Corporate Governance and Internationalization: theory and evidence from the United Kingdom (2014)

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Corporate Governance and

Internationalization: theory and

evidence from the United Kingdom

(2014)

Master Thesis International Business & Management

Franklin Dijs

S2580276

f.g.dijs@student.rug.nl

Supervisor: dr. Gjalt de Jong

University of Groningen

Faculty of Economics and Business

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Abstract

This research aims to understand whether, and if so, how board composition and a firm’s CEO matter for internationalization. Large firms have boards but among these firms the composition of such boards varies tremendously. Based on arguments drawn from upper echelons and internationalization theory this research claims that the impact of board size on internationalization is contingent on CEO tenure. This research studies the top 100 firms with their headquarter located in the United Kingdom and found significant relations for both board size and CEO tenure. The findings shows that board size has a positive linear effect on internationalization, CEO tenure has a negative moderating effect, and thus draws attention to the importance of matching CEO tenure and board size to a firm’s international strategy. Keywords: internationalization, corporate governance, board, top management team (TMT), board

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1. Introduction

In today’s world of globalization, internationalization places huge demands on firms and its managers. Some firms are very successful in going abroad whereas others fail. Internationalization provides firms with the opportunity for growth and the ability to access knowledge in foreign locations, but at the same time, it produces high costs and uncertainties (Contractor, et al., 2007). These thoughts led International Business scholars to appreciate the potential sources of competitive advantage in international environments from thoughtfully composed management at the top of organizational hierarchies.

There is a large amount of existing literature on the internationalization-performance relationship. Most research is focused on a firm’s endogenous factors (product diversification strategies, firm specific assets, size) and exogenous factors (institutions, culture, markets) (Hitt et al., 2006). However, few studies have examined how the board influences a firm’s internationalization. Sapienza, et al. (2006) proved suggested that managerial capabilities play an important role in internationalization because managers are able to draw upon their skills and experiences as they facilitate the establishment and operation of new offices, and they are able to decide how to organize activities dispersed across the world (Daily, et al., 2000). This research aims to understand whether, and if so, how executive board composition matters for successful internationalization. Boards have become increasingly diverse over the past several decades, but the performance implications of board diversity are not clearly established in the literature (Nielsen & Nielsen, 2013).

In relation to that, this research will investigate the role of the Chief Executive Officer (CEO). Researchers tend to treat a CEO the same as a board/ top management team member (i.e. CEO should be included in a top management team). Carpenter and Wade (2002), however, stated that the CEO and board possess different power and status, influencing upper echelons and corporate strategy. Combining CEO and board compositions thus leads to a rather narrow unit of analysis that might oversimplify, and most likely mask the relationship between distinct members of a firm’s top management and corporate strategy. Moreover, CEO’s differ in age, experience, tenure, etcetera as well. It can be expected, for example, that a large board in size headed by long-tenured CEO will export more than other CEO/board combinations.

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6 Hence, the purpose of this paper is to understand antecedents for successful internationalization. The results of this paper will eventually assist firms which would like to internationalize, or are forced to internationalize in order to stay competitive, to select the right CEO, board members, or the right composition of both, in order to successfully manage internationalization.

This research aims to answer the following question:

Does board composition matter for internationalization, and if so, how?

However, in order to answer this question. All significant elements which might play a role need to be studied. Therefore, answering the following sub-questions will be of support in order to answer the main research question:

1. What is internationalization and how can this be measured? 2. What is board diversity and how can this be measured?

3. What is the relation between board size and internationalization?

4. What is the moderator effect of CEO tenure on the relationship between board size and internationalization?

5. Can we find evidence for this in the United Kingdom?

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2.1 Literature review

This chapter will provide background literature on internationalization, executive board diversity, and CEO diversity from which the hypotheses are derived. In order to understand why the board, and CEO influence the internationalization of the firm; theory on internationalization and upper echelons theory will be reviewed first as they provide the foundation on which this study is executed. Furthermore, it will shed light on the specific situation and regulations of the United Kingdom. Finally, it will explain the choice for focusing on board size diversity and CEO tenure diversity.

2.1.1 Firm internationalization

Internationalization is an important growth strategy for both small and large firms, especially those firms whose home country market is limited, for these firms internationalization enables them to gain economies of scale and scope, reduce input costs, and increase market power (Hsu, Chen, & Cheng, 2013). Moreover, it allows firms to exploit their firm-specific assets in international markets (Delios & Beamish, 1999). Firms with subsidiaries in different countries have the opportunity to capitalize on host-country specific benefits, increase their knowledge base, capabilities, and competitiveness through experiential learning (Barkema & Vermeulen, 1998). Expansion into new geographic markets presents an opportunity for firm growth and value creation, the implementation of an international strategy involves high costs and many challenges which are related to the liability of foreignness (Zaheer, 1995). Managing subsidiaries in foreign countries is complex and requires significant internal coordination, the complexity results from the large diversity among customers, competitors, cultures, and regulations. Managers must invest time and effort in establishing and successfully maintaining the firm’s presence internationally. What’s more, competitive pressure is another source of complexity, firms competing worldwide must create synergies across products and markets, and develop a sense of community within a firm’s globally dispersed subsidiaries (Bartlett & Ghoshal, 1989). These complexities and internal coordination processes increase the workload and information processing demands put on a firm’s top management.

