in TMT composition. For the Upper Echelon perspective, multiple authors suggest more extended research in the future, which have to include moderators into the Upper Echelon Theory (Hambrick, 2007; Finkelstein & Hambrick, 1990; Hambrick, zu Knyphausen-Aufse & Nikol, 2008). Our research builds upon this result. It includes the moderating effect of culture, but it goes further by expanding the sample to 140 companies in different sectors. Figure 2.1
explains our theoretical framework. We follow the approach by Hambrick & Mason (1984) in their use of executive characteristics.
2.4. Board Member Characteristics
In the next section the board characteristics that will be used in this study will be elaborated. These are: 1.Age, 2.Tenure, 3.Female Representation, 4.Education, 5.Functional Background, and 6. Board size.
Age
According to Hambrick and Mason (1984), age is related to risk-taking. They mention three possible explanations for the difference in risk-taking behavior, as executives get older. The first is that older executives have less physical and mental stamina (Child, 1974). Second, they are less flexible and spend more time seeking information in order to evaluate
information accurately. This tends to make the decision process longer (Taylor, 1975). This can be explained by the fact that older executives want to avoid disruptions in their lives and are more committed to financial and career security (Hambrick and Mason, 1984; Carlson & Karlsson, 1970). The third and final explanation may be that older executives have a greater psychological commitment to the status quo (Hambrick and Mason, 1984). They state that firms with younger managers will be more inclined to pursue risky strategies than firms with older managers. Consequently, Hambrick & Mason (1994) formulated two propositions related to age. They stated that firms with young managers will a) pursue more risky strategies and b) will experience greater growth and variability in performance. We will follow this reasoning and assume an increase of age will lead to risk-averse behavior.
Tenure
Tenure has been widely used in previous studies that examined board member characteristics. Following Pffefer (1983), team tenure has the most significant theoretical footing of all demographic variables. Team tenure will affect the organizational outcomes, because it affects the team’s commitment to the status quo, it gives information about diversity and, most importantly, it affects the TMT point of view towards risk. It has been put forward that firms that have long-tenured top executives are more likely to have unchanging strategies and to have strategies and performance close to the average of the industry (Finkelstein and Hambrick, 1990). As executives stay in the organization longer, they tend to develop stronger social ties and get more attached to the firm (Vancil, 1987). This causes them to have a lot more to loose and makes them more risk averse (Finkelstein and Hambrick, 1990).
he will gain (Karake, 1995). The way to the TMT can be a long one; executives may have struggled for years to get a place in the TMT (Vancil, 1987). Coffee (1988) argues that this can lead to risk adverse decision making, because the executives have a lot more to lose than they stand to gain by taking risks. Therefore, an executive with a short-tenure is more willing to take risk and when tenure increases his decision making will be more risk avoiding. Hence, it may be assumed that executives with a short-tenure are more likely to pursue more risk-based strategies that differ from the norm within the industry (Finkelstein & Hambrick, 1990).
Female Representation
The role of women in board positions is getting increased attention (Nielsen and Huse, 2010). Some countries have even introduced formal laws requiring female representation on
corporate boards. According to Burke and Mattis (2000, p.193): ‘Increasing women’s board presence enriches board information perspective, debate and decision making’. Carter et al. (2003) argue that boards with women on them could benefit from a greater understanding of their customers or other key stakeholders. Female executives deal more effectively with diversity in labor and product markets; this can help firms to gain competitive advantage (Bilimoria and Wheeler, 2000). Burgess and Tharenou (2000) argue that women better reflect the workforce in the company, which makes that the employees, can identify themselves with the board. It is important that employees can identify themselves with the board, because it will get them more motivated and loyal towards the company. Studies have showed that there are a lot of similarities between males and females in the workforce. They are found to be equally capable of performing and achieving desired outcomes from decision-making under risk (Nielsen and Huse, 2010). They also tend to be equally effective in the role of a leader (Eagly et al., 1995) and equally capable of processing and reacting to information (Nielsen and Huse, 2010). Still, there is a difference between male and female that is found in both the general and business specific literature, namely the lower preference for risk taking amongst females (Nielsen and Huse, 2010). A difference could be expected between a management team with a high number of females, as opposed to a low one regarding its risk-taking and strategic decision-making.
Education
Multiple studies have used the level of education of TMT teams (Hambrick and Mason, 1984). It has been linked to performance (Norbun and Birley, 1988), and strategic change (Patzeltk zu Knyphausen-Aufse and Nikol, 2008; Goll,Sambharya and Tucci, 2001).
