Do cross-listings on foreign stock exchange markets affect the composition of boards of directors? The case of European MNCs.

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Final Draft

Do cross-listings on foreign stock exchange

markets affect the composition of boards of

directors? The case of European MNCs.

Master Thesis – International Business & Management

Rijkuniversiteit Groningen

Student: Ivo Dimchev

Student number: s2068468

Date: 22/04/13

Supervisor: Kees van Veen

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1. Introduction

The main purpose of the paper is to investigate whether cross-listing is related to a change in the board of directors. The research will be based on a sample of 342 European multinational companies and various characteristics of their boards. The investigation will provide an insight on the question “Do cross-listings on foreign stock exchange markets affect

the composition of board of directors?”.

The board of directors is the face of the company for all stakeholders, including potential investors. Therefore we suggest that a change might be undertaken in order to be more “attractive” to them and reap better the benefits of cross-listing on a foreign market. There are two arguments why the board composition has higher importance for foreign investors. Firstly, companies have already established reputation, network and history in their home markets which provides local investors with more information to use when assessing the risk of their investment. Moreover, investors and companies share common language and also they tend to be home country biased when choosing an equity to invest in. On the other hand, those incentives are not presented when the company is listed in a foreign market. Therefore, the board of directors can be used as a way to improve trustworthiness among such investors and that is why we suspect a relationship between number of cross-listings and changes in the composition of the boards.

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While the trend of cross-listing has been expanding, various events have brought up the importance of corporate governance for investors around the globe. It had become a key issue and led to the Sarbanes Oxley Act in the US, the Lisbon Strategy in the EU (EC 2003) and corporate governance reform in Japan (Gilson and Milhaupt 2004, Becht et al. 2003). Events such as the revealed deficiencies of the Asian, Russian and Brazilian crisis-stricken economies, the world-wide privatization wave and scandals in the U.S. and Europe, rapidly increased the importance of corporate governance and the composition of the board of directors as one of its components. Both cross-listing and corporate governance are subject of numerous papers which shows that they are intriguing themes of great importance for the operations of international companies. However, there is a significant lack of research in the literature regarding their mutual interrelation. Therefore, the aim of this paper is to investigate whether there is a correlation between cross-listing and the board of directors as a corporate governance element and in what direction. Moreover, the findings of the research will show whether cross-listing could be a possible reason for the change of composition of boards of international companies.

The study is an attempt to fill in a gap in academic research – the lack of empirical investigation on the connection between composition of TMTs and cross-listing. The relevance of the paper is related to the fact that the results will provide or exclude another possible reason for the change of the composition of boards of directors. A research of such nature might reveal another piece of the puzzle behind the change of board of directors.

1.1 Background

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improved financial flexibility (Oxelheim & Randoy, 2003). When countries have opened up their capital markets, they have given the opportunity for their local investors to diversify their risk globally which has led to one of the main reasons for companies to cross-list – access to cheap capital by raising funds in various foreign financial markets (Stulz, 1999).

Due to the increased financial flexibility, companies have the opportunity to increase the number of capital markets they operate in which comes with a number of benefits listed below. In his paper, Karolyi (1998) investigated 70 companies on the economic incentives of the corporate decision to list shares on foreign exchange. The advantages companies might expect from listing abroad include reduced cost of obtaining capital, reduced agency costs, enhanced reputation, increase of shareholders base, increased visibility, improvement of governance standards, the opportunity for controlling shareholder to divest on liquid market, capitalizing on product market reputation or product and labor market spillovers (Pagano et al., 2002; Karolyi, 1998; Stulz, 1999; Baker et al. 2002; Coffee, 1999).

Cross-listing abroad mitigates market segmentation by reducing barriers to foreign investors and transaction costs. In order to benefit from the cross-listing, companies need not only to cover certain legal requirements and disclosure, but they need to be able to attract foreign investors’ capital by promoting trustworthiness. A foreign exchange listing presents a signal for the firm’s commitment to the disclosure standards prevailing in the market in which it lists, a signal which eventually boosts foreign investors’ recognition and confidence in the firm. When a firm lists in another country, it makes a “credible and binding commitment . . . not to exploit

whatever discretion it enjoys under foreign law to overreach the minority investor . . . [so as to] induce minority shareholders to invest in it.” (Coffee, 1999). When companies cross-list on the

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base which results in higher valuation and reduced cost of capital (Bris, Cantale & Nishiotis, 2007).

