Foreign Independent board members across
corporate boards of listed firms
Empirical evidence from firms located in BRIC countries
University of Groningen, located in the Netherlands Faculty of Economics and Business
IB&M
Abstract
This Master Thesis examines the relationship between Foreign Independent Directors and firm performance, using a sample of 801 listed firms from the manufacturing industry located in one of the BRIC countries, and using Return on Assets and Return on Equity as the variables for firm performance. The Main Research Question for this Master Thesis is: “To
what extend have listed firms that are located in BRIC countries, integrated Foreign Independent Directors on their Board of Directors and does the presence of these board members increase firm performance?”
Existing literature have only focused on developed economies, whereas, this Master Thesis investigates the above relation for the context of Emerging Economies (EEs). This Master Thesis argues that the presence of FIDs indeed increases a firm’s performance that is located in a BRIC country. The empirical data indicate that BOD roughly consists of 40% independent directors on average, which is above the level that is mandated by different laws. However, only 111 firms in the sample have FIDs in their BOD. In addition, only 3% of the board members in the entire sample were FIDs. The empirical evidence failed to find a significant positive relation between FIDs and firm performance. This could be explained by the phenomenon that FIDs are relatively new in the context of EEs, and that these types of board members still need more time to significantly prove their potential value in relation to firm performance. Nevertheless, this Master Thesis did find a positive and significant relation between firms having foreign subsidiaries and the percentage of FIDs in a firm, which implies that firms with higher international involvement are more likely to have FIDs in their BOD. Overall, the results in this Master Thesis imply that listed firms (located in one of the BRIC countries) were not able to use FIDs and foreign involvement (in terms of foreign listing and foreign subsidiaries) to increase a firm’s performance.
Keywords: Board of Directors, corporate governance, firm performance, Foreign
Independent Directors, Emerging economies
Acknowledgment: The author of this Master Thesis would like to thank drs. ing. H. L. Faber
List of Abbreviations
BOD Board of Directors
BOS Board of Supervisors (SB)
BRIC Brazil, Russia, India and China
BSE Bombay Stock Exchange
BvD Bureau van Dijk
CEO Chief Executive Officer (MD)
CFO Chief Financial Officer
CIO Chief Information Office
COO Chief Operating Officer
CSRC China Securities Regulatory Commission
EEs Emerging Economies
FDI Foreign Direct Investment
FIDs Foreign Independent Directors
IBGC Brazilian Corporate Governance Institute (Instituto Braseleiro de Governanca Coporative)
MD Managing Director (CEO)
MNCs Multinational Corporations
MRQ Main Research Question
MT Management Team (SM)
OECD Organisation for Economic Cooperation and Development
RBV Resource-Based view
ROA Return on Assets
ROE Return on Equity
ROI Return on Investment
SAIC State Administration For Industry & Commerce
SB Supervisory Board (BOS)
SEBI Securities and Exchange Board of India
SM Senior Management (MT)
SOEs State-Owned Enterprises
List of Definitions
Audit committee An operating committee of the BOD with the task to review, report and disclose financials of a firm.
Board capital The resources available to the Board of Directors (e.g. knowledge, experience, expertise, network ties, etc.).
Board independence The percentage of independent directors in a Board of Directors.
Board members The board members (directors) in the BOD of a firm, who are referred to as executive- or non-executive directors.
Board of Directors (BOD)
A group with elected or appointed members who jointly oversee the activities of a firm, consisting of both executive and non-executive directors (one-tier governance structure).
By laws The rules and regulations within an organisation.
CEO duality Generally known as when the CEO holds both the position of chairman in a BOD as the managing director position in a firm
Chairman Highest officer of an organised group, such as a Board of Directors. The chairman presides over meetings and assures that these
meetings are conducted in a well-structured manner.
Corporate governance The framework of rules, relationships, systems and processes
within and by which authority is exercised and controlled in firms.
Emerging Economies A country with a rapid pace of economic development, and government policies favouring economic liberalisation and the adoption of a free-market system.
Executive directors Member in the BOD who is also employed by the firm as manager or executive, such as CEO, CFO, COO, Vice President, etc.
Foreign involvement In the context of this Master Thesis this term has two points. First, foreign involvement in terms of the degree of foreign listing, that is whether or not the firm is listed on a foreign stock exchange.
Second, foreign listing in terms of having foreign subsidiaries. Foreign Independent
Directors (FIDs)
Independent director Non-executive director who is a board member in the BOD, who
has no other ties with the firm other than being a board member in the BOD of the firm.
“Independency” factor
Whether or not the person or organised group is independent.
Information asymmetry
One firm or person has more or better information than the other firm or person in question.
Inside director Non-independent director who is a board member in the BOD and is also employed as a manager or executive of the firm (see executive director).
Insiders Non-independent employees/directors who are employed at the firm and run the day-to-day operations.
International board Board of Directors ≥ 1 Foreign Independent Directors
Intangible resources Resources that are nonphysical, which you cannot touch and relatively more difficult to obtain (e.g. knowledge, experience, etc.).
Internationalisation decisions
The decisions that determine the degree foreign involvement.
Listed firms The firm in question has stock/shares and is listed on a stock exchange, where the firm’s stock/shares can be traded or bought.
Management Team (MT)
A team of executives (CEO, CFO, COO, etc.) who have the day-to-day responsibilities of managing a firm (see Senior Management).
