Master Thesis
Charalambos Argyrou (s2536382) January 10, 2019
Abstract
This study examines how firms’ commercial and financial internationalisation influence the foreign directors and national directors with foreign experience sitting on the boards of 84 large capitalised UK companies for the years 2011 and 2016. Foreign directors appear to be related with both financial internationalisation through foreign listing and commercial internationalisation though foreign sales, while national directors with foreign experience have a relation to commercial internationalisation.
Keywords: internationalisation; board composition; financial internationalisation;
1. Introduction
Over the years, it has been indicated that board members of foreign nationalities appear more frequently on the boards of directors but still the debate about the impact of board diversity of foreign nationality is relatively new. Scholars have researched the impact of foreign directors to company value and performance and found contradictory results. Masulis et al. (2012) suggest that the performance of US companies with foreign independent directors is poor. On the other hand, Oxelheim & Randøy (2003) provide positive effects of Anglo-American directors on market value for Sweden and Norway companies. Moreover, Estelyi and Nisar (2016) found that nationality diversity is positively related to operating performance for the US companies.
Literature on the costs and benefits of having foreigners on the boards is divided into two groups. The first group argues that the benefits of having foreigners lie in the fact that diverse boards of knowledge improve the quality of decision making as board diversity has a greater set of alternatives that are considered by the boards. The second group supports that a disadvantage might be that the greater set of alternatives may bring challenges to the companies, such as teamwork problems, various conflicts, lack of information sharing and disagreements on mutual goals. Nevertheless, if firms wish to have board members of foreign nationalities, they assume that the benefits surpass the disadvantages.
However, a unique way of research on determining the internationalisation of boards and for better understanding them is written by Oxelheim et al. (2013). The sample is taken from 346 non-financial listed Nordic firms during 2001-2008. They use two types of directors, the foreign directors and home country based directors (nationals) with international experience as key element to fulfil the three major functions of the board. The results show that foreign directors are associated with financial internationalization because they mitigate possible agency problems between domestic and foreign shareholders, when foreign directors monitor on behalf of foreign shareholders. Moreover, the international experience of the nationals is related to the access of foreign markets. Finally, both are complementary and not substitute sources of expertise, which means that both should be taken into account when it comes to the optimal composition of the board.
globalisation we can expect a push towards more internationalised boards. The decision to select the UK as the testing country is based on the argument that the financial internationalisation in the UK is bigger in comparison to the Nordic countries and as a result the role of foreign directors on boards may be more important. Evidently, the net inflow of foreign direct investment (FDI) in the UK is larger than the FDI in Nordic countries based on absolute value and over the percentage of GDP during 2011-2016 (The World Bank, 2019). It is also noteworthy to mention that the ratio of foreign directors in the UK appears to be higher in the earlier stages of the tested years, while showcasing a gradual decrease during 2016, nevertheless remaining higher in comparison to that of the Nordic countries (SpencerStuart, 2012; SpencerStuart, 2016).
In addition to the above argument, time is also an important factor, which differentiates this study. Oxelheim et al. (2013) study the internationalisation of boards during 2001-2008, while this study tests the internationalisation of boards for the years 2011 and 2016. This is an important factor since there is evidence that globalisation is increasing over the years leading to higher commercial and financial internationalisation (The World Bank, 2019). Therefore, due to the recent developments over the recent years there is a clear need towards studying the increasing board internationalisation.
Oxelheim et al. (2013) brought new light in the way we see the board of directors today by taking into account the foreign experience of national directors. Oxelheim et al. (2013) use data across companies for the year 2007 in their analysis regarding the national directors with foreign experience. However, the current study also investigates the relationship between firms’ internationalisation and national directors with foreign experience for the years 2011 and 2016, which allows us to examine the subject for more than one year. Consequently, this study adds to the prior literature, by taking into account data both across companies and time, which is the basis of our attempt to address the possibility of causal relation between firms’ internationalisation and national directors with foreign experience. UK is considered as a good proxy when trying to draw generalised conclusions about the effect of firms’ internationalisation on the foreign directors and national directors with foreign experience, due to its different corporate system in comparison to the Nordic countries’ corporate systems1
. This study is using the three board functions, namely monitoring, advising and providing access to key resources, to understand the reason behind the need to internationalise boards. The relation in this study is explained as firms’ commercial and financial internationalisation influence the board internationalisation. Therefore, when companies decide to become internationalised they adjust their board composition by including foreign directors and national directors with foreign experience on their boards (Oxelheim et al. 2013). Foreign
1
The UK has an active takeover market, boards of directors are based on a single tier, managerial labour market is based on incentives, and so on, which are major and curial differences when compared to the Nordic
directors and national directors with foreign experience have the required knowledge of their respective foreign markets and the familiarity of the different national regulatory systems, and therefore they can give valuable advice about foreign sales. They can contribute to the networking of the firms by giving access to important suppliers, buyers and providers of finance. However, foreign directors in specific represent the interest of the foreign investors, who mitigate possible agency problems by monitoring on behalf of foreign shareholders. Foreign capital and cross-listing in different foreign stock exchanges may lead to more foreign directors.