One of the obstacles ahead of promoting confidence in investors is the problem, referred by academics as “the information asymmetry problem” which is of great importance when considering the relationship between foreign investors and the management of a company. It originates from the difference between management’s and investor’s assessment of a project based on the amount of information each side has. The other key problem is the “agency cost” problem where investors are concerned whether the management would use their capital in the most appropriate way (Stulz, 1999). Overcoming of the aforementioned difficulties is vital for companies in order to attract more capital on financial markets. One of the tools to do that is establishing an effective corporate governance system. Corporate governance is concerned with bridging the various and sometimes polar interests of investors and managers in the same direction and the operation of the company for the benefits of investors by using legal, institutional and cultural mechanisms (Mayer, 1997; John and Senbet, 1999; Shleifer and Vishny, 1996). According to Busham & Smith (2003) corporate governance as a mechanism is created to assure that shareholders are protected from an inappropriate managerial activities and to provide incentives for managers to maximize firm value instead of pursuing their own personal objectives. There are many examples which raised investors’ concerns when it comes to corporate governance. The demise of WorldCom and Enron in USA and Ansett, OneTel and HIH in Australia are just a few cases which put the quality of corporate governance on the spotlight (Kang, Cheng & Gray, 2007)

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companies. From investors’ perspective, the term corporate governance can be defined as a promise to repay a fair return on capital invested and the commitment to operate the company efficiently (Metrick and Ishii, 2002).

The perceived net benefits that stem from a lower cost of capital as the firm makes its shares more accessible also depend on the corporate governance problems among managers, shareholders and potential investors which inevitably arise from globalization. These problems can limit the benefits related to cross-listing. That is why numerous papers (Karolyi, 1998; Stulz, 1999) argue that the cost of capital will critically be dependent on the corporate governance system including the board effectiveness. In order to motivate shareholders to invest in equity, they must be confident in the trade-off of their current capital for the opportunity to receive sufficient future cash flow. An effective “monitoring” of the actions of the management would also lead to a reduction of the agency costs and the ability to expropriate capital which would increase the confidence of shareholders and potential investors. That can be achieved by various mechanisms of the corporate governance system.

According to Chen (2005), the corporate governance mechanisms include exogenous and endogenous elements. The latter include political, legal and cultural elements, while the former – the board of directors, management compensation, supervision level and independent directors (Stulz, 1999). Several investigations on corporate governance have acknowledged the critical role of the board of directors in sustaining effective and profitable organization and their importance as a potential determinant of the firm’s performance (OECD, 1999; Jensen, 1993).

Finkelstein & Hambrick (1996) underline two key responsibilities of the board. One of them is as a very high influential actor, determining the strategy direction of the company. The other one – as a monitor which includes representing the shareholders, monitoring the proper use of organizations’ wealth and supervising and controlling the work of the management. The board must be complementing market and shareholder pressure in limiting managers’ discretion to engage in opportunistic and self-interested behavior (Jensen, 1993; Shleifer & Vishny, 1996). In addition, the Upper Echelon Theory, originating from the work of Hambrick & Mason (1984), argues that top management’s

In his article, Gillan (2006) describes the board of directors as “the lynchpin of corporate

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of the board, in accordance to the agency theory, are to ensure that managers are acting responsibly and to protect the interest of shareholders by reducing management opportunism (Fama & Jansen, 1983). Moreover, they provide a link between the company and its external environment and are also responsible for the legitimacy of the company (Pearce & Zahra, 1992; Stiles & Tylor, 2001). The board is a key element of the governance system of a company and it accounts for the general strategic direction of the company. Furthermore, the composition, attitude and dynamics of the board affect the internal culture in the company (Stulz, 1999; Diversity on board of directors, 2009).

The corporate governance system and the board of directors in particular are of extreme importance when an agency problem or conflict exists among stakeholders of a firm. As mentioned before, such problems occur when the ownership and control are separated, which is the case of every cross-listed company. The role of the board is to ameliorate those issues in order to reduce uncertainty and information asymmetry (Hart, 1995). Having a board that is not credible enough is not a problem for companies which do not need external capital, but the boards of those who do cross-list will be taken into consideration when the companies are being evaluated by potential investors (Stulz, 1999).

1.2. Purpose

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their eligibility and benefit better from all listed advantages resulting from cross-listing on a foreign stock exchange market.