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internationalization-8 performance relationship, but acknowledges the complexity of managing a large international firm and the challenges this brings to its top management. Therefore, it looks at the degree of internationalization.

Existing research uses different labels such as (the degree of) internationalization, geographic diversification, country diversity, international expansion, globalization, and multi-nationality which all refer to the same strategic management construct (De Jong & Van Houten, 2014). Sullivan (1994) was among the first to identify the term ‘the degree of internationalization’. He showed that estimating internationalization is not arbitrary. Moreover, he introduced three attributes, including performance (what goes on overseas), structure (what resource is overseas), and attitude (what is top management’s international orientation) for investigation in firm’s internationalization research.

In this research, internationalization is interpreted as the extent of a firm's present involvement in international operations via subsidiaries or exports (De Jong & Van Houten, 2014). Consequently it argues that the characteristics of CEO’s and the board/top management of a firm influence a firm’s (degree of) internationalization.

2.1.2 Upper Echelons theory

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The initial upper echelons model proposed direct relationships between top management team (e.g. the executive board and board of directors) characteristics and organizational outcomes, such as strategic choices. Further developments and criticisms (Lawrence, 1997) of this perspective resulted in a large number of studies focusing on the processes through which top management team characteristics lead to firm strategy and behavior. As a result, updated upper echelons models include top management team processes as an important part of the causal chain linking top executives to firm level outcomes (Carpenter, et al., 2004; Finkelstein et al., 2009).

Looking at the Upper Echelons theory in relation to this study, leadership of an organization is not only an individual responsibility of the CEO but rather also a shared activity, and the collective cognitions, interactions, and capabilities of the full top management of a firm enter into strategic behaviors. Many studies have confirmed that strategic choices and organizational outcomes depend, partly, on the composition of a top management team and processes (Hambrick, 2007).

2.1.3 The United Kingdom corporate governance regime

Upper echelons theory assumes that executives vary and that the strategic choices available to them vary as well. These presumptions may be more valid in some societies, or national systems, than in others. The majority of empirical upper echelon studies have used samples of American firms which are more likely to generate results in support of upper echelons theory (Hambrick, 2007). This is due to the fact that in 80 percent of these US cases, CEO’s are also chairmen of their boards which means they have a major say as to who is on their boards, labor’s involvement in governance is minimal, ownership is typically widely dispersed which reduces investor oversight, and owners tend to have highly diversified investment portfolios and thus favor risk taking by CEO’s (Ward, 1997).

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together and are collectively accountable and responsible for a firm’s strategic aims, and performance. This means that the core of the top management team is also represented in a UK firm’s board, mostly limited to only the CEO and Chief Financial Officer being represented in the board (FRC, 2014; Pye, et al., 2012).

With regard to this study, it means that the UK corporate governance regime has its consequences on the effects of the top management, and CEO on a firm’s strategy and internationalization; which will be further enlightened in the next section.

Concluding, firm internationalization is a strategic choice and provides them with several opportunities, but capitalizing on these opportunities poses significant organizational challenges. Hambrick (2007) and Carpenter et al. (2004) argue that, based on the objectivity and availability of demographic data, the demographic characteristics of executives are valid proxies of executives’ cognitive frames for developing predictions of strategic actions such as internationalization. This study will adopt the same approach.

2.2 Hypotheses

In order to research the effects of the board and a CEO on internationalization, the most recent literature (from the last 5 years) which researched one of these have been studied. This resulted in a large list of conflicting findings and the effects of board size and CEO tenure on a diverse range of organizational outcomes. This exploratory literature review has revealed some gaps in extant research, the gaps and diverse findings have been taking into consideration for the hypothesis development of this study. For an overview of existing empirical research on board size, see appendix 1 table 6A. In the same appendix table 6B will provide an overview of the empirical findings on CEO tenure.

2.2.1 Board size and internationalization

As the upper echelons theory proves, the top management of a firm consisting out of both the CEO as well as the board and executives, are important firm strategy determinants (Henderson et al, 2006). Following this view, the relationship logic between executive board composition and a firm’s internationalization is developed.