According to Hambrick and Mason (1984), we can use education as a proxy for one’s values and preferences. This is because most people take decisions about education seriously. The level of education is positively related to processing information (Kimberly and Evanisko, 1981). Hambrick and Mason (1984) argue that the higher the use of complex coordinating devices and formal planning, the more open-minded people are towards change and innovation. According to Wiersema and Bantel (1992), executives with a higher level of education are more engaged in boundary spanning activities. It is also argued that top managers with a higher level of formal education are expected to come up with a broader range of creative solutions and are thus better able to solve complex issues (Patzelt, zu Knyphausen-Aufse & Nikol, 2008). This results in the expectation that executives with a lower formal education have a lower information processing ability, will be more resisting to change and are more risk-averse (Thomas & Ramaswamy, 1996). We will test for education, but we will not put forward a hypothesis, due to the fact that this relation is not a novel one.
Functional Background
The functional background of executive influences the way an executive perceives a particular situation (Finkelstein and Hambrick, 1996). Technical fields of education, which includes engineering, production, process R&D and accounting, are more open to ethical behavior than other areas such as marketing (Daboub, Rasheed, Priem & Gray, 1995). Hambrick and Mason (1984) have identified two educational backgrounds, ‘throughput’ backgrounds and ‘output’ backgrounds. This identification is based on the strategic typology of Miles and Snow (1978). Throughput backgrounds include engineering, production, process R&D and accounting. Output backgrounds include marketing, sales, product R&D and
entrepreneurship. The throughput functions are concerned with product efficiency, the output functions are more concerned with growth and searching for new opportunities (Daboub, Rasheed, Priem & Gray, 1995). Top managers with an output background will take greater risk and change when following a more innovative strategy (Musteen, Barker and Baeten, 2006). Herman and Dattaw (2005) argue that output functions are characterized by more uncertainty and greater ambiguity. On the other hand, top managers with a throughput
background will outline strategies of stability and efficiency (Musteen, Barker & Baeten, 2006). The study of Strandholm, Kumar & Subramanian (2004), therefore argues that these executives will be more conservative towards change. Hambrick and Mason (1984) mention a third type of functional background, which has been suggested by Hayes and Abernathy (1980): the peripheral functions. The peripheral functions include law and finance.
Executives with a more peripherally oriented background are open to unrelated
diversification and have experience in solving complex situations (Hambrick and Mason, 1984). This type of top manager is more open to change and less risk-averse.
Board Size
Board size is an important aspect of a TMT composition. Previous studies have argued that larger groups have more skills and abilities with which to solve large and complex problems (Sanders & Carpenter, 1998; Jackson, 1992). It is also argued that larger groups have greater information-processing capacity (Sanders & Carpenter, 1998). Therefore, it is often seen that a team can deal with more complexity and is therefore superior to an individual (Dutton & Duncan, 1987). Complementary to this view, Haleblian and Finkelstein (1993) found in their study that firms with large teams performed better than firms with small teams, when facing a complex environment. According to Hambrick and D’Aveni (1992), the resources that are available in a TMT depend on how many people are present in the TMT. This implies that the more people there are in a TMT, the more knowledge will be available. We will test for Board Size, but will not put forward a hypothesis, due to the fact that this relation is not a novel one.
2.5 Moderating effects of Culture
Culture, can be defined as the ideas, customs, arts, religions and social behavior of a
particular society or group. Culture is described as “the collective programming of the mind which distinguishes the members of one category of people from another” (Hofstede, 1994). Licht et al. (2005) define culture as the complex of meanings, symbols, and assumptions about good or bad, legitimate or illegitimate that underlies practices and norms in societies. There are many different studies on cultures. Some of the most well known cultural studies include cultural dimensions (Hofstede, 2010; Hofstede, 2001;), the GLOBE project (House, Hamges, Javidan, Dorfman & Gupta, 2004), Survey of Values (Schwartz, 1999), and World Values Survey (Inglehart, Basañez, Diez-Medrano, Halman & Luijkx, 2004). Also in the
field of corporate governance there are numerous studies using Hofstede’s (2010; 2001) cultural dimensions and Schwartz’s (1999) Survey of Values on the effects of culture on corporate governance (Haxhi & Van Ees, 2010; Licht et al., 2005; Mintz 2005; Lubatkin et al., 2005). Hofstede has been criticized by several scholars throughout the years (Brett & Okumura, 1998; Schwartz, 1994), but at the same time he is lauded for his clarity, parsimony and resonance with managers (Kirkman, Lowe, & Gibson, 2006). Because of this clarity, one can understand how and why culture differs per social group and research shows that people in different areas can identify themselves and show common characteristics in an
understandable way.