The paper will investigate board composition aspects such as size, gender and nationality diversity of a sample size of 342 European companies. Those companies, despite having company and country level differences all operate under the regulations of the European Union which gives coherence to the research process.

A research of this nature would contribute to academic literature and the business world in several ways. Firstly, the findings would provide solid systematic evidence on whether cross-listing on key foreign capital markets changes one of the significant elements of the governance system of companies - the board of directors. Secondly, findings in this field would contribute to the literature by documenting a specific channel in which cross-listing is related to alteration of the top management teams – a direction poorly investigated in the current existing literature. The most significant progress made in that direction is the paper by Lel & Miller (2006) where they investigated the effect of cross-listing on CEO turnover. However, little attention has been paid on the overall composition of the board of directors. Thirdly, a solid and accurately executed research, based on a properly chosen data set, would provide information to “construct” a general picture of the development of the board composition. The paper can prove whether cross-listing is a possible reason for change in board compositions. A significant findings can help scholars interested in board dynamics by indicating that cross-listing should be included as a control variable when researching boards.

Documenting the cross-listing as an influential factor over the structure of the boards can present a basis for further and narrower researches in that direction. The results of this investigation can be interpreted in more general way – this paper is the first to investigate and bridge two strands of literature – cross-listings and board composition. Moreover, if a quantitative relation between the two is documented, a further more qualitative oriented approach can investigate in-depth the reasons behind the occurring changes and the arguments of the boards itself by conducting interviews or surveys with the senior level management of large international companies.

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formulating hypotheses. Thereafter, the research procedure with the methodology used to investigate the hypotheses, followed by an overview of the empirical findings. Consequently, a conclusion and discussion of the results, acknowledgement of the possible limitations and suggestion for future research will be provided at the end of the paper.

Both cross-listing and corporate boards of directors present intriguing themes of great importance for the operations of international companies. However, there is a significant gap in the literature regarding the interrelation between the number of cross-listings of companies and the development of the composition of their boards. The first part of the paper will statistically analyze whether there might be a connection between number of cross-listings and board size, gender and national diversity of European boards. In the second part, a statistical test including control variables will be conducted in order to support the proposed hypotheses.

2. Theoretical background, causality propositions and

hypothesis formulation

The board of directors can be viewed as a source of competitive advantage determining a better performance of the company (Nicholson & Kiel, 2004). In their paper, the authors constructed a figure describing how satisfying human capital can be developed into board effectiveness and increased performance, elements valued by potential investors. Based on these suggestions, this research proposes that companies undertake change of the “face” of the company (the board of directors) in order to attract more investors and use fully the benefits of cross-listing.

Various papers (Maznevski, 1994; Milliken & Martins,1996; Pelled, 1996) describe two types of diversity – demographic (gender, age, race, ethnicity) and cognitive (knowledge,

education, functional background). Diversity leads to greater pool of knowledge, points of view

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In alignment with the previous paragraph, various papers documented that more diversified boards can increase the networking capabilities of the boards. We can bridge the two suggestions and claim that it leads to better board effectiveness. In addition, diversity in the board can also be used to create advantages for the firm, with a result of dynamics in the team, in order to build better balanced boards (Ingley & van der Walt, 2003). Companies nowadays operate in extremely interrelated and international context, especially the ones cross-listed on various stock exchange markets. The internationalization naturally results in increased requirements of international experience therefore a number of authors argue that boards can contribute from a mix of different people with various conceptions of the surrounding world, competences and perspectives (Bloodgood, Sapienza & Almeida, 1996).

There are a number of studies that examine the impact of board independence on the execution of specific tasks. Independence is found to be related to higher executive dismissal for unsatisfactory performance (Weisbach, 1988); selection of an outsider for CEO succession (Borokhovich et al., 1996); enhanced shareholder wealth (Cotter et al., 1997); improving the link between management pay and performance (Canyon & Peck, 1998) and lower likelihood of shareholders sues (Kesner & Johnson, 1990). All these studies and their findings are consistent with the agency theory and support the well-accepted belief that independent boards are more watchful monitors.