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11 Carpenter, 1998). This need for more specialized knowledge depends on the number of people in the board and their skill sets and breadth of profession (Carpenter & Fredrickson, 2001). Two perspectives play a role in this characteristic. According to some studies a large team possesses more human capital, therefore diverse ideas and information will offer the CEO greater opportunities and more confidence when adopting riskier and changing strategies (Simons, et al., 1999). This gives the CEO access to a wide selection of possible actions thereby potentially improving long-term decisions (Hambrick, 2007). A large group can also obtain more resources from other external organizations through interpersonal networking which facilitates the strategic decision making process. Hambrick and D’Aveni (1992) discovered that firms with more human resource achieve substantial internationalization. Most successful multinational firms have sufficient members working together, playing distinct roles, and providing a large variety of resources to deal with the turbulent environment of foreign markets. Another study indicates that a large board size provides a firm with depth and breadth of tangible financial assets and intangible cognitive resources. Consequently, larger boards with more physical, and interrelation resources fit better in situations of uncertainty and more uncontrollable factors from international markets (Levy, 2005). However, another perspective on board size claims that a large group will slow down team communication, and slow communication causes information asymmetry. This may obstruct a firm’s foreign expansion. Information asymmetry causes heterogeneous psychological cognition in team members (Smith et al., 1994). Consequently, this might lead to interpersonal distrust, communication breakdown and interpersonal conflicts. Interpersonal conflicts and a lack of mutual trust may cause a resistance to change the firm’s higher global expansion strategy since members are fearful that strategy change might jeopardize their current position and power.

Therefore, it is hypothesized that board size relates positively to a firm’s internationalization up to a certain point but negatively beyond that point. Consequently, this rationale claims that board size will exhibit an inverted U-shaped relationship with firm’s internationalization.

Hypothesis 1: An inverted U curvilinear relationship between board size and the firm’s internationalization.

2.2.2 CEO tenure and internationalization

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12 from other top management positions such as board members. Research has indicated that the difference in power and organizational position have a distinct effect on a firm’s strategy and performance. Peterson et. al (2003) proved that CEO personality can impact firm’s performance through its effect on top management dynamics. This study follows the logic of the upper echelons theory that executives’ demographic characteristics such as age, tenure, education level, and functional background represent valid proxies for their cognitive frame, values, skills, and knowledge; and that these represent explanations for differences in strategic choices made by the CEO (Hambrick, 2007). However, due to the time-frame in which this research needs to be done, this research will restrict itself to a CEO’s position tenure in its industry.

Tenure is often considered as an indication of a manager’s ability to gather and process information. The following rationale will explain why this research considers tenure a valuable characteristic from a managerial point of view. According to Finkelstein and Hambrick (1996), executives will selectively perceive strategic choice in line with their experiential history and functional background and act accordingly. Based on organizational familiarity, prior empirical research found that CEO tenure has a positive effect on the internationalization–performance relationship (Hsu, et al., 2013). CEO’s with a longer tenure may be more familiar with the

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13 The literature on CEO industry tenure supports the positive relationship suggested above, Hambrick et al. (1993) state that similarly to a CEO’s position tenure, CEO industry tenure reflects its knowledge, skills, and cognitive orientation as well. CEOs with long industry tenure have more knowledge of markets, competition, regulations, customers and suppliers, which help them identify and assess emerging opportunities, design proper strategies and position products and services strategically (Kor, 2003). Industry-specific knowledge, gained through industry tenure, can be expected to assist in assessing emerging opportunities and implementing strategies under conditions of uncertainty in international environments. Consequently, this study will combine both CEO position tenure and CEO industry tenure in a new way, suggesting that when a CEO has been in the same position for another firm in the same industry, this will add to his experience and skills in his/her current position, and thus will be counted as tenure as well.

Finally, the author of this study suggests that with the UK corporate governance regime in which CEO’s and chairmen are not allowed to be the same person, CEO’s are hired to execute a strategy which is set by the board of a firm. Concluding from the arguments above, this study hypothesizes that CEO tenure might have a positive moderating effect.

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3. Conceptual Model

Regarding hypothesis one, this research claims that board size positively relates to a firm’s internationalization up to a certain point but negatively beyond that point. Thus hypothesizing an inverted U-shaped curvilinear effect (H1). Due to a large board benefiting from human

capital which has a positive effect on internationalization. However, when a board grows too large it might suffer from interpersonal distrust, communication breakdown and interpersonal conflicts, which in turn might have a negative effect on internalization.

As derived from the upper echelon theory, both a firm’s board as well as the CEO have a significant impact on strategic choices such as internationalization. Moreover, the literature review has shown that the CEO should be regarded different due to its power and status within a firm, consequently influencing board dynamics. Accordingly, this study claims that CEO tenure has a positive moderating effect (H2) on the relation between board size

internationalization of the firm. E.g. a board which might be too large and shows signs of mutual distrust can and communication breakdown might be positively affected by a CEO with long enough tenure to have established interpersonal relationships and a familiarity with the firm, its industry, and (international) markets.

4. Methodology

4.1 Sample

The data has been collected from Bureau van Dijk's (BvD, 2015) Orbis database, corporate websites, and annual reports. Orbis is the most appropriate single-source firm-level database for this study because it is one of the most comprehensive and inter-temporal pan-European databases, containing detailed information about many public and private companies in virtually all European countries, including information on the CEO and executive boards of these firms. The sample consist out of the top 100 largest stock-exchange listed UK firms based on their 2014 operating revenue. See appendix 2 table 7 for an overview of the firms. The firms need to have their headquarters in the United Kingdom and at least one foreign subsidiary. In order to collect the top 100 firms which met these requirements, 270 of the largest