Concerning the results, in line with the theoretical background, financial and commercial internationalisation influence the appointment of foreign directors on boards. Additionally, commercial internationalisation also appears to affect the appointment of national directors with foreign experience which is also in line with the theory. We also found that national directors with at least two types of foreign experience might suggest a different link with financial internationalisation which requires further research. For the current moment we cannot provide more insight on this assumption as this relationship was not predicted.
The paper is structured as follows. We firstly present the relevant literature and set the theoretical for testing the hypotheses. The following sections introduce the data set and methodology and thereafter elaborate on the results. The final section presents the conclusions and suggest possible points for further research.
2. Literature review
2.1. The three board roles in firm’s governance systme
Based on the literature concerning boards, three prominent board roles are distinguished, through which directors can contribute to a company’s board. The first role includes hiring, firing and compensating the company’s management, namely the monitoring role, while the second and third roles include advising and providing access to key resources for important strategic decisions (Pearce & Zahra, 1992).
2.2. Commercial and Financial Internationalisation creates the need to change the board composition
poorer than others. Therefore, multinational companies should adjust to the environments they operate in and the governance issues they face (Oxelheim et al., 2013).
In the framework of commercial internalisation – meaning companies operating in international environments – firms are faced with operational challenges related to liability of foreignness and more specifically to the lack of “general international operations experience and country-specific experience” (Luo, 2005). Consequently, these challenges may affect the capability of a board of directors to perform the three board roles. The operating complexity, which arises from the foreign operations leads to higher information asymmetry between the managers and the board (Sanders and Carpenter, 1998). As a result, the monitoring costs are higher. Thus, to overcome such challenges, a board will change its governance structure and enhance it with directors who possess the required experience, international knowledge and affinity with the foreign environment.
The globalisation of financial markets not only led companies to operate internationally (commercial internationalisation), but also allowed them to raise foreign capital (financial internationalisation). In the framework of financial internationalisation, boards find themselves against the challenge of aligning the firms and foreign investors’ interests, with the ultimate goal of raising capital. Over the recent decades, increasing flow of capital is observed around the world (European Central Bank, 2000). At the same time, the demand for expertise in order to help companies raise foreign capital has increased. Both commercial and financial internationalisations require a specific board composition in order for companies to strengthen the three board functions.
Overall, it has been established that firm internationalisation demands the restructuring of a board’s governance to ensure functionality and performance. The question of how the governance restructuring of an internationally active firm can be implemented has been previously addressed by Sanders and Carpenter (1998), who suggested that a larger sized board would be the answer. On a contradictory argument drawn from Hillman et al. (2009) suggesting that the board size may not be relevant, Oxelheim et al. (2013) highlight that the type of the directors on a board and their contribution to the company are much more valuable and important rather than the number of directors on the board.
2.3. Types of directors in the context of internationalisation
providing access to key resources in order to tackle the challenges of internationalisation. The foreign directors and the home-country-based directors (nationals) with international experience in the context of and in relation to commercial and financial internationalisation are further explained below.
Directors of foreign origin are expected to have the required knowledge of their respective foreign market and familiarity with the different national regulatory systems of their respective country of origin (Oxelheim et al. 2013). These directors have a better understanding of the international business environment and foreign competition. In this manner, foreign directors showcase their ability to contribute to the roles of advising and providing access to key resources. More specifically, they can provide valuable insight over international employees, customers and suppliers (Oxelheim et al. 2013), which allows companies to compete abroad, and thus help with exploring opportunities in different international markets. Foreign directors are also part of foreign networks, which can also bring in important expertise and network ties to the company and consequently lead to better investment and operating decisions. The above characteristics of foreign directors can support companies’ operations in foreign markets (commercial internationalisation).
The second type of director is the national director with foreign experience. There is evidence indicating that despite the fact as to whether a person was not brought up in a foreign environment, it is still possible that they could acquire the necessary expertise by having spent time in that foreign environment (Carpenter et al., 2001). For example, foreign experience can be acquired simply by living abroad, studying abroad, working abroad and having international board positions (Tihanyi et al., 2013; Carpenter & Westphal, 2001). National directors with foreign experience may be appointed in a similar way and role to those of foreign directors due to their experience in competing in foreign markets. National directors with foreign experience have acquired the knowledge of the foreign markets, which may similarly bring valuable insight and resources, help explore foreign opportunities and bring network ties to the company (commercial internationalisation).