Based on that, it is an incentive for companies to increase diversity in relation to cross-listing in order to be more “eye-catching” to investors from foreign markets as discussed above. It is argued that diversity is one way to improve the board performance in modern literature (Cox & Beale, 1997; Ingley & van der Walt, 2002; Cascio, 2003). The underlying assumptions of diversity is that greater diversity should lead to greater openness to change, greater capabilities to collect information, and improve decision making processes (Ingley & van der Walt, 2003). A related quote on the matter can be found in the paper by Ingley & van der Walt (2003) – “board

composition and the varied combination of attributes, characteristics and expertise contributed by individual board members in relation to board process and decision-making” (p. 7). This

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Investors which are potential shareholders in the company must be confident that the use of their capital is aligned with their interests and the level of monitoring is sufficient (Stulz, 1999). Therefore, the information asymmetry should be reduced in order to attract more investors. An effective and proactive board, as a valuable corporate governance mechanism, can reduce agency costs and information asymmetries (Hart, 1995; Stulz, 1999) and also monitor managers in order to ensure proper actions that are aligned with the shareholders’ interest. In order to be effective and objective monitor, the board must possess sufficient independence vis-à-vis top management. Moreover, group effectiveness theories claim that the nature of the tasks and their execution is highly correlated to the team composition. That argument implies that boards with certain composition would perform better tasks than other ones as the two distinct sets of board tasks require different skills for their effective performance (Gist, Locke & Tylor, 1987).

2.1 Hypotheses

Based on a literature research, we’ve identified the most relevant components of the boards. For the purpose of this research, the chosen variables which will be investigated are size of the boards and board diversity, which will include nationality and gender diversity. Both size and diversity increase board capabilities and can counteract with problems related to the decision making process and improve critical thinking and monitoring functions.

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A few papers (John & Senbet, 1998; Coles et al. 2008; Jensen, 1993; Lipton & Lorsch, 1992) argue that larger boards are less flexible and efficient because of the coordination costs and the communication inefficiency. Benefits from smaller boards reduce the free-riding by individual directors and improve decision-making. However, in the academic field, there are number of researchers who have an opposite opinion. In two papers, related to financial disclosure practices, the authors (Song & Windram, 2004; Karamou & Vafeas, 2005) state that more members enhance the general board knowledge and increases capacity to share various activities including monitoring duties. Improvement of those duties has a direct effect on company performance and is seen by investors as a signal that their capital is being carefully managed.Moreover, if cross-listing on a foreign market has called upon the need of adding more international knowledge, this does not necessary mean that the current members and their expertise are not valuable – it can simply imply more members on the board from other genders/nationalities. Therefore, it is possible that when companies list their stock on a foreign stock exchange market, to “signal” investors by increasing the size of their boards.

H1: Boards of European MNCs cross-listed on more financial markets, are larger

than boards of European MNCs listed on less financial markets.

Besides board size, diversity on boards is a component, which can be used to send a signal to potential foreign investors. Before discussing gender and nationality diversity and form hypotheses, it is worth to mention the paper of Ramizer (2000) – “Diversity and the boardroom”, where he states that diversity, in general, has a positive impact on the corporation’s bottom line as it improves its ability to interact with its increasingly diverse workforce and customers.

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trust among potential foreign investors as they may be considered “grey outsiders” – related to the controlling shareholders or the management. Therefore, the presence of outside directors per se may not provide effective independent monitoring over the management (Choi et. al, 2012). Unlike domestic outsiders, foreign outside directors are considered as “relatively independent

from majority shareholders since they are not part of the traditional domestic cronyism of regionalism, school relationships and kinship with majority shareholders (page 208)” (Choi et.

al, 2012).

The effective monitoring of the management, as discussed earlier, is central to attract investors’ capital. Moreover, it contributes to battering the company and enhances the balance between controlling shareholders and outside shareholders. Meanwhile, voluntary efforts by the company to enhance the expertise of the board makes necessary that recommendation committees to include foreign members on the board. Despite the fact that there are additional costs involved, the rationale behind foreign board membership is very highly likely to be based on expertise related to specific foreign market knowledge or foreign experience. In that line of reasoning, the paper by Oxelheim & Randoy (2003) argues that foreign board membership also signals stock markets the firm’s willingness to apply either advanced governance structure or expand its expertise of foreign outside directors. The authors investigated the effects of Anglo-American foreign membership and suggested that presence of such would result in more active boards. In that sense, foreign board membership is likely to affect independent monitoring to ensure expertise, improve corporate governance and therefore lead to value boost which is beneficial for potential investors (Shin et al., 2004; Kim, 2006). Based on those theoretical findings, we will investigate whether companies who cross-list undertake an increase in nationality diversity as a step to improve trustworthiness and appeal in the eyes of foreign investors.