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15 exchange listed firms have been studied. Most of the excluded firms on the London stock-exchange appeared not to be a UK firm, meaning that their headquarters were not situated in the United Kingdom; some firms were excluded due to a lack of data. Many top firms in the initial list of 270 firms also appeared to have multiple listings on the London stock-exchange with several different legal entities or firm divisions, the multiple listings have been excluded, counting each firm only once. Furthermore, the data has been corrected for outliers by calculating the upper and lower bounds by of Cook’s distance (Siero, et al., 2009). In six cases, the data exceeded the upper/lower bounds, these have been replaced with the upper/lower bounds due to the small simple size of this study (Fields, 2009). However, as a robustness test these outliers will be removed to see whether this has any significant impact on the empirical results. The United Kingdom, as one of the main financial hubs of the world, is an inherently small-sized economy with pressure for early internationalization, and therefore traditionally houses a high number of MNE’s. Therefore, the sample may be skewed towards the high-end of internationalization, as large companies can better overcome the barriers in foreign expansion than their smaller counterparts (Calof, 1994). Since the proposed relationship is recursive and internationalization (the dependent variable) is continuous, ordinary least squares(OLS) multiple regression analysis will be used.

4.2 Measurement of variables

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16 CEO has been with that firm as a CEO and the number of years that same person has been a CEO of other firms in the same industry. Finally, some control variables will also be taken into account in order to explain the variance in the independent variable. These are: firm size, debt ratio, and industry which are derived from existing research (Hitt et al, 1997). Firm size will be controlled through net sales. Second, debt ratio is the ratio of total liabilities to assets, this may affect a firm’s ability to expand and impact its performance. Industry will be used in order to control for unmeasured industry effects. The representation of the industries in this sample has been split into 5 dummy variables representing 4 major industries representative of this sample, see table 8 in appendix 3 for an overview of the industry categorization. Table 1 below provides for an overview of all the variables.

Type Variable Definition Measure

Dependent Internationalization Number of countries firm in which the firm has

subsidiaries Continuous

Independent Board size

Number of members in the board of directors plus the executives above vice president level (excl.

CEO) Continuous

Independent CEO Industry tenure

Number of years a person has been CEO in the firm + numbers of years this person has been CEO

for other firms in same industry Continuous

Control Firm size Net sales in thousands of US Dollars Continuous

Control Debt ratio Total debt to total assets ratio Ratio

Control Dummy industry* Mining, Utilities & Construction 1=this industry, 0=other

Control Dummy industry* Manufacturing 1=this industry, 0=other

Control Dummy industry* Professional & Information Servives 1=this industry, 0=other

Control Dummy industry* Wholesale & Retail 1=this industry, 0=other

Control Dummy industry* Other, all firms which do not belong to the four

focal industries 1=this industry, 0=other

*Based on industry classification of Orbis.

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5. Data

5.1 Evaluation of method assumptions

Ordinary Least Square analysis has several assumptions that must be satisfied in order to have the best linear unbiased estimates. The assumptions that are tested for are multicollinearity, normality, endogeneity and homoscedasticity. A violation of these assumption might create problems with the reliability of the results.

Multicollinearity

The first assumption is that the independent variables are not perfectly correlated such that “the values of xik are not exact linear functions of other

explanatory variables.” (Hill et al., 2009). If this assumption is violated, the variables are said to be collinear, which makes it difficult to isolate the relationship between these variables. The main concern is that when the multicollinearity degree increases, the estimates of the regression model become unstable and the standard errors of the coefficients can get inflated. This could result in relatively inaccurate information about unknown

parameters due to large standard errors. It might then be difficult to predict the true parameters, an issue which might even become more problematic when there is little variation in the explanatory variables. To test for the presence of multicollinearity, the variance inflation factor (VIF) is calculated which is an index, estimating how much the variance of an estimated regression coefficient is inflated due to collinearity. The values in table 2 indicate that multicollinearity is not a problem as all variables show VIF values well below the cut-off value of 10 (Neter et al., 1985).

Normality

The next test examines whether the normality assumption is met. Normality assumes that the values of the error term are normally distributed around the mean. A violation of the normality assumption might lead to biased p-values and thus affects the test for statistical significance. However, the Gauss-Markov theory states that OLS still provides linear unbiased estimates even when errors are not normal nor independent and identically distributed (Hill et al., 2009).

Variable VIF 1/VIF

Firm size 1,104 0,906206

Debt ratio 1,154 0,866823

Mining, Utilities &

Construction 1,584 0,631261 Manufacturing 1,576 0,634369 Professional & Information

Services 1,623 0,616109

Wholesale & Retail 1,564 0,639276

Board size 1,177 0,849393

Board size square 1,084 0,922567

CEO tenure 1,110 0,900569

Moderator: Board

size*CEO tenure 1,085 0,921413

Mean VIF 1,306

Table 2

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18 Thus, a violation of the normality assumption is not as severe as a violation of the other OLS assumptions. Following the graphical analysis depicted by Figure 2 in appendix 6, which plots the residuals against the normal distribution (straight line), it can be concluded that the residuals are approximately normal distributed.