Nevertheless, when referring to internationalisation, we cannot only discuss a firm’s operations abroad without acknowledging the intentions of raising foreign capital (financial internationalisation). In light of this statement and as explained later on, foreign directors appear to bring a different set of skills and added value to a board than national directors with foreign experience, as they are perceived to be able to better represent the interest of foreign investors.
uncertainty regarding the abilities of directors, foreign owners have an incentive to replace the director and appoint a director who serves their interest. In this context, foreign shareholders may influence the appointment of foreign directors in the board, whom they may consider more trustworthy to secure their interest. Furthermore, prior literature discusses that trustworthiness could be established based on demographic similarities (Levin et al., 2006). Therefore, foreign shareholders may be more assertive that their interests will be represented in a better way when foreign directors are appointed on the board.
Oxelheim et al. (2013) suggest that another factor that might induce foreign directors on the board is the cross-listing on the foreign stock exchange (financial internationalisation). When a firm decides to cross-list it should comply with the foreign-listed country’s policies, regulatory and accounting systems, also known as corporate accountability, which “enhance[s] transparent disclosure and responsive support in corporate activities, strategic decision-making, and financial information” (Luo, 2005). Therefore, the company may hire foreign directors originating from the foreign-listed country, since they are familiar with the foreign policies, regulatory and accounting systems and are very likely to help sustain corporate accountability. Moreover, the presence of a foreign director may also contribute to increasing the share’s attractiveness to foreign investors (Oxelheim et al. 2013).
3. Research hypotheses
After setting the context and the theoretical background in relation to the commercial and financial internationalisation, there are six formulated hypotheses, which will be examined. The aim is to observe the association between foreign sales, foreign ownership and foreign listing on the one hand and the presence and type of foreign directors on the other hand. Based on the theoretical framework, the following hypotheses can be summarised:
Hypothesis 1a (commercial internationalisation)
Foreign sales influence the appointment of foreign directors positively.
Hypothesis 1b (commercial internationalisation)
Foreign sales influence the appointment of national directors with foreign experience positively.
Hypothesis 2a (financial internationalisation)
Foreign ownership affects the appointment of foreign directors positively.
Foreign ownership does not affect the appointment of national directors with foreign experience.
Hypothesis 3a (financial internationalisation)
Cross listing of shares influences the appointment of foreign directors positively.
Hypothesis 3b (financial internationalisation)
Cross listing of shares does not influence the appointment of national directors with foreign experience.
4. Methodology and data
4.1. Sample and data collection
The sample was derived from the observations of publicly traded non-financial firms headquartered in the United Kingdom and listed on the FTSE 100 and FTSE 250 indices in 2018 for the years 2011 and 2016. The two FTSE indices (2018) offer the ability to study the internationalisation of boards for the largest industrial companies in the UK. The two years are selected to facilitate researching the most recent effects on foreign directors and national directors with foreign experience taking into account the data availability and also to avoid any possible economic fluctuations2
. Considering the two main selection criteria, namely selecting non-financial firms that have their headquarter in the UK, the sample from FTSE 100 reduced from 100 to 64 firms. Moreover, the largest cap companies from the FTSE 250 were selected until total companies equal to 893
. Taking into account that the composition of boards in the UK is one tier, the sample taken distinguishes between executives and non-executive directors. In this framework, relevant variables of executive directors, such as the names of non-executive directors, nationalities, age, gender, year of birth, date of first appointment to the board, were collected. The identities of directors were collected mainly from BoardEX and, where possible, the identities are double-checked using annual reports. Missing nationalities from the BoardEx are obtained using annual reports, Bloomberg’s Executive Profile & Biography, Linkedin, Endole and Wikipedia. Finally, the identities of all non-executive directors were found.
The collection of data regarding the international experience of domestic directors was taken from BoardEX and it was verified through annual reports, Bloomberg’s Executive Profile & Biography, Linkedin and Wikipedia. Collecting this information required reading through
2 In reference to economic fluctuations, the study period selected for the current study falls within the initiation
of BREXIT procedures, which is taken into account and therefore further tests will be held in the robustness section.
3 The sample contains 89 companies given the constraint of time and the time consuming of finding
directors’ biographies in detail, which proved to be a laborious and time-consuming activity. Three different types of information were collected based on the Oxelheim et al. (2013) approach:
1. International study experience: whether a national director studied abroad;
2. International working experience: whether a national director had worked for a foreign-based company (at any point before the two-time periods 2011 and 2016 for at least three months working experience);
3. International board experience: whether a national director had been a non-executive director of an international company or still was.