Non-executive director
Board member in the BOD who is not otherwise employed by the firm.
Non-independent director
Board member who has a direct conflict of interest (e.g. determining executive pay), and is engaged with the firm other than being employed in the BOD of the firm.
One-tier governance structure
Outside directors Non-executive director who is non-independent and is engaged with the firm other than being employed in the BOD of the firm (e.g. via personal or professional relationship with the firm, through family or business ties, such as representing a shareholder).
Ownership concentration
In this Master Thesis entails that a person or firm holds more than 50% of the shares of the firm in question.
Peer reviewed The evaluation of the produced work by one or multiple individuals that are qualified members in the field of the produced work.
Principal-agent problem
When manager or executives who run the day-to-day operations in a firm maximise their own interests rather than fulfilling the owner’s interests upmost.
Principal-principal problem
When majority shareholders expropriate minority shareholders.
Return on Assets (ROA)
An indicator to determine how profitable a firm is relative to its total assets.
Return on Equity (ROE)
A measurement to determine a firms profitability, by showing the degree of profit that is generated with shareholders invested money.
Senior Management (SM)
A team of executives (CEO, CFO, COO, etc.) who have the day-to-day responsibilities of managing a firm (see Management Team).
Supervisory Board (SB)
Similar to the tasks of a Board of Directors but the composition of a Supervisory Board only consists of non-independent directors (two-tier governance structure).
Tangible resources Resources that are physical, which you can touch (e.g. land, equipment, machinery, etc.).
Tobin’s Q The ratio of the market value of assets to their book value.
Two-tier governance structure
This governance structure comprises of two boards, respectively the Board of Directors and the Supervisory Board. In this case, the BOD has control over the day-to-day operations, and the SB has the monitoring role (SB can be seen as the BOD in a one-tier structure).
List of Tables
Table 1 Corporate Scandal (American firms) Page 10
Table 2 Characteristics of Board of Directors and Management Team Page 17
Table 3 Roles of the Board of Directors Page 17
Table 4 Summarised distinction between board members (directors) Page 18
Table 5 Board composition Page 19
Table 6 Summary of events – Brazil Page 23
Table 7 Summary of events – Russia Page 25
Table 8 Summary of events – India Page 27
Table 9 Summary of events – China Page 30
Table 10 The Principal-agent problem and Principal-principal problem Page 32
Table 11 Causes why FDIs can be less effective monitors Page 33
Table 12 The Resource Dependence theory Page 35
Table 13 Explanation of two topics Page 36
Table 14 Descriptive statistics 1 Page 53
Table 15 Descriptive statistics 2 Page 54
Table 16 Correlation matrix of the variables Page 56
Table 17a Linear regression analysis FIDs country of residence (ROA) Page 57
Table 17b Linear regression analysis FIDs country of residence (ROE) Page 57
Table 18a Linear regression analysis Foreign listing (ROA) Page 58
Table 18b Linear regression analysis Foreign listing (ROE) Page 58
Table 19a Linear regression analysis Foreign subsidiary (ROA) Page 59
Table 19b Linear regression analysis Foreign subsidiary (ROE) Page 60
Table 20 Linear regression analysis on % FIDs Page 60
List of Figures
Figure 1 Average amount of board meetings per year Page 12
Figure 2 Conceptual model 1 Page 43
Figure 3 Conceptual model 2 Page 44
Figure 4 Research framework Page 46
Abstract ... 2 List of Abbreviations ... 3 List of Definitions ... 4 List of Tables ... 7 List of Figures ... 7 1. Introduction ... 10 2. Literature review ... 16
2.1 Board of directors (BOD) ... 16
2.2 Foreign Independent Directors (FIDs) and Gap Analysis ... 19
2.2.1 Foreign Independent Directors ... 19
2.2.2 Gap Analysis ... 20
2.3 Corporate governance in the four BRIC countries ... 21
2.3.1 Brazil ... 21
2.3.2 Russia ... 23
2.3.3 India ... 25
2.3.4 China ... 28
2.4 Two theoretical perspectives ... 30
2.4.1 Agency theory ... 30
2.4.2 Resource Dependence theory ... 33
3 Hypotheses ... 36
3.1 Hypotheses development ... 36
3.1.1 Main Research Question and Hypotheses ... 37
3.1.2 Foreign Independent Directors and firm performance ... 38
3.1.3 International involvement of a firm ... 40
3.1.4 Ownership concentration of listed firms ... 41
4 Methodology ... 45
4.1 Research Framework ... 45
4.2 Sample and data collection ... 46
4.3 Measures and variables ... 47
4.3.1 Dependent variable ... 47
4.3.2 Independent variable ... 48
4.3.3 Moderating variable ... 48
4.3.4 Control variables ... 49
4.4 Data analysis ... 50
4.5 Reliability and Validity ... 50
4.5.1 Data ... 50
4.5.2 Applied literature ... 51
4.5.3 The researcher’s input ... 52
5 Data and results ... 53
5.1 Descriptive statistics ... 53
5.2 Correlation matrix ... 55
5.3 Linear regressions ... 57
6 Discussion and conclusion ... 61
6.1 Discussion and conclusion ... 61
6.2 Implications ... 63
6.3 Limitations and recommendations for future research ... 64
7 References ... 66
Appendices ... 73
Appendix I: Structure of BOD and MT ... 74
Appendix II: Agency theory ... 75
Appendix III: Ways to reduce agency costs ... 77
Appendix IV: Firm performance measurements ... 78
1.