Endogeneity

Here it is assumed that the error term is uncorrelated with the independent variables. If this assumption is violated such that xi is correlated with an unmeasured variables (ei), than the

effect of xi on y will be consistently overestimated. Consequently least square estimates are

inconsistent and do not converge even in large samples. In addition, none of the hypothesis test procedures are valid (Hill et al., 2009). There is no simple numerical or statistical test for this assumption hence it has to be satisfied theoretically. This is because the sample residuals will always be uncorrelated to the independent variables, so using those to test for endogeneity will not be appropriate (Hill et al., 2009). From a theoretical point of view there is no reason to assume board size or CEO tenure to be correlated with unobserved variables in the error term as they can easily be estimated and observed. Therefore, the exogenous nature of the independent variables in this study have to be assumed.

Homoscedasticity

Homoscedasticity assumes that the variance of the error term is constant and the same for all observations (i) (var(ei) = σ2). If this assumption is violated and the error variance for all

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19 Breusch-Pagan test for heteroscedasticity has been computed.

This test has been chosen since it provides more reliable results with smaller sample sizes (Koenker, 1981). Table 3 shows that heteroscedasticity is not an issue since the test provides an insignificant result, and since in this sample is measured for one period in time (2014) it is unfeasible to test for autocorrelation.

All four of the OLS assumptions have been satisfied, which means that OLS regression can be used to provide the best linear unbiased estimates.

Table 3

Koenker's Breusch - Pagan test for Heteroscedasticity H0: Homoscedasticity

Variables: Board size, CEO tenure Chi2(2): 4.05

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6. Empirical Results

6.1 Descriptive Statistics

Table 4 above provides an overview of the most relevant descriptive statistics of the independent variables and two control variables for all 100 firms in the sample. The descriptive statistics of the industry dummy variables are less informative, however the frequencies can be found in table 8 in appendix 3. The dependent variable internationalization shows that the average degree of internationalization in this sample is 34 foreign countries where UK firms have subsidiaries. The firm with the lowest degree of internationalization has just 1 foreign subsidiary, whereas the most internationalized firm in this sample had 133 foreign subsidiaries. Regarding the independent variables, the average board in the UK consists out of 18 members with the smallest board counting only 7 members, and the largest board consisting out of 29 persons. The average tenure of CEO’s shows to be 8 years, the CEO with the lowest tenure had just 1 year of experience, whereas the CEO with the most tenure shows to have 28 years of experience. The control variable firm size reports that the average size is around $30.67 billion worth of net sales, the smallest firm in the sample has $5.81 billion net sales and the largest firm has $111.50 billion net sales. The mean debt ratio is 0.58, a firm with a debt ratio less than 1 indicates that a firm has more assets than debt. The lowest debt ratio is 0.18 whereas the highest debt ratio is 0.97, indicating that this firm nearly has the same amount of debt as assets. In the appendix, table 9 the correlations between each variable can be found, showing that there are no problematic correlations.

6.2 Regression results

Table 5 provides a summary of the OLS regression results. The regression has four different models. The first model only contains the control variables, the second model adds board size and a squared term of board size in order to test for the hypothesized curvilinear relationship.

Mean Std. Dev. Min Max

Dependent variable Internationalization 33.66 31.72 1 133 Independent variables Board size 17.59 4.97 7 29 CEO Tenure 7.92 5.74 1 28 Controls Firm size $30,677,633 $28,803,474 $5,806,060 $111,497,050 Debt ratio .58 .18 .24 .97

*See appendix 4 table 9 for all correlations. Table 4

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21 In the third model CEO tenure has been added, finally, in the fourth model an interaction variable (board size*CEO tenure) has been added in order to test for the hypothesized moderating effect of CEO tenure. A moderator has been defined as “a variable that affects the direction and/or strength of the relation between an independent or predictor variable, and a dependent or criterion variable” (Baron & Kenny, 1986). An interaction term is the product between a moderator and an independent variable. Thus it can be concluded that whether the interaction term is a significant predictor or not, is the test of whether significant moderation has occurred or not. Furthermore, all independent variables have been standardized before calculating the square and interaction term and entering them into the regressions in order to avoid multicollinearity problems (Baron & Kenny, 1986). Additionally, this also makes the interpretation of the regression coefficients more meaningful since the value of 0 does not exist nor does it occur for this study’s independent variables (Siero, et al., 2009).

Model 1 Model 2 Model 3 Model 4

Constant .150 (.201) .099 (.217) .079 (.218) .067 (.212)

Controls

Firm size .033 (.102) .007 (.098) .001 (.099) .027 (.096) Debt ratio -.062 (.104) -.034 (.100) -.043 (.101) -.024 (.098)

Industry dummies:

Mining, Utilities &

Construction -.006 (.336) .033 (.092) .046 (.331) .058 (.321) Manufacturing .067 (.319) .010 (.309) .027 (.314) .029 (.305) Professional &

Information Services -.074 (.285) -.104 (275) -.087 (.280) -.101 (.272) Wholesale & Retail -.283 (.302)** -.209 (.101) -.195 (.298) -.226 (.291) Board size .327 (.101)*** .328 (.102)*** .359 (.099)**** Board size squared .049 (.082) .039 (.033) .065 (.055)

CEO tenure .081 (.099) .051 (0.97) Moderator: Board size*CEO tenure -.244 (.080)** Observations 100 100 100 100 R2 .098 .193 .199 .254 Adjusted R2 .040 .122 .119 .170 F-value 1.682 2.716*** 2.481** 3.023*** Independent variables Table 5

Regression results with Internationalization as dependent variable

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23 Concluding the findings, board size has been tested on a non-linear relationship but the test results shows that board size has a positive linear relationship with internationalization, rejecting hypothesis 1. The control variables do not have any significant relationship. Finally, CEO tenure exhibits a negative moderating effect, however as hypothesis 2 proposes a positive moderating effect, this hypothesis is rejected as well.