In a similar way, as also presented by Oxelheim et al. (2013), directors with board experience in subsidiary companies, and not in parent companies, were not considered as having international board experience and were thus excluded from the sample. Thus, the only variable that might bias our results is the international working experience in respect to foreign experience of the national director since in some cases it was not possible to retrieve valid evidence as to whether a home-country-based director, who had worked in a foreign company, actually carried out the work abroad. In the robustness section, a re-estimation of the regression model is used without taking in account the international working experience.
4.2. Variables
4.2.1. Dependent Variables
The dependent variable is measured as the percentage of foreign non-executive board members out of the total non-executives on the board. To consider the alternative way of measuring board internationalisation suggested by Oxelheim et al. (2013), the percentage of national non-executive board members over the total national non-executives on the board with any type (at least one type) of experience abroad, such as board, work or education, are used. Additionally, a measure concerning national directors with foreign experience more than one of the three alternatives is constructed. The percentage of national non-executive board members over the total national non-executives on the board with at least two types of international experience was taken into account. Finally, the percentage of national non-executive board members over the total national non-non-executives on the board with all three types of international experience was taken into account.
4.2.2. Independent variables
When financial internationalisation is set to 1, it indicates that the company has cross listed shares in at least two foreign countries, otherwise it is set to 0. Due to the fact that most of the companies in our sample have cross-listed shares in at least one foreign country, we took at least two foreign countries into account in order to get more variability. Having cross listing in more than one foreign countries may lead to an increase in national diversity in the boardroom. The company may hire foreign directors originating from the foreign-listed countrie(s), since they are familiar with the foreign policies, regulatory and accounting systems and maintain corporate accountability as explained in the theory. Consequently, the board of directors becomes more dependable to the existence of nationally diverse directors and as a result we are expecting an increase of foreign directors on the boards.
Finally, the third variable also measures financial internationalization, which is a proxy for foreign ownership. It is measured by the percentage of foreign-owned shares in the total sum of the five largest share blocks in the company.
4.2.3. Control variables
Two board specific variables are added in this study. The median age of the nationals on the board is used as the first control variable. This control variable accounts for language and other age-related factors for the nationals on the board, which might prevent the appointment of foreigners on the boards. Communication problems may arise from the language abilities of the home country directors, which is correlated to their age (Piekkari et al., 1999). Moreover, old board members are more risk averse and less willing to accept new ideas (Cochran, Wartick, & Wood, 1984), which may prevent the appointment of foreign directors. Therefore, the older the board members are, the more negative they are in the appointment of foreign directors. The second variable is the number of independent directors over the total non-executive directors. We use this variable since we could identify a trend based on figures in the UK, which highlights the increase of independent directors and at the same time the increase of international diversity in the boardrooms (SpenserStuart, 2016). Moreover, in support of the previous statement, Estélyi and Nisar (2016) also include independent directors as a control variable for their study in the UK.
Four firm specific variables are included as control variables. First, we are using the companies’ total assets in millions to measure companies’ ability to attract foreign directors. Primarily, it appears that prestige is a very important factor and incentive for foreign directors to sit on boards (Harmoni, 2006). Large sized companies are offering the relative reputation, experience and expertise that directors seek.
that most foreign directors with a strong profile would not risk their job profile and reputation to work for a company, which performs poorly.
Leverage is measured as the total debt over the total assets and accounts for the third control variable. Powerful CEOs may choose higher than optimal leverage as a way to strengthen their control of voting rights (Stulz, 1988). As a result, high leverage may suggest that there is a powerful CEO, who may positively influence the appointment of foreign director as argued by Masulis et al. (2012), foreign directors are less effective in monitoring for the US companies. This is mainly due to the geographic distance from the company’s headquarters. Another argument, foreign directors may avoid joining a company which is highly leveraged, as it could likely damage their reputation.
Research and development (R&D) is the last control variable, which accounts for companies’ growth opportunities (Masulis et al., 2012). R&D is measured by the funds invested in research and development over the total sales. Thus, larger firms with more growth opportunities are more likely to attract foreign directors (Masulis et al., 2012), who may see this as an opportunity for their personal and career development.
4.3. Data description
Financial and ownership data was collected for the needs of the research. Financial data was drawn from Datastream and ownership data from Thomson Reuters Eikon. It should be noted that there was a lack of data regarding ownership, which creates constraints for our research. Financial data is used for the construction of foreign sales, size (total assets in millions), ROA, R&D and leverage variables. The three specific board variables are taken from BoardEx. Foreign listing variable is constructed using dummy variable set to 1 by checking on Yahoo finance and Investment.com companies’ historical share prices, traded in at least two foreign stock markets before the 2011 and 2016. We collected data only for two years since the collection of data regarding international experience was time consuming. Thus, 2011 and 2016 are selected in order to study the effects of internalisation on directors over time.