Introduction
The research field of corporate governance has been a widely researched topic and today it still deserves a significant amount of attention due to the corporate scandals during the beginning of the 21st century, and more recently the financial crisis, which started in October 2008 (Economist, 2013; The Guardian, 2011). According to Essen, Engelen, and Carney (2013) corporate governance and in more detail the role of the Board of Directors (BOD) can both significantly influence the performance of firms. The BOD of a firm has an overarching role and controls to a great extend what happens in a firm (ASX Corporate Governance Council, 2007). Therefore, it is not surprisingly that the BOD is in the centre of attention. For example, the board members of American companies Enron, WorldCom and Freddie Mac were held accountable for fraud, consequently the directors of these firms had to pay a substantial amount of money (Adams, Hermalin, and Weisbach, 2010). Table 1 provides more information about these scandals.
Table 1
Corporate scandals (American firms)
The companies The outcome The scandals
Enron (2001) - Energy sector
- Shareholders lost $74 billion - Many jobs were lost
- Thousands of employees and investors lost their retirement accounts
Keeping huge debts of the balance sheet.
Worldcom (2002) - Telecommunications sector
- Inflated assets by $11 billion - 30,000 jobs were lost
- $180 billion in losses for investors
Underreported line costs by capitalising rather than expensing, and inflated
revenues with fake
accounting entries. Freddie Mac (2003)
- Mortgage sector
- Five billion dollars in earnings were misstated.
Intentionally misstated
and understated earnings. (Source: Adams et al., 2010; Account-Degree)
Corporate governance refers to “the framework of rules, relationships, systems and
Shleifer, and Vishny (1997), corporate governance is an overarching system that balances the interests of the stake- and shareholders of a firm and ensures that the management actions are in line with these interests in order to ensure that investors get a Return on their Investments (ROI). In large firms it is common to have a separation of management and ownership, and the OECD defines corporate governance as a tool to coordinate the roles between shareholders, BOD, managers and other stakeholders (Guo, Smallman, and Radford, 2013).
The members in a BOD are referred to as executive- or non-executive directors (not to be confused with the CEO function), generally consist of both inside directors, as outside
directors, with functions such as Chairman of the Board of Directors, secretary, and board
members (refers to directors in the BOD, see definition list). Inside directors are people who are a board member in the BOD and are employed as a manager or executive of the firm, referred to as executive directors. Outside directors are directors who are a member of the BOD but who are not otherwise employed by the firm, referred to as non-executive directors. Many articles refer to outside directors as independent directors (Adams et al., 2010; Hilman, and Dalziel, 2003; Petra, 2005). This Master Thesis defines outside directors as:
“Non-executive directors who are non-independent and are engaged with the firm other than being employed in the BOD of the firm”
Moreover, there are two board systems: (1) one-tier governance structure and (2)
two-tier governance structure. This Master Thesis focuses on the one-two-tier governance structure, in
which the BOD has the monitoring and advisory role of a firm. However, there is also a two-tier governance structure in which the Supervisory Board (SB) accounts for the monitoring and advisory role of a firm. The largest difference between a BOD and a SB is that the BOD consist of both executive- and executive directors, whereas, SB only consists of non-executive directors. Accordingly, these two roles are used in a similar manner in this Master Thesis and in this Master Thesis referred to as BOD.
Generally, a MT includes functions such as Chief Executive Officer (CEO), Chief Financial
Officer (CFO), and Chief Operating Officer (COO), etc.
Figure 1 illustrates that BOD generally only meet between 8 to 10 times on average (annually) (SpencerStuart, 2015). Moreover, the average amount of board meetings in Russia and India are respectively, 7.4 and 7.3 times annually (SpencerStuart, 2014; SpencerStuart, 2015). It appears that the amount of board meetings between developed- and Emerging Economies (EEs) is fairly the same. Emerging Economies can be defined as a country that satisfies the following criteria: “Economies with a rapid pace of economic development, and government policies favouring economic liberalisation and the adoption of a free-market system” (Hoskisson, Eden, Lau, and Wright, 2000:249). The BOD has many functions, such as appointing the CEO, securing shareholders’ interests, approving budgets, monitoring, advisory role, etc. (Adams et al., 2010; Essen et al., 2013; Masulis, Wang, and Xie, 2012).
Figure 1
Average amount of board meetings per year
(Source: SpencerStuart, 2015)
This Master Thesis focuses on the monitoring and advisory role. Both roles will be elaborated in more detail in chapter 2 Literature review. When these functions are well executed, both shareholder value and effective decision making by the BOD will increase (Masulis et al., 2012). Many existing studies have analysed BOD performance for example in terms of:
• CEO duality (Essen, Oosterhout, and Carney, 2012; Essen et al., 2013; Coles, McWilliams, and Sen, 2001; Rechner, and Dalton, 1991)
• Board independence (Essen et al., 2012; Essen et al., 2013; Waqar, Rashid, and Jadoon, 2014)
• Board size (Cheng, 2008; Waqar et al., 2014; Yermack, 1996)
CEO duality, board independence and board size can affect a firm’s performance. The degree to how a BOD of a firm performs may very well be influenced by other factors as well. This Master Thesis argues that the board composition and in more detail Foreign Independent Directors (FIDs) in a BOD is a factor that influences a firm’s performance, that is from the emerging BRIC (Brazil, Russia, India and China) countries. In this Master Thesis FIDs is defined as:
“Independent directors who are domiciled in a foreign country, other than the country of the firm at which the board member is employed”.