In this study, the cultural dimensions of Hofstede (2010; 2001), will be used as the cultural model in our framework. Hofstede’s values are some of the most widely used in the measurement of national culture in companies (Haxhi & Van Ees, 2010) and the way Hofstede had conducted his studies matches well with our research of culture and firm performance.
Hofstede (1994) argues that there are serious differences between the values and customs of countries worldwide. These differences are referred to as national cultures. Hofstede differentiates national cultures according to four dimensions (1980). These four dimensions are: uncertainty avoidance, power distance, masculinity and individualism. Uncertainty avoidance focuses on society’s tolerance for uncertainty and ambiguity. Power distance refers to extent to which the less powerful members of organizations and institutions accept and expect that power be distributed unequally. Masculinity refers to the distribution of roles between the sexes and individualism is the degree to which individuals are integrated into groups (Hofstede, 1994). In this study we will only use uncertainty avoidance, power distance and masculinity. These dimensions of national culture will be used to investigate their influence on firm performance.
Business is in its core a human process. Therefore culture is very important in the literature of International Business. It is one of the most extensively researched dimensions. Therefore, it comes as no surprise that culture has often been linked with firm performance (Brouthers, Brouthers & Werner, 2008; Brouthers, 2002; Barkema & Vermeulen, 1997). In his research Hofstede shows that countries with colonial ties, countries that have a similar history and neighboring countries are likely to have more similar cultures.Cultural differences can cause conflicts and difficulties in the understanding between two or more parties. These difficulties in understanding can affect a firm’s performance. This is because it has been found that it causes misunderstandings in negotiating and ambiguity about the goals
of a firm. It can also reduce trust and perceived performance and it can increase instability. Cultural differences can also lead to some advantages. They can lead to sustained teamwork and more communication, which is likely to improve performance (Ren, Gray & Kim, 2010). Thus cultural differences can have different effects when it comes to performance. We will now elaborate further on the four cultural dimensions.
The first cultural dimension is uncertainty avoidance and it can be defined as the degree to which people in a country prefer structured over unstructured situations. Structured situations are those in which there are clear rules as to how one should behave. These rules can be written down, but they can also be unwritten and imposed by tradition (Hofstede, 1993). In countries that score high on uncertainty avoidance, people tend to be more up tight, while in countries that score low on uncertainty avoidance, people are more easy-going (Hofstede, 1993). We see that countries where uncertainty avoidance is strong, people are more averse of change and what is different. While in countries were uncertainty avoidance is low people tend to be more flexible and curious towards new things. In societies rating high on uncertainty avoidance people respond to uncertainty by introducing laws and sets of guiding rules, decreasing flexibility and improvisation (Hofstede, 1994; Vaaland, Haugland & Purchase, 2008). This because people tend to feel uncomfortable in unstructured and unpredictable situations. Uncertainty avoiding societies try to respond to uncertainty by lower levels of uncertainty avoidance have often been associated with risk-taking behavior
(Vaaland, Haugland &Purchase, 2008). Brinckmann, Grichnik and Kapsa (2010) studied the relationship between business planning and firm performance. Their research shows that in countries rating high on uncertainty avoidance, firms rely more heavily on business planning in order to deal with uncertainty. According to Brinckmann, Grichnik & Kapsa (2010) business planning has been found to limit innovativeness and firm performance.
The second dimension is power distance. This refers to the extent to which less powerful group members accept and expect that power is unequally distributed amongst each other (Hofstede, 1994). According to Hofstede are all societies unequal, but some are more unequal than others. He argues that power is a fundamental aspect of all human societies, but that the degree to which power is divided is different (Hofstede, 1994). Organizations in countries rating low on power distance are expected to be more flexible and organic which ought to make them survive longer (Vaaland, Haugland & Purchase, 2008). Shenkar and Zeira (1992) argue that power distance will also lead to an increase in management role ambiguity, which can negatively affect firm performance. Other research has further found that in countries rating high on power distance, common management interventions such as
employee empowerment and increasing employee participation are negatively related to productivity (Rao, 2013).