0 2 4 6 8 10 12 14 16 18 20 0 5 10 15 20 25 30 35 In ter n atio n lizatio n Board size

Fig. 1. Interaction effect of CEO tenure on Internationalization

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6.3 Robustness tests

Robustness tests are necessary in order to make valid causal inferences from the regression. With the robustness tests one can determine how regressions coefficients behave when the model specifications are altered. When the coefficients are found to be plausible and robust, structural validity can be concluded (White & Lu, 2010). Two robustness tests will be performed, the first one has been mentioned earlier in this study regarding the removal of outliers. Due to the small sample size of this study, the author chose to replace outliers with the calculated upper or lower bounds of Cook’s distance. This resulted in replacing the firm size (net sales) of 6 firms by the upper bound, which is $111.49 billion, since the net sales were higher than the upper bound. However, it can be said that these outliers simply needed to be removed since it might influence the regression model. The regression has been computed again without the outliers, resulting in a sample size of 94 firms. Table 10 in appendix 5 provides an overview of the summarized regression results. The test results provide similar coefficients and a similar overall model fit. However the industry dummy Wholesale & Retail shows improved significance levels in models two, three, and four. The Wholesale & Retail dummy now has a significant negative effect on internationalization (relative to firms in the other industries control group) in model 2(β= .214; p<0.10), model 3(β= 0.196; p<0.10), and model 4(β= -0.222; p<0.10). However, this is the only significant difference which can be found, supporting the structural validity of the original regression performed in this study.

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7. Conclusion

Many existing research argues that the relationship between a board (or top management team) and firm internationalization is based on the traditional upper echelon perspective, in which the role of the CEO is assumed to be similar to other members in the top management of a firm. However, some scholars acknowledge the different power and status of a CEO from other board members (Carpenter & Wade, 2002). Combining CEO and board compositions thus leads to a rather narrow unit of analysis that might oversimplify, and most likely mask the relationship between distinct members of a firm’s top management and corporate strategy. Thus, it is necessary to look at a distinct CEO and board members perspective when modelling the factors that might shape a firm’s degree of internationalization. Therefore, this study aims to address this gap, acknowledging the different power and status of a CEO and proposing he/she might have a moderating effect on the board of a firm by looking this. The findings of this study are based on the top 100 UK firms and show that board size has a positive linear effect on internationalization, rejecting hypothesis 1. This is supported by Levy (2005) which indicated that most successful large firms have sufficient members working together, playing distinct roles, and providing a large variety of resources to deal with the turbulent environment of foreign markets. A large board size provides a firm with depth and breadth of tangible financial assets, intangible cognitive resources, and interrelation resources which fit better in situations of ambiguity and uncontrollable factors from international markets. Another finding of this study shows that CEO tenure exhibits a negative moderating effect, however hypothesis 2 proposes a positive moderating effect, which results in the rejection of this hypothesis. Existing research has claimed that long-tenured CEO’s are often complacent, they resist change and embrace the strategic status quo (Simsek et al., 2005). Another study by Boeker (1997) found that older CEO’s were less adaptable to new ideas or behaviors, whereas new CEO’s were highly attuned to a firm’s external environment, often being specifically selected for their fit with a firm’s current conditions.

7.1 Added value

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27 answered by a review of existing literature. The last three research questions have been partially answered by the literature review, and conclusively answered by the empirical part of this study. Furthermore, this study has combined CEO position tenure and CEO industry tenure into a new measure which might be worthwhile to research more upon in the future as it has proven to be a significant measure in this study. Furthermore, some managerial implications can be derived from this study. The findings draw attention to the importance of matching CEO tenure and board size to a firm’s international strategy. E.g. a firm which is highly internationalized or seeks ways to internationalize (more) might benefit from a CEO whose tenure supports such a strategy, the same can be said regarding the size of a firm’s board in which large boards with many cognitive and interrelation resources might support such a strategy.

7.2 Limitations & Future research

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8. Bibliography

Barkema, H. G., & Vermeulen, F. 1998. International expansion through start-up or acquisition: A learning perspective. Academy of Management Journal, 41 (1): 7–26.

Baron, R. M., & Kenny, D. A. 1986. The moderator-mediator variable distinction in social psychological research: Conceptual, strategic, and statistical considerations. Journal of Personality and Social Psychology, 51, 1173–1182.