An average company in the sample generates 13.46% (median of 9.28%, not reported in the table) of operating income and has 1.80% (median of 0.052%, not reported in the table) of its sales invested in R&D. The average size of a company in terms of its assets in the sample is equal to £15.91 billion (median of £4.41 billion, not reported in the table) and the leverage (total debt over total assets) is equal to 26.86% (median of 25.54%, not reported in the table). In the sample, an average company sold 61.46% of its total sales in foreign markets. Approximately, 10% (not reported in the table) of the companies in the sample have not reported any sales abroad during one of the two time periods. About 78% of the companies in the sample were listed in at least two foreign stock markets during the periods 2011 and 2016. Most of the companies in the sample indicate a preference in the US and German stock markets to trade their shares.
It is observed that the average board consists of 7 (not reported in the table) non-executive board members and 88.95% of the board consists of independent directors. The median age of national directors on the board in the sample is 59 years old (not reported in the table).
Table 2 (in Appendix 1) presents the correlation patterns of the two main dependent variables. The observations derived from table 2 indicate that foreign directors increase when older aged national directors (board age) and CEOs (CEO on board) are sitting on the boards, since the p-values in table 2 are statistically significant. Moreover, foreign directors are more likely to appear on larger companies with more foreign operations as the relation is statistically significant as presented in table 2. Next, a statistically significant relationship is observed in table 2 between the nationals with foreign experience and large sized companies, and nationals with foreign experience and foreign sales. However, nationals with foreign experience are positively related (statistically significant) with the leverage of a company, and negatively (statistically significant) with the returns on assets.
Table 1
Descriptive Statistics
Num. Variable Mean Std. Dev. MIN MAX
Dependent variables: 1 Foreign Directors 30.71 24.46 0.00 91.67 2 National directors_1 61.39 28.22 0.00 100.00 3 National directors_2 23.16 22.04 0.00 100.00 4 National directors_3 4.27 11.72 0.00 66.67 Independent variables: 1 Foreign sales 61.46 38.25 0.00 165.10 2 Foreign Listing 0.78 0.42 0.00 1.00 Control variables: 1 Board age 59.16 4.13 49 69 2 Independent directors 88.95 11.16 41.66 100.00 3 Size (millions) 15914.67 30058.90 40.87 209704.30 4 ROA 13.46 27.53 -25.82 302.28 5 R&D 1.80 3.85 0.00 24.62 6 Leverage 26.86 16.62 0.00 100.61
Note: The sample consists of 155 firm-year observations (84 companies) for the years 2011 and 2016. Foreign directors represent the number of non-executive foreign directors over the total non-executive board members. Domestic index represent the number of non-executive national directors over the total non-executive national directors with any type of experience abroad, such as board experience, work or education. Domestic index1 represent the number of non-executive national directors over the total non-executive national directors with two criteria points of international experience. Domestic index2 represent the number of non-executive national directors over the total non-executive national directors with all the three criteria points of international experience. Foreign sales refer to the foreign sales over total sales. Foreign listing is a dummy variable that is equal to one, if the company’s shares are listed on at least two foreign exchange markets. Board age is the median of the national non-executive board members on the board. Independent directors are the number of independent directors over the total non-executive board members on the board. Size is defined as the companies’ total assets in millions. ROA is the ratio of the companies’ earnings before interest and taxes to their total assets. Leverage is defined as the ratio of total liabilities over total assets. R&D is the ratio of funds invested into research and development to the total sales.
5. Empirical methodology
The main dependent variable – which represents foreign directors and more specifically the number of foreign directors over the total non-executives – takes the value 0 or is continuously distributed over strictly positive values. The Ordinary Least Squares (OLS) estimator could have been used to test our hypotheses, however to avoid the risk of generating biased and inefficient results, also considering that the basic principle of Best Linear Unbiased Estimator is violated, we are using a Tobit regression model. Moreover, variables that have values concentrated around zero do not have a conditional normal distribution. Therefore, by estimating a Tobit model, the specific distribution of the dependent variable would be taken in to account more efficiently (Wooldridge, 2002).
If one of firm’s commercial and financial internationalisation variables depends on unobservable variables that are correlated with the error term, then omitting variables could bias the results. Moreover, an additional problem that might arise is the reverse causality. To mitigate the endogeneity problem, we use the fixed effect model. This methodology was used in Oxelheim et al. (2013) and therefore to follow that example, we use it in the current study as well.