According to Shleifer, and Vishny (1997) the quality of monitoring and
decision-making by the BOD can influence the value of a firm. Barroso, Villegas, and Pérez-Calero
(2011) mention that members of a BOD with a foreign background can have a different line of approach to the collection, analysis, and interpretation of information; this can allow them to see opportunities around the globe that otherwise would have been neglected. Moreover, Zahra, Neubaum, and Naldi (2007) mention that FIDs are able to recognise these opportunities, and can become key players in supporting a firm’s internalisation process in order to exploit business opportunities. Furthermore, higher commitment to corporate monitoring and transparency can be acquired by the presence of FIDs in a firm (who are familiar with “good” governance practices), and it may signal to outsiders that the firm is willing to improve its governance practices (Oxelheim, and Randoy, 2003). Moreover, the presence of FIDs may result in a more independent BOD, which increases investor confidence, and eventually can lead to a higher firm performance (Oxelheim, and Randoy, 2003). Therefore, it appears that the presence of FIDs in the BOD can be beneficial for firms.
Existing research has shown that governance mechanisms applied to developed economies may be effective in those economies but less effective or even not applicable in the context of EEs (Rajagopalan, and Zhang, 2008; Yang, Chi, and Young, 2011). Consequently, due to institutional differences between developed- and EEs “good” governance mechanisms applied in developed economies may or cannot be applied to EEs. For instance, the article of Chen, Firth, Gao, and Rui (2006) shows that when “good” governance practises are in place in EEs, it typically should improve investor protection but instead minority shareholders were (and still are) expropriated.
According to Barroso et al. (2011) there is not much research on to what degree a BOD has the influence on a firms internationalisation decisions. On the other hand, studies from Anderson, Reeb, Upadhyay, and Zhao (2011); Johnson, Schnatterly, and Hill (2013); Oxelheim, Gregoric, Randoy, and Thomson (2013) have performed research on the composition of BOD and the presence of FIDs in BOD, however, the results of FIDs in BOD are ambiguous and remain debatable. Whereas, Oxelheim, and Randoy (2003) studied whether or not the presence of foreigners in the BOD influence firm performance; their empirical results were significant concerning that firms with outsider Anglo-American board member(s) that are located in Norway and Sweden have a higher firm performance.
As mentioned earlier, it appears that results of existing research on FIDs in firms are ambiguous and not without flaws. This Master Thesis will contribute by adding more empirical evidence to existing research. Furthermore, the presence of FIDs in a BOD can allow firms to explore and interpret (foreign) opportunities that lead to higher firm value or performance. Thus, it may be in the best interest for a firm to appoint FIDs in their boards. According to Oxelheim, and Randoy (2003) it can reduce a firms’ barrier to cross-border information flows.
improve its governance practices in order to acquire higher governance standards, which may also reduce a firms´ costs (Oxelheim, and Randoy, 2003).
Therefore, the following Main Research Question (MRQ) is formulated:
“To what extend have listed firms that are located in BRIC countries, incorporated Foreign Independent Directors in their Board of Directors and does firm performance increase when these board members are present?”
This Master Thesis is organised in the following order. In chapter 2 Literature
review, BOD and FIDs in the BRIC countries will be addressed. In addition, an extension of
the gap analysis is given. Chapter 2 ends with the elaboration of two theories, namely the Agency theory and the Resource Dependence theory. This extensive literature review has been performed, based on the foundation of the MRQ and subsequently grounded hypotheses can be developed and formulated. Therefore, chapter 3 Hypotheses addresses the MRQ and subsequently the formulation of the hypotheses. These two chapters have been placed before chapter 4 Methodology, because first in-depth knowledge is required and acquired via chapter 2 Literature review. Chapter 4 Methodology addresses the sample, the required variables, measurements, and regressions, and the reliability and validity. Chapter 2 and 3 are required in order to develop the fourth chapter because the creation of the sample is dependent on the formulated hypotheses. The other addressed points in the fourth chapter also depend for a great extent on the outcome of the second and third chapter. Next, chapter 5 Data and
results presents and analyses the acquired data from the performed regressions. Finally, the
findings are discussed and concluded in chapter 6 Discussion and conclusion. In addition, to the sixth and final chapter the implications, limitations, and suggestions for further research for this Master Thesis are given.
2.
Literature review
The previous chapter has already given a brief view about the focus of this Master Thesis. This chapter elaborates the different theories in more detail. First, the BOD and FIDs are elaborated. In addition, an extension of the gap analysis is given. Subsequently, the corporate governance mechanisms of the BRIC countries both past and present are presented. The last chapter elaborates two theoretical perspectives (Agency theory and Resource Dependence theory). The relevance and reason for these topics is twofold. First, knowledge about these topics is required in order to gain a base of understanding what this Master Thesis is about. Second, these topics provide in-depth knowledge, which is required in order to explain and assess the relation between FIDs and firm performance.
2.1 Board of directors (BOD)
As mentioned in the introduction the BOD has many functions. However, this Master Thesis focuses on the monitoring and advisory role of the BOD. These two functions have been chosen because they entail a significant amount of the BOD’ tasks. Moreover, Masulis et al. (2012) mention that two major functions of the BOD are the (1) monitoring role (e.g. ensure that managers act in the best interest of the shareholders), and the (2) advisory role (e.g. advise executives on important strategic decisions). The focus of the BOD is to ensure that the MT acts in the best interests of the shareholders. The MT runs and has control over the daily operation in an organisation. Table 2 shows a distinction between several (key) characteristics of a BOD and MT.