H2: Boards of European MNCs cross-listed on more financial markets, have

higher nationality diversity than boards of European MNCs listed on less financial

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Besides the quality of the corporate governance and the protection of shareholder’s rights, profitability presents a key element in the decision making of investors when they choose a potential venture to invest their capital. A number of papers suggest that companies do need to adopt profitability perspective on the subject of diversity as there has been a proven link regarding the positive relation between firm performance and board diversity (Fahim, 2005; Nicholoson & Kiel, 2004). In the field of corporate governance an issue currently encountered by managers, shareholders, and directors is the cultural, gender, and racial composition of the board of directors. The issue of the board’s cultural composition has received much public attention with major institutional shareholders adopting investment policies to promote diversity. One example is TIAA-CREF (a major U.S. based pension fund) and their investment criterion of diversity. TIAA-CREF believes that diversity on the board of directors will equal less indebtedness to management (Carter et al., 2003). Moreover, the author associates the positive relationship between diversity and board independence to the fact that people with different cultural values, gender, and ethnicity can be assumed as the “ultimate outsider”. Women on boards are associated with their ability to provide strategic input and generate more productive discourse along with different perspectives which inevitably improves decision-making process and overall effectiveness. This is supported by Adams & Ferreira (2009) who discuss in their paper the pressures to increase the number of female board directors, which is consistent with the view that it could impro ve the governance of companies. This opinion can be backed up with the words of Sun Oil’s CEO Robert Campbell for The Wall Street Journal (August 12, 1996): “Often what a woman or minority person can bring to the board is some perspective a

company has not had before - adding some modern-day reality to the deliberation process. Those perspectives are of great value, and often missing from an all-white, male gathering. They can also be an inspiration to the company’s diverse workforce.”

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the authors. Fondas (2000) found that women board directors possess higher expectations of board performance. Huse & Solberg (2006) suggest that because of the lesser experience, women on boards prepare more for meetings and devote more time on evaluation, monitoring and development of potential areas for improvement. Support to that view is provided by the paper by Dunstan et al. (2004) where the researchers investigated the relationship between gender diversity and board effectiveness. Based on their sample, the authors concluded that it is positively related to the effectiveness of the board to operate as an active monitoring mechanism. In addition Robinson & Dechant (1997) reason that gender diversity on board provides a better insight of the marketplace, boosts creativity, provides a different perspectives and most importantly for the purpose of this paper – enhances the effectiveness of corporate leadership. Following the suggested relationship, this research will investigate whether companies who are presented on more financial markets have higher gender diversity.

H3: Boards of European MNCs cross-listed on more financial markets, have

higher gender diversity than boards of European MNCs listed on less financial

markets.

The above formulated hypotheses were created to guide the process of answering the main research question, stated in the beginning of the thesis proposal:

Does cross-listing on foreign stock exchange markets affects the

composition of board of directors?

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3. Methodology

In order to investigate the relationship of the chosen variables, this research takes into consideration a database of 342 large European companies in order to extract the ongoing trends in the development of the boards with solid statistical significance. The data set consists of the chosen variables of board memberships of large European multinational companies in the 2007/2008 fiscal year. The year of analysis has been chosen because it is the last year prior the financial crisis, when the majority of European companies delisted from key financial markets including the NYSE and NASDAQ. Choosing that time period would allow the paper to fully investigate into the research problem by looking into a significant number of cross-listed companies.

The dataset includes nearly 5500 directorship positions from 342 companies. It has been constructed based on the data used by Van Veen & Marsman (2008) and includes 15 EU members Austria, Belgium, Denmark, Germany, Finland, France, Greece, Ireland, Italy, Luxembourg, the Netherlands,

Portugal, Spain, Sweden and the UK. The other 10 members who have gained membership in 2004 and 2007 are characterized with more problematic data access (Afonso et al., 2006) which requires intense data collection, inconsistent with the scope and time limitations of this paper. Additional descriptive information about the sample size has been provided in Table 1 below.

The selected companies from each country are listed on the

respective main regional stock markets. In cases where the number of the companies has been

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too high, approximately the biggest 30 have been chosen. As stated by van Veen and Marsman (2008), the companies on the database can be characterized as stable and financially strong, with a relatively long corporate history. In terms of their market capitalization they have been considered as the most important in each respective country.