Assuming that the relationship between the foreign directors and its independent variables (foreign sales and foreign listing) are linear, the Tobit regression model is estimated as: !"#$ = &'+ )*!+#$ + ),!-.#$+ )/!0#$+ )123 4 #5* 6-789-0+#$ + )*' 4 #5* :;<=>?@A <=CC:D>#$+ )**ADE@ <=CC:D>#$ + =#$ (1) A#$ = A?, !" > 0 A#$ = 0, I?ℎD@K:>D
6. Results
6.1. Multivariate regression
Table 3 presents the results of the estimated Tobit regression (1), where the percentage of foreign directors is regressed on foreign sales, foreign listing and board and firm specific control variables. Column 1 tests the relationship between foreign sales and foreign directors. A positive relationship between these two variables is observed, as the variable of foreign sales is positive and statistically significant. From this relationship, it can be stated that the higher the company’s foreign sales, the more likely it is that foreign directors are appointed to its respective board. More specifically, companies’ commercial internationalisation is related to higher percentage of foreign directors.
Column 2 investigates the relationship between foreign listing and foreign directors. In line with the theoretical arguments of the foreign listing, a positive relationship between foreign listing and foreign directors can be distinguished, as the coefficient of foreign listing is positive and statistically significant. In other words, a company’s financial internationalisation is related to higher percentage of foreign directors. Moreover, the foreign listing variable in this study measures cross listing under the condition that a company has listed shares in at least two foreign countries. The full model’s results are reported in column 3, which regress foreign directors on foreign sales and foreign listing. Results are largely in line with the above explanation. A higher share of foreign directors is observed in companies that showcase more foreign sales and are cross-listed.
The board-specific control variables in column 3 indicate that there is a higher percentage of foreign directors on boards with less independent directors and on boards with older national directors. Looking at the firm-specific control variables in column 3, we can observe a higher percentage of foreign directors in larger companies. Moreover, it appears that no significant relationship can be distinguished between the rest of the firm-specific control variables and the foreign directors.
There might be concerns that foreign directors are correlated with omitted firm-specific time-invariant variables, such as company culture. To remove any concerns related to omitted variables, the full model (regression 1) is re-estimated by using the fixed effect estimator4
. Moreover, following the same method used by Oxelheim et al. (2013), all explanatory variables in column 4 are lagged by one year to tackle any endogeneity problems. The results from the fixed-effect regression in column 4 suggest no changes in the foreign sales and foreign listing variables, however, all the control variables become insignificant. Additionally, in column 5, the fixed effect estimator is used without lagging the explanatory variables. The results are
4 It should be clarified that we used the Ordinary Least Squares (OLS) estimator instead of Tobit, due to an issue
Note: This table reports regressions of the effect of foreign sales, ownership and foreign listing on foreign directors over 2011 and 2016 for the 84 (58 by adding the ownership variable) largest capitalised firms listed on FTSE-100 and FTSE-250. The control variables include: board age, independent directors, size of the company in terms of its total sales, return on assets (ROA), research and development (R&D), and the leverage of companies. Column 1 examines the relationship between foreign sales and foreign directors. Column 2 investigates the relationship between foreign listing and foreign directors. Column 3 provides the full model results. Column 4 examines the full model and all explanatory variables are lagged for one year. Column 5 adds the period-fixed effect using the OLS estimator. Column 6 uses the full model with the addition of the foreign ownership variable. Column 7 examines the model in column 6 with all explanatory variables being lagged one year. To control for serial correlation and heteroscedasticity, the Huber/White standard errors and covariance are used. Constant is not reported. The brackets indicate the p-values. The symbols ***, **, and * indicate significance at the 1, 5 and 10 percent levels, respectively. Dep. Variable FD FD FD FD FD FD FD (Model) (1) (2) (3) (4) (5) (6) (7) Independent Variables: Foreign sales 0.319*** 0.292*** 0.344*** 0.238*** 0.307*** 0.244** (0.000) (0.000) (0.000) (0.000) (0.000) (0.018) Foreign ownership 0.149* 0.083 (0.080) (0.479) Foreign listing 16.965*** 12.338** 18.997** 7.544** 17.310** 25.806** (0.001) (0.014) (0.013) (0.050) (0.046) (0.041) Control Variables: Board age 1.125** 1.515*** 1.209** 0.180 0.886 0.597 0.431 (0.024) (0.003) (0.012) (0.770) (0.018) (0.276) (0.469) Independent directors -0.443*** -0.391** -0.461*** -0.233 -0.373*** -0.535** -0.606* (0.006) (0.027) (0.005) (0.415) (0.007) (0.016) (0.071) Size 0.0003*** 0.0003*** 0.0002** 0.0001 0.0002*** 0.0003** 0.0002 (0.006) (0.005) (0.016) (0.441) (0.001) (0.026) (0.268) ROA 0.049 0.024 0.049 0.121 0.043 -0.072 0.054 (0.294) (0.682) (0.340) (0.363) (0.451) (0.799) (0.916) R&D -0.463 0.041 -0.434 0.965 -0.439 -2.063*** -1.917** (0.434) (0.949) (0.462) (0.244) (0.394) (0.003) (0.038) Leverage 0.018 0.050 -0.035 -0.009 -0.020 0.037 -0.011 (0.900) (0.785) (0.804) (0.967) (0.854) (0.842) (0.965)
Industry dummies yes yes yes yes no yes yes
Time dummies yes yes yes - no yes no
comparable to the previous test, as both the foreign sales and foreign listing affect the percentage of foreigners on the boards positively.