The third cultural dimension is masculinity. This dimension refers to the emotional roles on which societies are based. A high degree of masculinity is related to higher societal levels of assertiveness and competitiveness (Hofstede, 1994). Cohen and Keren (2008) argue that in masculine societies (for example Japan) things like achieving ambition are of greater importance than in feminine societies (for example the Netherlands). Masculine cultures are found to be having more competitive behavior, favor managerial decisiveness more and in general having more of a performance orientation (Li & Harrison, 2008; Steensma, Marino, Weaver & Dickson, 2000). According to Pothukuchi et al (2002), previous research has found a positive relation between a country's masculinity and firm performance.
The fourth and final cultural dimension that we will discuss is individualism.
Countries rating high on individualism represent societies where individuals are expected to take care of themselves, without having to depend too heavily on family, friends or members of the groups of which they are part of (Hofstede, 1994). In individualistic societies people are responsible for themselves and get rewarded if they outperform others. Previous studies have found a clear relation between individualism and firm performance. They found that businesses in countries rating low on individualism were able to benefit more from innovation, thereby increasing firm performance in comparison with businesses in more individualistic countries (Rosenbusch, Brinckmann & Bausch, 2011; Su, Xie & Li, 2011; Pothukuchi et al, 2002).
2.6 Hypotheses Development
In this section the hypotheses will be developed, which will serve to answer the research question of this paper: What is the effect of corporate board characteristics in Newly
Industrialized Economy firms on firm performance? And is this effect moderated by Culture? Board Characteristics and Firm Performance
According to Child (1972), it is the people who make choices, not the organizations. These decisions are based on prior processes of perception and evaluation. These processes, in turn, are assumed to be restrained by the managerial orientation, which is created by needs, values, experiences, expectations, and cognitions of the manager. Regarding this process, in 1984 Hambrick and Mason came up with the Upper Echelon Theory, which suggest that the objective situation and the characteristics of the TMT of an organization have a major influence on its strategic choices. This theory argues that the TMT characteristics affect the managerial perception and, hence, strategic choices (Hitt and Tyler, 1991). The question whether different backgrounds and expertise in the TMT are related to a firm’s strategic decision making has, until now, been ignored (Carpenter and Fredrickson, 2001). According to Carpenter and Fredrickson (2001), UET research has indicated that demographic
characteristics of the TMT are indeed related to important organizational outcomes. Finkelstein and Hambrick (1996), argue that having a TMT with diverse backgrounds can indicate the member’s socio-cognitive diversity. This is the breadth of their social and professional ties. Having diverse knowledge, skills and ties will benefit the TMT, allowing it to better manage complexity and change. This diversity can help TMTs overcome
information overload, complexity and domestic myopia, which can limit firm’s globalization (Carpenter and Fredrickson, 2001). Taking all this into account, it is clear that having
diversity in the TMT will benefit a firm’s performance. However, it is important to note that some researchers have argued that a certain level of demographic similarity can encourage behavioral integration among team members and that diversity can be a source of conflict. Still, the selection and socialization process among TMTs will most likely minimize such conflict (Carpenter and Fredrickson, 2001). Increasing importance of globalization makes it opportune to observe the TMT effects, but not less important. According to Nielsen and Nielsen (2011), a large body of literature has connected management demographic
characteristics with strategic decision-making. Due to the increase of globalization over the past few years and the pressure on TMTs to internationalize their firms, researching manager
demographic characteristics has become more important. In summary, according to current theory we can state that there is a direct relationship between TMT characteristics and firm performance. Because this is already found in prior research, there is no need to build a hypothesis.