Table 2
Characteristics of Board of Directors and Management Team
Board of Directors Management Team
- Generally meet between 6 – 12 times annually.
- Makes decisions on behalf of the shareholders.
- Generally consist of both inside as outside (independent) directors.
- Elected by shareholders (with voting power).
- Monitors and gives advice to the Management Team.
- Control over day-to-day business.
- Generally, consists of CEO, CFO, COO, CIO, etc. (insiders).
- The CEO is appointed by the BOD (sometimes other executives of the MT as well).
- Usually higher level of responsibility in comparison to the BOD.
(Source: Annual reports, 2014)
Table 3
Roles of the Board of Directors
BOD roles Role descriptions
Control (Monitoring)
- Task to monitor managers to ensure that they act in the best interests of the shareholders.
- Hiring and firing the CEO and other top managers.
- Determine executive pay.
Service (Advisory)
- Advising the CEO and top managers on administrative and other managerial (strategic) issues.
- Actively initiating and formulating strategy. Provision of resources
(Advisory)
- Facilitators for the acquisition of resources that are critical to the firm’s success.
(Source: Johnson et al., 1996)
amount of directors), board composition (in terms of gender), CEO duality (see definition list), and board independence. Furthermore, the OECD principles which are used as a guidance tool by countries all around the world (Jesover, and Kirkpatrick, 2005), suggest that independent directors should have a significant presence in a BOD (OECD, 2007). The presence of FIDs in a firm’s BOD could create more transparency and the quality of governance practices could increase (Oxelheim, and Randoy, 2003).
Many authors have addressed the terms inside directors (Adams et al., 2010; Hillman, and Dalziel, 2003; Masulis et al., 2012), outside directors (Adam et al., 2010; Hillman, and Dalziel, 2003; Peng, 2004), independent directors (Hillman, and Dalziel, 2003; Masulis et al., 2012; Peng, 2004) and Foreign Independent Directors (Masulis et al., 2012) in their articles. Generally, the above terms are used in a similar manner by the authors or this Master Thesis has controlled for the differences between the terms used by the different authors. Table 4 makes a distinction between the characteristics of four different kind of board members.
Table 4
Summarised distinction between board members (directors)
Type of Directors Director characteristics
Inside directors - Directors who are also a full-time directors of the firm (e.g.
insiders who run the day-to-day operations).
- Non-independent directors because they may be charged with a direct conflict of interest (e.g. executive-level compensation, executive succession).
Outside directors - Non-executive directors in the board.
- Personal or professional relationship with the firm (e.g.
through family and/or business ties), therefore they may be less effective in fulfilling their role as a board member.
- Non-independent outside director.
Independent directors - Type of outside director (non-affiliated to the firm)
- Non-executive director of the board.
- No personal or professional relationship with the firm other than being employed in the BOD of the firm.
- Independent outside director. Foreign independent
directors (FIDs)
- The same four characteristics as an independent director. - In addition, FIDs are domiciled in a foreign country. (Source: Hillman, and Dalziel, 2003; Masulis et al., 2012; Peng, 2004)
2.2 Foreign Independent Directors (FIDs) and Gap Analysis
This section provides information about FIDs. Moreover, this section also provides an extension to the gap analysis that is given in the introduction.
2.2.1 Foreign Independent Directors
The phenomenon of globalisation is ongoing and becomes more important as more firms seek growth opportunities abroad (Manolova, Brush, Edelman, and Greene, 2002). Not surprisingly, the presence of FIDs among BOD of multinational corporations (MNCs) is more common today. A study performed by Gillies, and Dickinson (1999) investigated a great amount of large MNCs, and found that in 1993, 36% of these companies had at least one international board member. A follow-up to Gillies and Dickinson, in 2005 found that 75% of these firms had at least one non-national board member (Staples, 2007). Table 5 shows a short list of these well-known firms. Although, the presence of international board members has increased among firms, it does not necessarily mean that the presence of independent directors has risen as well. Moreover, there is limited empirical research on the effects of FIDs in BOD, especially in EEs context, thus this trend may very well be worth monitoring and examined in more detail.
Table 5 Board composition
Firm International board
member(s) (1993)
International board member(s) (2005)
ABN-Amro No Yes
Akzo Nobel No Yes
Chrysler No Yes
General Motors No Yes
Peugeot No Yes
Proctor & Gamble No Yes
Volkswagen No Yes
(Source: Gillies, and Dickinson, 1999; Staples, 2007)
board members in the BOD, who have no other ties with the firm other than being employed as a board member in the BOD of the firm, whereas non-independent directors are inside directors or non-independent outside directors. A non-independent director can be defined as a board member who has a direct conflict of interest, and is engaged with the firm other than being employed in the BOD of the firm. As mentioned in the introduction, in this Master Thesis FIDs is defined as:
“Independent directors who are domiciled in a foreign country, other than the country of the firm at which the board member is employed”
2.2.2 Gap Analysis
It appears that, only several studies have investigated the effect of FIDs in BOD. Oxelheim, and Randoy (2003) have researched FIDs in the BOD of European firms and found evidence that FIDs indeed increase a firms’ market value. On the other hand, Masulis et al. (2012) performed their analysis on American firms and their results show in contrast to the results of Oxelheim and Randoy that FIDs have a negative effect on a firms’ performance. Finally, the study of Oxelheim et al. (2013) was performed on Norwegian and Swedish firms. They found that internationalised BOD is significantly positive related to the extent of firm internalisation. The above studies give a clear message that the results are very debatable due to the limited amount of existing research on this research field and the contradicting results among these studies.