3.1 Data

The data has been constructed by using documents and records. The sources include annual reports, databases (Datastream and Orbis) and a number of websites (EODdata.com) – sources which have been created without the intervention of the researcher. Statistical analysis of the collected quantitative data has been conducted further on in the paper, in order to investigate whether there is a relationship between the number of cross-listings of a company and chosen relevant components of its board composition.

3.1.1 Independent variable: Number of cross-listings

The variable represents the number of foreign financial markets on which a company has its equity shares listed in. The following formula has been used when calculating the number of cross listings:

Where is number of cross-listings, T is total financial markets where the company is presented and is number of home markets. In terms of variables, the country of origin of a company has been classified as the place where the company is being headquartered which is almost always the location of the primary listing. Respectively, the cases of mergers or companies with roots in two countries (i.e. Unilever, Shell), the number of home markets has been adjusted accordingly.

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Looking at the data reveals an interesting discovery – despite being very international, more than half of the European companies are not cross-listed (58 %) on any foreign stock exchange market. Table 2 shows descriptive statistics in regards to the chosen independent variable and Table 3 reveals listing distribution of the sample size. The majority of cross-listings are still located within Europe with few exceptions. There are two hubs, however, that stand out significantly – the US and UK.

Table 2: Frequency of cross-listing

Frequency Percent Valid Percent

Cumulative Percent Valid .00 195 56.9 57.0 57.0 1.00 112 32.7 32.7 89.8 2.00 29 8.5 8.5 98.2 3.00 5 1.5 1.5 99.7 4.00 1 .3 .3 100.0 Total 342 100.0 100.0

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3.1.2. Dependent Variables

As stated in the hypothesis formulation section, for dependent variables we have selected genres ratio, foreigner ratio and board size – elements of the board composition. The ratio has been calculated respectively by dividing the number of women and foreigners to the total number of board members. This information has been gathered, verified and calculated manually in order to assure an utmost data quality.

The official annual reports from 2007/2008 have been used as a primary source of information. When necessary, additional information (gender and nationality of board members) has been gathered from other available Internet sources. That includes the official websites of the companies and additional databases such as Zoominfo (www.zoominfo.com) and Market Visual (www.marketvisual.com).

Tables 4 provides additional information about the final sample regarding the dependent variables and the data itself. The descriptive statistics present important features of the chosen dataset in regards to various board characteristics. Interesting to note is that the mean of foreigners’ ratio is significantly higher than female ration – 19% as opposed to 9 %.

Table 4: Descriptive Statistics (dependent variables)

N Minimum Maximum Mean Std. Deviation

femalerat 342 .00 .45 .0910 .08583

foreignrat 342 .00 .92 .1865 .18591

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3.1.3. Control variables

Varieties of capitalism (Liberal versus Central Market Economies)

There is a strand in academic research that investigates the varieties of capitalism and their relationship to corporate governance systems and managerial labour. Those differences affect how easily a foreign national can become a member of a board of a MNC. For example, German and French managerial careers are observed to be developed internally within a company (Stewart et al. 2004, Lane, 2003). Therefore, in some cases this can be rather interfering with the accessibility to board membership of foreigners, which would affect the variables subject of this paper. Another argument, which is also visible in our data, is the strong presence of local representation in some countries such as Germany due to the corporate culture in the country. German boards in the data are evidently larger because of the mandatory participation of local representatives on board. Those requirements affect the chances of foreigners being on the board of German companies and for that reason they are included our analyses as a control variable.

Table 5: LME versus CME country scores

1

The higher the score is, the more the country matches a Central Market Economy (Based on the paper by Hall and Gingerich)

2_{Greece and Luxemburg are not part of Hall’s and Gingerich’s study so they are assigned a mean score}

Country CME-LME score1

Austria 1.00 Belgium 0.74 Denmark 0.70 Finland 0.72 France 0.69 Germany 0.95

Greece 0.57 (mean score)2

Ireland 0.29

Italy 0.87

Luxembourg 0.57 (mean score)