Age, Firm Performance, Uncertainty Avoidance
Age is negatively related to risk taking (Karake, 1995; Wiersma &Bantel, 1992; Hambrick & Mason, 1984). The age a board member has an impact on the choice of the strategy the firm will adopt (Hitt & Tyler, 1991), whereas younger TMTs are expected to choose more risky strategies than older TMTs (Hambrick & Mason, 1984). Different studies have distinguished three clarifications for this difference in risk-taking by older managers (Hambrick & Mason, 1984). First, there is a decrease in flexibility (Wiersema & Bantel, 1992) due to less mental and physical stamina (Child, 1974). Therefore, will a manager spend more time on seeking for relevant information, evaluating and making decisions (Taylor, 1975). Second, another clarification for spending significant more time on information seeking, could be caused by a greater commitment to financial and career security at a higher age. Hambrick and Mason (1984) argue that managers try to avoid any disruptions in their established life, and therefore they will potentially spend more time on decision making to prevent bad outcomes. The third and final explanation is the greater psychological commitment to the status quo of the
organization (Hambrick & Mason, 1984). Hambrick & Mason (1994) have formulated two propositions related to age, namely that firms with young managers will a) pursue more risky strategies and b) will experience greater growth and variability in performance. We will follow this reasoning and assume the understanding that an increase of age leads to risk-averse behavior. We therefore expect a certain TMT risk-profile to be influenced by age. According to Hofstede (1994), uncertainty avoidance refers to a society’s tolerance for uncertainty and ambiguity. Cultures that score high in uncertainty avoidance will often rely on clear procedures, well-known strategies, and see unknown future contingencies as undesirable (Ozbebek & Kilicarslan, 2011). There are different ways in which this distaste for risk will be expressed. For example, Australians approach diminish their exposure to risk by writing lengthy business contracts that specify many contingencies, while the Japanese will only do business with trusted known partners (Aguilera & Jackson, 2010). Although different cultures approach uncertainty in different ways, the bottom line is that those with high
uncertainty avoidance will use legal means to protect themselves or avoid it completely. Consequently, this will have a direct impact on firm performance. Cultures with high
uncertainty avoidance are not willing to bear risks and they will often choose to suppress transparency so as to avoid conflict and competition and to preserve security (Buck & Shahrim, 2005; Licht, 2001). A TMT with a high rate of risk-aversion in combination with high uncertainty avoidance will probably lead to lower firm performance. For example, a TMT with a higher mean age in a highly uncertainty avoiding country, like Taiwan, is thought to lead to a stronger negative impact on performance. Therefore, we hypothesize:
Hypothesis 1a: A higher mean age of the top management team in combination with a culture high on Uncertainty Avoidance will have a negative influence on firm performance.
Age, Firm Performance and Power Distance
Hofstede (1994) defined power distance as the extent to which the less powerful members of an organization accept that power is distributed unequally. Cultures with high power distance generally expect strong authority and steep hierarchies to maintain social order. Ozbebek & Kilicarslan (2011) have furthermore cited that firms in these cultures tend to be centralized with power being held by a select few. Also, when there is little resistance, the powerful have the decision to exercise their power to further the goals of the group (Satkunasingam, Yong & Cherk, 2012; Hofstede, 2001). Griffin et al (2014) have supported the notion that power distribution relating to corporate governance focuses on the dynamics among different parties inside and outside the firm. This would suggest that in cultures with unequal distribution of power strong external parties would be empowered to use governance principles to monitor and control the firm. Thus, in cultures with a high level of power distance there is much hierarchy and power is in the hands of a few. Organizations in countries rating low on power distance are expected to be more flexible and organic which would lead them to survive longer (Vaaland, Haugland & Purchase, 2008). Shenkar and Zeira (1992) argue that power distance will also lead to an increase in management role ambiguity, which can negatively affect firm performance. Other research has found that in countries rating high on power distance, like Singapore, common management interventions such as employee
empowerment and increasing employee participation are, amongst others, negatively related to productivity (Rao, 2013). In combination with a higher mean of the TMTs age, this is likely to lower flexibility and lead to more time spent on seeking information before taking action. Accordingly, this leads to the following hypothesis:
Hypothesis 1b: A higher mean age of the top management team in combination with a culture high on Power Distance will have a negative influence on firm performance.
Tenure, Firm Performance and Uncertainty Avoidance
As executives stay in the organization longer, they tend to develop stronger social ties and get more attached to the firm (Vancil, 1987). This causes them to have a lot more to lose,
rendering them more risk averse (Finkelstein and Hambrick, 1990). Moreover, they will gain firm-specific knowledge and experience (Karake, 1995). Hence it can be assumed that executives with a short tenure are more likely to pursue more risky strategies that differ from standards and norms within the industry (Finkelstein & Hambrick, 1990). It can therefore be expected that a management team with long tenure will make different decisions when it comes to risk-taking and strategic decision-making, than a management team with short tenure. The length of tenure for top executives is another demographic variable that has been used in several upper echelon studies related to (Finkelstein & Hambrick, 1990; Norburn & Birley, 1988). This variable is easy to observe and is one of the most used demographic variables (Goll, Sambharya & Tucci, 2001). The connection between tenure and risk-taking is similar to the relationship previously described considering the age of executives (Karake, 1995). Managers have sometimes struggled for years to achieve a place in the TMT (Vancil, 1987). Therefore, they avoid taking significant risks or changes (Krug, 2003; Staw and Ross, 1987) so they can maintain the current situation (Bantel & Jackson, 1989; Jackson, 1992) and to avoid any disruptions in their lives (Karake, 1995). In principle, executives with a long-term membership have a lot more to lose by taking unnecessary risks than they can potentially gain (Coffee, 1988).