In column 6 we analyse regression (1) with the addition of the ownership variable. It is important to mention that due to the unavailability of foreign ownership data, we have few observations. Even though we cannot make strong conclusion, we intent to still analyse both variables regarding financial internationalisation for the sake of observing the influence of the variable on the appointment of national director with foreign experience. The results in column 6 indicate that the coefficient variable of ownership is positive however weak. The rest of the independent variables results are in line with the results presented in column 3. To mitigate simultaneity biases, in column 7 we lagged the explanatory variables by one year and observed that ownership is not statistically significant, while foreign sales and foreign listing variables indicate a positive and statistically significant relation. The fact that ownership is not statistically significant could be related to the smaller size of the sample, although commercial and financial internationalisation may still influence the appointment of foreign directors.
To summarize this section, overall the results indicate that foreign sales and foreign listing have a meaningful impact upon foreign directors. Even though our findings are in line with the theory, it should be stressed that our results are not consistent with those in Oxelheim et al. (2013). The authors suggest that only financial internationalisation might influence the appointment of foreign directors in the case of Nordic countries, however in our case both commercial and financial internationalisation influence the appointment of foreign directors. 6.2. Testing the relationship between firms’ internationalisation and nationals with
international experience
This section investigates the validity of the hypothesis that national directors with foreign experience might be viewed as an important source of expertise when it comes to companies’ internationalisation. Table 4 reports the results for regression (1) but in this analysis national directors with foreign experience – either with one type of experience or with two types of experience such as board, work or education — is the dependent variable.
we observe that the commercial internationalisation is in line with our theoretical arguments, nevertheless the financial internationalisation is not in line with the theory.
In column (2) explanatory variables are lagged by one year in order to mitigate simultaneity bias for the model in column 1 (as explained above). This analysis adds to the existing literature since Oxelheim et al. (2013) used data across companies for testing the relation of companies’ internationalisation and national directors with foreign experience. The results of column 2 display that the variable of foreign sales is still positively and statistically significant. However, the variable of foreign listing is not statistically significant and therefore it does not influence the national directors with foreign experience. Additionally, the fixed effect estimator (cross section and period) is used in column 3. The results indicate a weak relation between foreign sales and national directors with foreign experience and no relation between foreign listing and national directors with foreign experience. The results from the fixed effect and lag of one period strongly support the hypothesis that financial internationalisation does not influence the appointment of national directors with foreign experience. Based on the evidence, we cannot ignore the existence of a relationship between commercial internationalisation through foreign sales and national directors with foreign experience on the one hand, however it should also be noted that there is a conflict in the statistical significance of the foreign sales variable amongst the two models on the other hand.
Note: This table reports regressions of the effect of foreign sales, foreign ownership and foreign listing on national directors with foreign experience over 2011 and 2016 for the 84 largest capitalised firms listed on FTSE-100 and FTSE-250. The control variables include: board age, independent directors, size of the company in terms of its total sales, return on assets (ROA), research and development (R&D), and the leverage of companies. Column 1 examines the respective relationships between national directors with one type of foreign experience and (a) foreign sales and (b) foreign listing on. Column 2 uses the same model as in column 1 but with all explanatory variables lagged for one year. Column 3 uses OLS fixed effect model to test the model in column 1. Column 4 uses the column 1 model with the addition of the foreign ownership variable. Column 5 use the lagged explanatory for the model in column 4. Columns 6,7 and 8 use the same models as columns 1, 2 and 3 with the difference that two instead of one types of foreign experience is taken into account. To control for serial correlation and heteroscedasticity, the Huber/White standard errors and covariance are used. Constant is not reported. The brackets indicate the p-values. The symbols ***, **, and * indicate significance at the 1, 5 and 10 percent levels, respectively.