Portugal 0.72

Spain 0.57

Sweden 0.69

The Netherlands 0.66

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Similarly to the research of Van Veen & Marsman (2008) this paper will adapt the “varieties of capitalism” approach based on the Liberal Market Economies and Coordinated Market Economies distinction made in the paper of Hall & Soskice (2001) and Hall & Gingerich (2004). The abovementioned papers suggest the fact that in LMEs it is easier for foreigners to have an access to board membership. Van Veen & Elbertsen (2008) also investigate the relationship between nationality diversity and governance regimes of the countries of origin. This fact will be taken into consideration when investigating the hypotheses in order to improve the quality of the findings of this paper. The analysis will use this distinction as a control variable. Based on the paper of Hall & Gingerich, the following values in Table 5 have been assigned to the different countries:

Control variable: company size

In their paper Tihaniy et al. (2004) argue that the size of the company has an indirect effect on board diversity due to their widespread activities across more nations. This leads to a higher international pool of foreign candidates within the workforce of the company which increases the chances of having foreign nationals on the board, especially in the executive boards (when a

company uses the two-tier system). The increased pool of candidates can also lead to increased

gender diversity on board. That is why, in order to fully grasp the relationship we investigate in this paper, the company size will be taken into account as a control variable in our statistical analysis. The company size variable is operationalized with the total number of employees and operating revenue of the corresponding company.

Control variable: board size

Regardless of the fact that board size is also subject of the investigation of this paper (hypothesis 2), it will be also used as a control variable when investigating the other two hypotheses. The larger the board is, the higher the chances are to have increased diversity (both national and

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4. Correlation Analysis

Before running a multiple regression analysis and investigating the direction of the influence of the number of cross-listing, the correlation matrix of the variables is being examined (Table 6). The correlation analysis shows that there is a significant correlation between the number of cross-listings and the ratio of foreign members and board size.

The first hypothesis investigates the link between number of cross-listings and the board size of European international companies. The data in the correlation table (Table 6) reveals a significant and acceptable correlation between the variables (p-value 0.008), although not very strong (r-value of 0.143).

In regards to the second hypothesis, which is related to number of cross-listings and foreigner diversity, the r-value is 0,569 (+), the p-value 0.00 is ≤ 0.05 and the correlation is significant at the 0.01 level. The correlation is not only significant, but the r-value shows a strong relationship between the two variables.

Finally, in our last theoretical section, the last hypothesis connects the number of cross-listings to the level of gender diversity on executive boards. According to the data in the correlation table (Table 6), there is no significant relationship (r-value = 0.029, p = 0.594).

Table 6: Correlations

crosslisting femalerat foreignrat boardsize

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5. Multivariate Test of the Propositions

After examining the correlation matrix and analyzing whether the propositions can be supported or not, the paper continues with a multiple regression analysis. We constructed 2 models in order to control for the chosen variables. Model 1 includes the control variables which affect board composition (as independent) and in Model 2 we include the independent variable which we investigated – the number of cross-listing and compare the results for each hypothesis. Afterward the results of the two models are then compared in order to draw conclusions on the effects of the number of cross-listings.

5.1 Cross-listing and board size

The second proposition which was supported in our correlation analysis (Table 6) was the relationship between board size (which in this case has been removed as a control variable) and number of cross-listings. Similarly to the previous regression analysis, 2 models are being constructed and the results with and without cross-listings as independent variable are being benchmarked.

In this case, the parameters of the company characteristics (number of employees and

revenues) are affected by the introduction of cross-listing variable and are slightly reduced in

their strength. In spite of this, their values are still statistically significant. On the other hand, the CME-LME increases slightly in importance from 0.361 to 0.399.

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Table 7: Regression analyses with board size as a dependent variable

Model 1 Model 2 beta p beta p (constant) 0.00 0.00 CME_LME 0.361 0.00 0.399 0.00 Numberemp 0.141 0.018 0.122 0.04 Revenue 0.216 0.00 0.182 0.02 Cross-listing 0.158 0.002 Adj. R-square 0.218 0.248 F-value 32.769 27.581 Df 3 4 p-value 0.00 0.00 N 342 342

5.2 Cross-listing and nationality diversity

In Table 8, we present the results of the 2 constructed models. In model 1 we analyze the relationship between the selected control variables and the dependent variable, in this case –the foreign ratio in boards. In the case of Model 1, the adjusted R-square has a p-value of 0.00 which makes it significant, but with an low value of 0.063. If we look at the characteristics of the chosen control variables, it turns out that the only significantly relevant one is the varieties of capitalism variable. The other ones are irrelevant for the explanation of the gender diversity in our sample size. Afterwards, we constructed a Model 2, which incorporates the independent variable which we investigated – the number of cross-listings. We can see in the table, that the changes in the estimated parameters are significant. The explained variance (Adj. R-square) increases more than 5 times - from the 0.063 value to the value of 0.326. In addition, the parameters of the variables in the first model are affected positively with the introduction of the cross-listing variable. Most significantly – the beta of varieties of capitalism.