This relationship can be influenced by culture. As mentioned before, cultures that score high in uncertainty avoidance, like South Korea will often rely on clear procedures, well-known strategies, and see unknown future contingencies as undesirable (Ozbebek & Kilicarslan 2011). Thus, an uncertainty avoiding corporate culture in combination with a long tenured TMT is not likely to produce a lot of novel strategies and such management is likely to stick with what is known. Therefore we hypothesize:
Hypothesis 2a: A higher mean tenure of the top management team in combination with a culture high on Uncertainty Avoidance will have a negative influence on firm performance.
Tenure, Firm Performance and Power Distance
As stated earlier, Hofstede (1994) defined power distance as the extent to which the less powerful members of organization accepts that power is distributed unequally. Power distance also has an effect on tenure. Griffin et al (2014) have supported the notion that power distribution relating to corporate governance focuses on the dynamics among different parties inside and outside the firm. Thus, in cultures with a high power distance, there is a lot of hierarchy and power is in the hands of a few. Organizations in countries rating low on power distance are expected to be more flexible and organic which will lead them to survive longer (Vaaland, Haugland & Purchase, 2008). This, in combination with a higher mean of TMTs tenure that is likely to be more risk-averse will lead us to the following hypothesis:
Hypothesis 2b: A higher mean tenure of the top management team in combination with a culture high on Power Distance will have a negative influence on firm performance.
Gender, Firm Performance and Uncertainty Avoidance
According to Burke and Mattis (2000, p.193): ‘Increasing women’s board presence enriches board information perspective, debate and decision making’. Female executives deal more effectively with diversity in labor and product markets; this can help firms to gain
competitive advantage (Bilimoria and Wheeler, 2000). Still, there is a difference between that is found in both the general and business specific literature, which is a lower preference for risk taking amongst females (Nielsen and Huse, 2010). According to Farrel and Hersch (2005), women are significantly more risk averse in financial decision making than men based on survey responses. They confirm previous studies which found evidence for this. A difference is thus to be expected between a management team with a high rate of females as opposed to a low rate of females in the TMT in risk-taking and strategic decision-making. This relationship can be influenced by culture. This, in combination with a higher mean of TMTs tenure that is likely to be more risk-averse will lead us to the following hypothesis
Hypothesis 3a: A higher mean of women in the top management team in combination with a culture high on Uncertainty Avoidance will have a negative influence on firm performance.
Gender, Firm Performance and Masculinity
A high degree of masculinity is related to higher societal levels of assertiveness and competitiveness (Hofstede, 1994). In masculine societies (for example Japan) things like
achieving, value competition and ambition have greater importance than in feminine societies (for example the Netherlands) (Cohen & Keren, 2008; Li & Harrison, 2008). Masculine cultures are found to emphasize proactive competitive behavior, while at the same time favoring managerial decisiveness and in general having more of a performance orientation (Li & Harrison, 2008; Steensma, Marino, Weaver & Dickson, 2000). Previous research found a positive relation between a country's masculinity and firm performance (Pothukuchi et al., 2002). The masculinity/femininity continuum has a clear relationship with female
representation in the TMTs. As stated above, increasing the number of women enriches the board’s perspective, debate and decision-making (Burke and Matis, 2000). Female executives are deal more effectively with (Bilimoria and Wheeler, 2000), but also have a lower
preference for risk-taking (Nielsen and Huse, 2010). A difference is to be expected between a management team with a high rate of females as opposed to a low rate of females in the TMT in risk-taking and strategic decision-making. We therefore argue that a culture with low masculinity in combination with a high percentage of women in the TMT could have a negative impact on culture. We hypothesize:
Hypothesis 3b: A higher mean of women in the top management team in combination with cultures low on Masculinity will have a negative influence on firm performance.
Functional Background, Firm Performance and Uncertainty Avoidance
According to Finkelstein and Hambrick (1996) the functional background of executives influence the way he perceives a particular situation. Two types of functional background have been identified: throughput backgrounds and output backgrounds (Hambrick and Mason, 1984). Top managers with an output background will take greater risk and change when following a more innovative strategy (Musteen, Barker and Baeten, 2006). Herrman and Dattaw (2005) therefore argue, that output functions are characterized by more
uncertainty and greater ambiguity. On the other hand, top executives with a throughput background will be more conservative towards change (Strandholm, Kumar & Subramanian, 2004) and thus will emphasize strategies of stability and efficiency (Musteen, Barker & Baeten, 2006). Taking this into account, it is argued that top executives with an output background are more open to risk and change than top executives with a throughput functional background (Musteen, Barker and Baeten, 2006).