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9. Appendices

Appendix 1: Literature review Appendix 2: Company list

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Appendix 1: Literature review

Table 6A

Overview of reviewed empirical literature on Board Size*

Findings Context Reference

Negative effect between board size and corporate performance

of manufacturing firms. Netherlands (Postma et al, 2003) In state-owned entreprises, a large board has been found to be

more effective at coping with a complex and uncertain

environment. Canada (Bozec & Dia, 2007)

Inverted U shaped relationship between TMT size and degree of internationalization. A large TMT size shows positive

internationalization due to abundant resources, but when TMT size goes beyond a certain level, members are unable to reap increased size benefit, resulting in a negative degree of firm’s

internationalization. Taiwan (Yaw & Lin, 2009)

A negative board size - firm performance relationship has been found, supporting the argument that problems of poor

communication and decision-making undermine the effectiveness of large boards.

United

Kingdom (Guest, 2009) Board size positively affects corporate performance in the

presence of CEO non-duality (board leadership structure that is split between the roles of the CEO and the roles of the

chairman). Egypt (Elsayed, 2011)

Based on resource dependence theory, the study shows that environmental performance is higher in firms that have larger

boards. United States

(Villiers, Naiker & Van Staden, 2011)

There is an inverted U-shaped relationship between Agent

(non-founder) CEO tenure and market expansion of a firm. United States

Souder, Simsek & Johnson, 2012) Board size and board-level compensation has no significant

effect on CEO power and therefore no impact on corporate performance.

United Kingdom

(Veprauskaité & Adams, 2013)

* Only studies showing significant results have been included in this table.

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36 Table 6B

Overview of reviewed empirical literature on CEO Tenure*

Findings Context Reference

Firms in the food industry showed an inverted U shaped relationship between firm performance and CEO tenure.

Downturns in performance occurring only among the few CEOs who served more than 10–15 years. However, in the computer

industry CEOs showed a linear negative relationship. United States (Henderson et al, 2006) CEO industry tenure positively moderates, and CEO position

tenure negatively moderates, the Entrepreneurial Orientation-performance relationship.

United States _{(Richard, Wu &} Chadwick, 2009) CEO position tenure is negatively related to firm financial

performance.

United Kingdom

(Veprauskaité & Adams, 2013)

CEO tenure has a positive moderating effect on the

internationalization–performance relationship of SMEs. Taiwan

(Hsu, Chen & Cheng, 2013)

Firm-employee and firm-customer relationship strength mediate the effects of CEO tenure on firm performance magnitude and

volatility . United States

(Luo, Kanuri & Andrews, 2014) CEO tenure positively affects the choice for ownership mode of

firms investing abroad. China (Xie, 2014)

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Appendix 2: List of companies