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to have a strong effect over the nationality diversity on the board of directors of international European companies. Based on the results below, it seems that number of cross-listings have stronger effects over board composition than other company characteristics (number of

employees and revenue). At the same time, the number of cross-listings is consistent with the

varieties of capitalism variables we’ve chosen. Adding the cross-listings adds a substantial increase in the explanatory power of the model.

Table 8: Regression analyses with foreign ratio as a dependent variable

Model 1 Model 2 beta p beta p (constant) 0.00 0.00 CME_LME -0.259 0.00 -0.91 0.00 Numberemp 0.53 0.418 -0.01 0.983 Revenue 0.56 0.401 -0.42 0.677 Boardsize 0.76 0.203 -0.22 0.532 Cross-listing 0.562 0.00 Adj. R-square 0.063 0.326 F-value 6.73 33.930 Df 4 5 p-value 0.00 0.00 N 342 342

5.3 Cross-listing and gender diversity

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Table 9: Regression analyses with board size as a dependent variable

Model 1 Model 2 beta p beta p (constant) 0.00 0.00 CME_LME -0.22 0.00 -0.23 0.00 Numberemp -0.05 0.935 -0.02 0.97 Revenue -0.098 0.14 -0.0952 0.175 board size 0.231 0.00 0.237 0.00 Cross-listing -0.035 0.542 Adj. R-square 0.051 0.050 F-value 5.563 4.516 Df 4 5 p-value 0.00 0.001 N 342 342

6. Conclusion and discussion

The purpose of the study was to examine the relationship between the number of cross-listings and various components of the board of directors while controlling for various company and country variables. Despite the strand in the literature that deals with board diversity, empirical research related to its connection to cross-listing has been significantly limited. The paper analyses empirically a sample of 342 companies from 15 developed countries, members of the European Union.

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of the boards of directors and its prominence as a representative feature of an international company.

There are a number of observations in the research that deserve further attention. For example, our data revealed that nationality diversity is nearly two times higher than gender diversity among European boards. However, that is not a complete explanation to why gender diversity is not being influenced by the number of cross-listing. It seems worthwhile to further research, quantitative or qualitative, the reasons for that. It would be intriguing to look whether this pattern applies for companies outside of the European Union. An article, which is doing a small-scale comparison, is the work of Knudsen (2001), where the author shows that the US companies set clear goals for gender diversity, while Danish welfare state is inadequate when it comes to promoting female managers in the private sector. That might be an explanation for the lack of correlation between number of cross-listings and gender diversity is the nature of the sample size. That is why it would be intriguing to conduct a research using sample sizes with companies from different geographical regions.

A possible direction of this research is also to compare companies from both developed and developing countries and to investigate whether the effects of cross-listings are stronger for MNCs from economies, where corporate governance mechanisms are not yet fully developed.

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Before concluding, it is important to note the endogeneity problem brought by the timing issue. A more in-depth research would require longitudinal study which analyzes change of boards throughout time and takes into consideration cross-listing data as well.

In essence the paper answers the question do some board dynamics change as result of cross-listing activities. I believe the findings of the research can serve as a hint for a possible new direction for researches in the area of TMTs development and dynamics. The research is important for anyone interesting in investigating the complex dynamics of boards of international companies and possible causalities.

In conclusion, the research recognizes various country and company variables, affecting the board of directors and investigates in depth further explanation for the change of the composition of one of the key corporate governance elements. Despite the fact that results do not fully support all suggested hypotheses, they do demonstrate the existence of a relationship, which has not been thoroughly researched before – the influence of number of cross-listings over board composition. The findings can complement other researches related to executive board diversity (van Veen & Marsman, 2008) by give an additional explanation for nationality diversity or can set path for further investigation where companies from different backgrounds are being compared (US and European or developing and developed countries). The research is a step in an important direction towards fully understanding not only board composition, but significance of corporate governance and dynamics of the top managerial workforce in a world, where globalization is constantly pushing the boundaries of business.

7. Acknowledgement

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Do cross-listings on foreign stock exchange markets affect the composition of boards of directors? The case of European MNCs.

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