According to Thomas and Ramawamy (1996), there are two types of firms; the externally oriented prospectors or the internally focused defenders. The former type competes
mainly on new product innovation and market development, whereas executives of the defenders are more focused on efficiency. Thomas and Ramaswamy (1996), argue that executives of prospectors are significantly younger, have a shorter tenure, a higher formal education and have mostly output-oriented functional backgrounds. Managers of the defending firm, on the other hand, tend to have more throughput oriented functional backgrounds. Taking this into account, it can thus be argued that top executives with an output functional background are more open to risk and change than top executives with a throughput functional background.
Taken together with the fact that cultures with high uncertainty avoidance are not willing to bear risks (Buck & Shahrim, 2005; Licht, 2001), we argue that high uncertainty avoidance will enforce the relation of throughput functions on firm performance. We therefore hypothesize:
Hypothesis 4: A higher percentage of top management members who have a functional background in ‘throughput’ functions in combinations with in combination with cultures high on Uncertainty Avoidance will have a negative influence on firm performance.
3. Methodology
This method section consists of four sub-sections: 3.1 data collection, 3.2 samples, 3.3 variables and 3.4 the analysis of the model. First the data collection is being discussed. Following by the samples. Then in the section ‘variables’, the independent, dependent, moderating and control variables are explained. And finally, the model is being analyzed. 3.1 Data collection
This research studies 140 companies in the Newly Industrialized Economies in 2012 in different sectors. All companies were publicly listed. Our data is collected in multiple steps. First, we acquired general data and performance numbers for all the companies listed in 2012 with the use of Orbis and DataStream. The companies that did not have the necessary data available were excluded. Second, we collected the data of the board characteristics for the remaining companies. We only examined the board of directors, for each board member we studied his/her position in the company. We collected the following information of each board member: the appointment date, gender, age, functional background and education. When the information was not available, we removed the company. Due to the unavailability of some, this led to the removal of some more companies. We found the complete
information for 140 companies. Finally, we included the data on firm performance. Our measurements of performance were Tobin’s Q and Return on Assets.
The next section will describe in depth how all variables will be computed and operationalized. The dependent variables are described first, then the independent variables, the mediator and finally the control variables.
3.2 Variables
In this section the variables and their measurements are being discussed. Firstly, the dependent variables will be elaborated. Following by the independent variables. Then, the moderating variables are discussed and finally the control variables are explained.
3.2.1 Dependent variables
The dependent variable in this research is the performance of each company. We measured the firm performance with ROA and Tobin’s Q:
ROA
Return on Assets (ROA) (Wiersema & Bantel, 1992; Goll, Sambharya & Tucci, 2001; Finkelstein & Hambrick, 1990). Return on Assets is a widely used measure of the profitability of a firm. This measure is mostly used for accounting purposes (Lehn & Makhija, 1996; Hillman & Keim, 2001) Were Tobin’s Q is mostly used in financial studies (Holderness, Kroszner & Sheehan, 1999). Combining these two measures gives an accurate measure of firm performance (Smirlock, Gilligan & Marshall, 1984). The choice for any of these two proxies would not influence the outcome of the research (Jacobsen, 1987). Based on the previous benefits, we have been using both measures in this study (Finkelstein & Hambrick, 1990, p. 492). Return on assets, indicates the net income per dollar of assets employed and is a common measure of firm performance. It is important, because some industries require a larger amount of assets for a similar amount of profits compared to other industries. The ROA for every firm in the sample is obtained in Orbis for the period of 2012. The following formula was used to calculate ROA:
(Net Income)/(Total Assets) Tobin’s Q
Tobin’s Q is defined as the market value of a company relative to the replacement cost assets and is an indicator of good performance (Charlton et al., 2002; Sauaia & Castro, 2014). The higher the outcome of Tobin’s Q, the better a firm performs in the market. A value below 1 indicates that assets cost more than the profits they generate. A value above 1 indicates that a firm is overvalued in the market. The formula we use (Berger & Ofek, 1995; Smirlock, Gilligan & Marshall, 1984) can be described as:
Tobin’s Q = (Equity Market Value + Liabilities Book Value)/(Equity Book Value + Liabilities Book Value)1
Tobin’s Q provides has some advantages over other measures. It makes comparisons between firms easier than in the case of accounting measures. And it overcomes many deficiencies that are present with using other measures (Smirlock, Gilligan & Marshall, 1984; Lindenberg & Ross). Cui and Mak (2002), have found very different results for ROA and Tobin’s Q. Both measures on firm performance are even negatively correlated in their study. Therefore,
1. 1 The formula used in Datastream to compute Tobin’s Q is:
DPL#((X(WC08001)+X(WC03351))/(X(WC03501)+X(WC03351)),6)
we chose to run regressions on both performance variables. ROA is often used in
combination with Tobin’s Q. They both look at the firm form another perspective and they therefore complement each other. It is important to overcome the bias of static research. It could be said that Tobin’s Q shows the expectations of the market in future results and it therefore by definition is forward looking (Rijsenbilt, 2011 p.111). Tobin’s Q therefore complements the ROA. The Tobin’s Q for every firm in the sample is also obtained in Orbis for the period of 2012.