Table 7 List of companies

1 BP PLC 51 SABMILLER PLC

2 GLENCORE PLC 52 CO-OPERATIVE

3 E D F TRADING 53 DELPHI AUTOMOTIVE

4 TESCO PLC 54 RSA INSURANCES

5 BHP BILLITON 55 BALFOUR BEATTY

6 UNILEVER PLC 56 CARNIVAL PLC

7 HSBC HOLDING 57 VALERO ENERGY

8 VODAFONE GROUP 58 JOHN LEWIS PLC

9 AVIVA GROUP 59 LIBERTY GLOBAL

10 RIO TINTO PLC 60 THOMAS COOK GROUP

11 SSE PLC 61 RECKITT BENCKISER

12 PRUDENTIAL PLC 62 DIXONS RETAIL PLC

13 BARCLAYS PLC 63 G4S PLC

14 GLAXOSMITHKL 64 VEDANTA RESOURCE

15 CENTRICA PLC 65 SKY PLC

16 LLOYD'S OF LONDON 66 GKN PLC

17 LIDL U.K. GM 67 AON PLC

18 BLACKROCK FUNDS 68 BRITISH UNITED PLC

19 J SAINSBURY 69 FIRSTGROUP PLC

20 ASDA GROUP LTD 70 JOHN SWIRE & SON

21 RBS 71 INCHCAPE PLC

22 JAGUAR LAND 72 LEGAL & GENERAL

23 LLOYDS BANK 73 WORLD FIRST UK LTD

24 BRITISH TELECOM 74 BUNZL PUBLIC LTD 25 ANGLO AMERICAN 75 REED ELSEVIER GROUP

26 WM MORRISON 76 HOME RETAIL GROUP

27 BAE SYSTEMS 77 AIG LTD

28 COMPASS GROUP 78 PEARSON FUNDING

29 ASTRAZENECA 79 MONDI PLC

30 GREENERGY FUNDS 80 TRAVIS PERKINS PLC

31 ROLLS-ROYCE 81 CISCO INTERNATIONAL

32 BRITISH AMERICAN TOBACCO 82 NOBLE CLEAN FUEL

33 TOTAL GAS 83 BOOKER GROUP PLC

34 WILLIAM HILL 84 DCC PLC

35 NATIONAL GRID 85 EASYJET PLC

36 TUI TRAVEL LTD 86 REXAM PLC

37 WOLSELEY PLC 87 SERCO GROUP PLC

38 IMPERIAL TOBACCO 88 DS SMITH PLC 39 ASSOCIATED BANKS 89 INTU GROUP PLC

40 BG GROUP PLC 90 JOHN WOOD PLC

41 STANDARD CHA 91 AMEC FOSTER WHEEL

42 BRITISH AIRWAYS 92 MURPHY OIL PLC

43 JOHNSON MATTEY 93 PETROFAC LTD

44 KINGFISHER PLC 94 HAYS GROUP LTD

45 WPP PLC 95 PENDRAGON PLC

46 ROYAL MAIL PLC 96 NEXT RETAIL LTD

47 CONOCOPHILLIPS 97 MARTIN BROWER

48 DIAGEO PLC 98 DIMENSION DATA PLC

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Appendix 3: Industry categorization

Table 8

Industry dummy categorization (n=100)

Category n Initial Industry Categorization n

Mining, utilities & construction 15 Construction 3

Gas, Water, Electricity 4

Primary sector 8

Manufacturing 17 Chemicals, rubber, plastics, non-metallic products 5

Food, beverages, tobacco 5

Machinery, equipment, furniture, recycling 4

Metals & metal products 3

Professional & information services 24 Post & telecommunications 3

Publishing, printing 1

Insurance companies 8

Banks 7

Transport 5

Wholesale & retail 19 Wholesale & retail trade 19

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Appendix 4: Correlations matrix

1 2 3 4 5 6 7 8 9 10 11 1 0.042 1 -0.094 -0.138 1 0.072 0.139 -0.195 1 0.162 0.055 -0.186 -0.190 1 -0.019 0.076 0.148 -0.236 -0.254 1 -0.278 -0.012 0.019 -0.203 -0.219 -0.272 1 0.374 0.097 -0.108 -0.073 0.232 0.137 -0.269 1 0.048 -0.020 0.093 -0.186 0.071 -0.027 0.006 0.018 1 0.076 0.010 0.147 -0.073 -0.087 -0.058 -0.033 -0.031 0.162 1 -0.142 0.112 0.020 0.064 0.081 0.008 -0.154 0.161 0.088 -0.093 1 Correlations Table 9 1 Internationalization 2 Firm size 3 Debt ratio

4 Mining, Utilities & Construction 11 B. size x CEO Tenure 5 Manufacturing 6 Professional & Information Services 7 Wholesale & Retail 8 Board size

9 Board size x Board size

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Appendix 5: Robustness tests

See the next page for table 11 with the test results of the second robustness test.

Constant .125 (.195) .058 (.211) .017 (.212) .017 (.207) Controls

Firm size -.013 (.131) -.036 (.125) -.053 (.126) -.019 (.124) Debt ratio -.043 (.103) -.020 (.099) -.040 (.099) -.019 (.097) Industry dummies:

Mining, Utilities &

Construction -.119 (.338) -.082 (.328) -.063 (.329) -.044 (.322) Manufacturing .087 (.309) .035 (.298) .067 (.302) .064 (.295) Professional & Information Services -.067 (.277) -.095 (.267) -.061 (.271) -.079 (.265) Wholesale & Retail -.288 (.297)** -.214 (.290)* -.196 (.290)* -.222 (.284)* Independent variables Board size .327 (.098)*** .326 (.098)*** .353 (.096)**** Board size squared .069 (.080) .055 (.080) .077 (.078)

CEO tenure .140 (.097) .109 (.095) Moderator: Board size*CEO tenure -.222 (.078)** Observations 94 94 94 94 R2 .101 .199 .217 .261 Adjusted R2 .039 .123 .133 .172 F-value 1.626 2.637** 2.580** 2.938*** Table 10

Robust regression with Internationalization as dependent variable, outliers removed

Standard errors in parentheses

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Constant .150 (.201) .099 (.217) .079 (.218) .067 (.212) Controls

Firm size .033 (.102) .007 (.098) .001 (.099) .027 (.096) Debt ratio -.062 (.104) -.034 (.100) -.043 (.101) -.024 (.098) Industry dummies:

Mining, Utilities &

Construction -.006 (.336) .033 (.092) .046 (.331) .058 (.321) Manufacturing .067 (.319) .010 (.309) .027 (.314) .029 (.305) Professional &

Information Services -.074 (.285) -.104 (275) -.087 (.280) -.101 (.272) Wholesale & Retail -.283 (.302)** -.209 (.101) -.195 (.298) -.226 (.291)

Board size .327 (.101)*** .328 (.102)*** .359 (.099)**** Board size squared .049 (.082) .039 (.033) .065 (.055)

CEO tenure .081 (.099) .051 (0.97) Moderator: Board size*CEO tenure -.244 (.080)** Observations 100 100 100 100 R2 .098 .193 .199 .254 Adjusted R2 .040 .122 .119 .170 F-value 1.682 2.716*** 2.481** 3.023*** Table 11

Robust regression with Internationalization-ratio as dependent variable

Independent variables

Standard errors in parentheses

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Corporate Governance and Internationalization: theory and evidence from the United Kingdom (2014)