Dep. Variable NDFE1 NDFE1(lag) effect) NDFE1 NDFE1(lag) NDFE2 (lag) effect)
(Model) (1) (2) (3) (4) (5) (6) (7) (8) Independent Variables: Foreign sales 0.212*** 0.217** 0.298* 0.309*** 0.252** 0.144* 0.045 -0.001 (0.001) (0.012) (0.074) (0.000) (0.037) (0.053) (0.655) (0.956) Ownership 0.237*** 0.176 (0.006) (0.226) Foreign listing 16.226*** 11.403 7.548 23.75*** 19.125 12.757* 28.386*** -9.151 (0.009) (0.108) (0.438) (0.002) (0.104) (0.058) (0.004) (0.387) Control Variables: Board age -0.289 -0.824 0.314 -0.190 -0.044 -0.231 0.062 0.213 (0.603) (0.262) (0.563) (0.722) (0.955) (0.729) (0.950) (0.718) Independent directors -0.193 -0.163 -0.086 -0.191 -0.397 -0.155 0.777** -0.063 (0.347) (0.552) (0.688) (0.384) (0.200) (0.618) (0.023) (0.786) Size (millions) 0.0001 0.0001 -0.0007** -0.0004 0.0006 0.0001 0.0002 0.0002 (0.246) (0.353) (0.045) (0.666) (0.571) (0.465) (0.270) (0.563) ROA -0.070 0.031 0.182 0.0186 0.048 0.005 0.144 0.131 (0.398) (0.848) (0.201) (0.945) (0.938) (0.931) (0.337) (0.397) R&D 0.678 2.165** 1.326 1.818** 2.147 0.355 1.275 -0.048 (0.386) (0.029) (0.482) (0.049) (0.146) (0.667) (0.265) (0.981) Leverage 0.278* 0.394 0.223 0.297 0.370 -0.036 -0.342 0.101 (0.095) (0.154) (0.445) (0.163) (0.241) (0.846) (0.290) (0.749)
Industry dummies yes yes no yes yes yes yes no
Time dummies yes - no yes - yes - no
We also considered national directors with at least two types of foreign experience (e.g. board, work or education) in column 6. The foreign sales and foreign listing variables are positive and statistically significant, with values slightly above 5%. In light of these results, there is an indication that both variables may influence the appointment of national directors with foreign experience. We lagged the explanatory variables by one year once again to mitigate simultaneity biases and used the fixed effect model (cross section and period). The results of the lagged model in column 7 suggest that the foreign sales variable is not statistically significant any longer and that the foreign listing variable becomes statistically significant at 1%. Additionally, the fixed effect estimator is used in column 8. The results record the absence of a relation between foreign sales and national directors with foreign experience, as well as well as the absence of a relation between foreign listing and national directors with foreign experience. To summarise, commercial internationalisation through foreign sales seems to not influence the appointment of national directors with foreign experience since the lagged model and the fixed effect model do not present a statistically significant relation. Deriving from the evidence, we can argue that commercial internationalisation through foreign sales does not influence the appointment of national directors with two or more types of foreign experience, as the number of experience does not appear to add more value.
Moreover, financial internationalisation through foreign listing does not allow us to draw a certain conclusion regarding the appointment of national directors with foreign experience based on the results. In the occasion that a relationship between foreign listing and national directors with foreign experience does exist, financial internationalisation becomes important towards appointing national directors with foreign experience on the board. Under this rationale, the role of these national directors could be considered important for financial internationalisation and not for commercial internationalisation as initially supported by the theory and hypotheses. Further research can be conducted to examine if financial internationalisation influences the appointment of national directors with at least 2 types of foreign experience, as we currently are not in position to draw strong conclusions through this study.
7. Conclusion
This study examines the relation between commercial and financial internationalisation and board internationalisation. We have used a sample of 84 large capitalised firms listed on FTSE-100 and FTSE-250 over 2011 and 2016.
to mention that our study recorded conflicting results with regards to the appointment of foreign directors related to commercial internationalisation, which was not the case in Oxelheim et al. (2013), but was in line with our theoretical arguments. Foreign directors appear to have a more substantial understanding, knowledge and experience of their respective foreign country and can therefore advice and provide access to key resources to their company.
Appendix 1 Table 2
Partial correlation coefficient Correlation with Foreign Directors Correlation with Domestic index Foreign Directors 1.00 0.41*** --- (0.00) Domestic directors 0.41*** 1.00 (0.00) --- National directors_1 0.33*** 0.55*** (0.00) (0.00) National directors_2 0.17** 0.26*** (0.04) (0.00) Foreign sales 0.46*** 0.38*** (0.00) (0.00) Foreign Listing 0.30*** 0.33*** (0.00) (0.00) CEO on board 0.16** 0.08 (0.04) (0.34) Board age 0.24*** 0.06 (0.00) (0.43) Independent directors -0.11 -0.02 (0.19) (0.81) Size 0.39*** 0.28*** (0.00) (0.00) ROA -0.04 -0.14* (0.64) (0.08) R&D 0.06 0.12 (0.49) (0.14) Leverage 0.09 0.18** (0.29) (0.03)
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