3.2.2 Independent variables
The independent variables are the corporate board characteristics, which are determined by six aspects: 1. Age, 2. Tenure, 3. Female representation 4. Formal education, 5. Functional background and 6. Board size. These variables are based on the study of Hambrick and Mason (1984) and measured for the year of 2012. We obtained the board characteristics from the database Orbis. However, the information was not complete for all 140 firms, the rest we obtained out of annual reports. The first characteristic is age: an easily observable variable. For the analysis, we took the average of the ages for all board members for each company. The same is done for the length of service for each member: the tenure (Finkelstein & Hambrick, 1990; Carpenter, Geletkanycz & Sanders, 2004). The following independent variable is female representation. We created a dummy variable to separate female board members from male board members. Female board members were rewarded with a ‘1’ and male board members were rewarded with a ‘0’. The next independent variable is functional background. We created a dummy to separate throughput functions from other functions. For each member, we studied his functional background and filled in a ‘1’ if this was a typical throughput function. Output and peripheral functions were rewarded with a ‘0’. Next, we calculated the fraction of board members in a company with a throughput background. Appendix B offers the coding for each different type of function into the dummy variable.
3.2.3. Moderating variables
A moderating variable affects the relationship between an independent variable and a dependent variable (Saunders et al., 2012: 424). As figure 2.1 shows, we are examining the effect of the characteristics of board members, multiplied by Hofstede’s Cultural Dimensions, on firm performance. Therefore, our moderating variables in this research are three of the
four Cultural Dimensions: 1. Uncertainty Avoidance, 2. Power Distance, and 3. Masculinity. This needs to reflect the risk-taking behavior that is stimulated by the culture.
3.2.4. Control variables
Based on a theoretical foundation we assume that national culture plays a role in relation to firm performance. It is however essential for the validity of the study to control for the influence of other variables. This thesis controls for potentially co-founding factors at two levels: the firm level and the industry level. Based on previous research (Finkelstein & Hambrick, 1990; Sander and Carpenter, 1998), firm size and firm industry are included as the control variables. Firm size will be measured by the total number of employees of the firm. Larger firms can potentially have more comprehensive processes, due to greater complexity (Miller, Burke & Glick, 1998, p. 43). This can cause differences in the demand for specific competences in a TMT. Two different variables are used to proxy for firm size: the total number of employees (Finkelstein & Hambrick, 1990; Miller, Burke & Glick, 1998) as well as the total sales (Carpenter, 2002) in 2012. Many studies state the importance of taking the type of industry into UE research. We therefore added industry as a control variable to this study. Because we only have 140 firms in our dataset, we cannot divide the firms into too many different sectors for methodological reasons. Therefore we divided the industries into two groups: the Industrial/Manufacturing (secondary) sector or the Service (tertiary) sector (Habib & Victor, 1991; Prajogo, 2005; Morris & Johnston, 1987); Kaldor, 1976, p. 705). All the data for the control variables are attained from the database Orbis.
3.3 Method
We tested our hypotheses with the use of a Hierarchical Ordinary Least Squares (OLS) regression (Finkelstein & Hambrick, 1990). Regression analysis is used when one or several independent variables are hypothesized to affect one dependent variable. Thus, regression analysis finds the best fitting with a straight line through a set of points. This relationship can be expressed in the following equation: Y = !0 + !1 * X1i + !2 * X2i + "
To show the strength of the relationship between the dependent and independent variables a correlation test will be reviewed, the blocks were built in a hierarchical way. The first model exists of only the control variables. Because we were only interested in the relative difference of total employees and total sales, we calculated the log of the control variables to account for skewed distribution (Mille, Burke & Glick, 1988, p.44; Patzelt, zu