Evidently, the inconsistency of the results in this research field show that this field needs more empirical research. This Master Thesis will extend the current line of research by focusing on EEs instead of developed ones. Moreover, in 2010 the UNITAD stated that the geographical composition of Foreign Direct Investment (FDI) had changed significantly. For the first time EEs represented for more than half of the world’s FDI (UNCTAD, 2012). This underscores the global importance of EEs today.
well, using the Agency theory and Resource Dependence theory. It is meaningful to assess a BOD via multiple theoretical perspectives, because the advantages of FIDs may very well be explained by more than one theory, because a BOD has a wide range of attributes besides the “independency” factor (Barroso et al., 2011). The monitoring- and advisory role are at the centre of attention within the Agency- and Resource Dependence theory, and for this reason this Master Thesis has chosen both Peng’s (2004) and Ruigrok et al. (2007) line of reasoning for this research on FIDs.
2.3 Corporate governance in the four BRIC countries
This section addresses the corporate governance mechanisms within the BRIC countries over time. In addition, the role of and presence of BOD is elaborated per country. Furthermore, after each paragraph a short summary of events per country is displayed by means of tables 6 to 9.
2.3.1 Brazil
Since the 1950s one of the key assets of the development of the Brazilian economy has been the focus on increasing the industrial capacity for their domestic market. However, in the
1970s and 1990s two very important developments occurred which drastically changed the
governance on hand in Brazil. Due to an oil crisis in 1970 Brazil needed to adopt different policies (e.g. energy and export) and were forced to open their borders, in order to increase exports. In 1990 the revolution took place, in which the Brazilian government started to break down import barriers, by either trade tariff reductions or the entire removal of tariffs. In addition, an economic stabilisation program took place, which changed the role of the Brazilian state and opened the opportunity for an enormous privatisation program (Brainard, and Martinez-Diaz, 2009).
state-owned Brazilian firms were privatised it should be noted that the Brazilian state still has a strong foothold in many firms (Rabelo, and Vasconcelos, 2002; Brainard, and Martinez-Diaz, 2009). Until the early 2000s, the corporate governance practices in Brazil were still considered relatively weak e.g. expropriation of minority shareholders by controlling shareholders was not uncommon (Black, Carvalho, and Sampiao, 2014). Today Brazil is one of the largest economies (CNNMoney, 2015).
Board of Directors in Brazil. Since the establishment of the Brazilian Corporate Governance
Institute (IBGC) in 1995, the role of BOD has improved (IBGC, 2015). Since then the presence of independent board members has become more present. The need to adhere to good governance mechanisms became more and more important for shareholders (Brainard, and Martinez-Diaz, 2009). As a result, in order to meet this need for good governance mechanisms, the IBGC created the Code of Best Practices in Corporate Governance in 1999, which for instance contains rules that describe how BOD should behave and act (IBGC, 2015). Since 1976, Brazilian listed firms were obliged to have a BOD (Leal, and Oliveira, 2002). In addition, a study performed by Stuart (1999) showed that the average board size of Brazilian firms is 6.8 board members.
Table 6
Summary of events - Brazil
Period
Events
Since 1950s - Focus on increasing the industrial capacity for their domestic market.
1970s - Adoption of new policies (e.g. more export, gaining higher levels of energy self-sufficiency).
- Borders were opened for increased exports (forced).
1990s - Trade tariffs were reduced or removed (encouragement of trade). - Start economic stabilisation program.
- Privatisation of state-owned enterprises started. - The presence of foreign investors started (to increase).
Board of Directors
1976 - The presence of a BOD became obligatory.
- Listed firms should contain a minimum of three board members by law.
Since 1995 - Code of conduct for the improvement of BOD actions. - Presence of independent directors increased.
- Rules that describe how BOD should behave and act.
- Corporate law mandates that 66% of the BOD is independent. - The government still has/had a strong foothold.
(Based on literature analysis)
2.3.2 Russia
firms. Mainly, due to this reason the Soviet Union had only very few small and medium enterprises (Cooper, 2013).
After 1991 the transformation started, the Russian economy started to reform in the sense that market forces determined prices and market-oriented institutions were established (Robinson, 1999). However, evidence suggests that the state ownership has increased instead of decreased e.g. back in 2007 at least 49% of the organisations in the defence industry in Russia were fully state-owned. (Cooper, 2013). The Russian state evidently still has great stake and power in a great amount of affairs, therefore it remains questionable to what extend the Russian economy is truly independent. It seems that due to institutional differences between Russia and the Western world it is more difficult to reform and apply western practices (Robinson, 1999).
Board of Directors in Russia. According to a study of Russian firms the corporate
governance practices on hand were strongly related to a firm’s market value potential (McCarthy, and Puffer, 2002). Black (2001) concluded that corporate governance practices have an enormous effect on the market value of countries with a weak legal and cultural constraint on corporate behaviour. Back in the days, the BOD of most Russian firms were particularly characterised by inside boards, which can be seen as BOD that are almost fully composed of members of the management (Iwasaki, 2008). It should be noted that companies are more and more adopting western corporate governance practices. Moreover, the pressure of shareholder groups are prompting firms to attract and add outside (independent) board members to their BOD of the firm (Iwasaki, 2008). Typically, the new code of Russian firms recommends having two separate individuals for the CEO and chairman of the BOD position (McCarthy, and Puffer, 2002). Moreover, Russian firms tend to adopt a two-tiered board, where the SB with non-executive directors has a leading role in monitoring the MT. The Russian law restricts the level of executive board members on the BOD to a maximum of 25% of the total amount of directors.
Table 7
Summary of events - Russia
Period
Events
Before 1990s - Many firms were significantly owned by the state (e.g. oil companies, production companies in general, etc.).
- Companies did everything by themselves (no outsourcing)
Since 1990s - Dissolution of the Soviet Union.
- Prices were determined by market forces - Marked oriented institutions were established
Board of Directors
Before 1990s - Firms particularly have inside non-independent board members
Since 1990s - Western governance practices are more adopted. - Firms tend to be characterised with a two-tiered board.
- Maximum of 25% of executive directors in the BOD (by Russian law).
(Based on literature review)
2.3.3 India
currency the Rupee became more accessible for the conversion of current account transactions. Another major change was that India created more institutions and stock exchanges. Until 1992 there was only one major stock exchange, the Bombay StockExchange (BSE), which was often not favourable for external market users (Chakrabarti et al., 2008), and characterised by for example:
• High entry costs
• High intermediation costs • Administrative inefficiencies • Manipulative practices
However, one of the most notable developments has been the establishment of the Securities and Exchange Board of India (SEBI). SEBI has initiated the proposition of governance laws, reforms and review of governance challenges (Goswami, 2002; Chakrabatri et al., 2008; Rajagopalan, and Zhang, 2008). Moreover, SEBI created a transparent market for takeovers and ensured that in any takeover minority shareholders have the right to obtain a market-driven price, which have been proven in practice (Goswami, 2002). Since the introduction of SEBI the environment faced improved fairness, transparency and efficient regulation, which has been and still is beneficial for the Indian stock exchange market (Chakrabarti et al., 2008). It appears that institutions and regulations in India are improved; however, the enforcement of corporate laws remains questionable (Chakrabarti et al., 2008). The World Bank noted that India has one of the worst and inefficient juridical systems in terms of resolving disputes. Nevertheless, today India is one of the largest economies (CNNMoney, 2015).
Board of Directors in India. In recent years the Anglo-American model of corporate
governance has been adopted more and more by the Indian economy. Reed (2002) mentions three reasons why India is moving more towards the Anglo-American governance structure:
• More corporate growth (profit) will be created • The increase of opportunities (e.g. employment)
India used to be characterised by a lack of independent directors in the BOD. However, in 1992 SEBI developed the corporate governance mechanisms by establishing regulations, creating more transparency and improved the investor protection in India (Chakrabarti et al., 2008). Furthermore, in the early 1990s SEBI created Clause 49, which is seen as a significant milestone in the evolution of the Indian corporate governance. Clause 49 obliged that the BOD of firms should be composed of at least 50% of non-executive members (Chakrabarti et al., 2008; Rajagopalan, and Zhang, 2008). In addition, it defines that when the chairman of the BOD is an executive director the BOD should consist of at least 50% independent directors, and if the chairman of the BOD is a non-executive director the BOD should consist of at least 33% independent directors. According to the regulations of Clause 49, an audit committee should be in place in order to monitor. The audit committee is an operating committee of the BOD with the task to review, report and disclose financials of a firm (Chakrabarti et al., 2008). The prerequisites of the audit committee are that the committee should at least consist of an independent chairman with excellent financial skills and three independent directors, and per annum at least three meetings must be conducted (Chakrabarti et al., 2008; Rajagopalan, and Zhang, 2008).
Table 8
Summary of events - India
Period
Events
Before 1990s - State was the main provider for long-term credits to firms. - State had a great amount of shares in the companies they lent to. - Governance practices in place were not reliable.
Since 1990s - Economic liberalisation started. - Import, export tariffs were reduced.
- The Indian currency the Rupee became more accessible for conversion.
- Creation of more institutions and stock exchanges.
Board of Directors
Before 1990s - Lack of independent directors on BOD.
Since 1990s - More transparent and improved investor protection.
2.3.4 China
China started to reform in the late 1970s, which has significantly contributed to the economic growth on hand. After the late 1970s China “opened-up” which allowed the Chinese economy to move from a centrally planned towards a more market-based economy e.g. China’s change in ownership structure. However, before the late 1970s, many enterprises were characterised as SOEs and the regulation and development of these enterprises were in the hands of the government, which resulted in inefficient performances e.g. managers could not fully exploit their skills and capabilities (Guo et al., 2013). One result of the economic reforms that took place is that SOEs became more independent and the tasks of the government and management were separated (Guo et al., 2013).
In the early 1990s, the Chinese state opened the stock exchange in which they allowed SOEs to issues shares to individual investors, which can be referred to as joint-stock companies (Bai, Lie, Lu, Song, and Zhang, 2004; Guo et al., 2013). The corporate law was established in which enterprises were obliged to set up BOD and hold annual shareholder meetings, because before the privatisation, BOD were not present in Chinese SOEs (Rajagopalan, and Zhang, 2008; Yang et al., 2011; Guo et al., 2013). From then on, China stock markets have grown significantly to become one of the largest ones in the world. Despite the fact that many firms became more independent and privatised, the state still remained to be the largest shareholder (Chen et al., 2006). On average, about 30% of the shares were owned by the Chinese government. Another 30% of the shares were owned by legal entities, which on their turn were often owned by the state. The remaining 40% of the shares of firms were owned by privatised individuals or privatised institutions (Chen et al., 2006).
in this case can be referred to as a principal conflict. Because a traditional principal-agency conflict is caused by the separation of interest between management and ownership, however, instead in this case it is created by the expropriation of minority shareholders by majority shareholders. Another remarkable twist in the Chinese governance mechanism is that even in cases where the Chinese government is minority shareholder in privatised SOEs, it still can exercise its control over these firms by appointing (top) managers (Rajagopalan, and Zhang, 2008). It may very well be that without the continuous interference of the state that Chinese firms could have adopted the western corporate governance mechanisms in a more rapid pace. Nevertheless, China is the second largest economy of the world (CNNMoney, 2015).
Board of Directors in China. Not until the early 1990s the presence of a SB (BOD) in listed
firms was introduction and required. In China the role of SB (BOD) is to monitor the MT and should consist of at least three independent members, from which the employees elect (at least) one member and the shareholders elect (at least) another member (e.g. members of the MT, managers, and financial officers cannot be part of the SB – as mentioned earlier SB should consist of only non-executive board members) (Yang et al., 2011). In addition, the China Securities Regulatory Commission (CSRC) also contributed to the corporate governance mechanisms in China, for example by placing corporate governance principles in place for
Chinese listed firms (Chen et al., 200 6). In general, the reform of the corporate
governance mechanisms in China was based on Western governance mechanism. Not until 2002, the Code of Corporate Governance for Chinese listed firms obliged that listed firms needed to appoint independent directors (Guo et al., 2013). Moreover, not only are independent directors now part of Chinese listed firms, the CSRC established a regulation that Chinese listed firms were obliged to have at least one-third of their BOD to consist of independent board members (Guo et al., 2013). However, both the CSRC regulations as the Company Law approve that a CEO duality could take place. Furthermore, the Chinese Corporate Law does not impose restrictions for the size of the boards, but suggested that a board typically would consist between 5–19 people (Guo et al., 2013).
al., 2013), and followed the Anglo-American governance structure because information regarding the business of the company is more tacit (Guo et al., 2013).
Table 9
Summary of events - China
Period
Events
Before late 1970s - Many enterprises were characterised as SOEs.
- The state had a significant amount of power in the regulation and development of the SOEs.
- BOD was absent.
Since late 1970s - SOEs became more independent and the tasks of the government and management were separated.
- Managers and BOD were given more autonomy, without interference from the state to run their business.
1990s - Establishment of the Corporate law, which mandated the presence of BOD.
Board of Directors
Since 1990s - Presence of BOD (SB) became compulsory
Since 2002 - Listed firms were obliged to have independent directors in their BOD.
- Characteristics of both the single-tier and two-tier governance structure.
(Based on literature review)
2.4 Two theoretical perspectives
This section addresses two theoretical perspectives: Agency theory and Resource Dependence theory from the FIDs perspective. As mentioned in paragraph 2.2.2 Gap analysis, there are many different theories. This Master Thesis focuses on these two theories because the monitoring role and advisory role fall within these two theories. In addition, it could very well be that there are other theories that could also explain the monitoring and advisory role, however, due to the issue of limited time only these two theories have been addressed.
2.4.1 Agency theory
means the daily decision making and running of the firm. The agency problem can be characterised as when executives or managers who run the day-to-day business of a firm are maximising their own interest rather than the interests of the owner(s). This can occur due to, information asymmetry, uncertainty and risk (Eisenhardt, 1989). As mentioned earlier, one of the main tasks of the BOD is to monitor a firm’s management on behalf of the owners in order to prevent managers from engaging in opportunistic behaviour at the expense of a firms profit (Eisenhardt, 1989). According to the literature, there are two ways to insure that manager’s act in the owners’ interest, thus reducing agency costs: (1) incentive alignment and (2) monitoring (McCarthy, 2014).
Managerial actions can be aligned via several incentives: cash bonuses, share plans,
stock options and temporary contracts (see appendix III, table I) (McCarthy, 2014). In
addition, monitoring is also required because the alignment of managerial actions via incentives may reduce agency problems, but shareholders in general still have less information than the executives of the firm (information asymmetry). There are several ways to reduce the information asymmetry via monitoring: internal monitoring, external
monitoring and competition based monitoring (see appendix III, table II) (McCarthy, 2014).
Nevertheless, a balance should be found when using incentives for the alignment of managerial actions. If incentives are too strong, managers may very well commit fraud by manipulating revenues and profit figures (e.g. Enron, Worldcom, and Freddie Mac), whereas, when they are too weak they will simply be ignored (see appendix II, figure III) (McCarthy,2014). Naturally, there should be a balance for monitoring as well, as too much monitoring may become too expensive and outweigh the marginal benefits of monitoring.
Table 10
The Principal-agent problem and Principal-principal problem
Type of conflict The cause of the conflict
Principal-agent problem
- The separation of interest between management and ownership. - Managers or executives who run the day-to-day operations in a
firm act in their own interests, rather than fulfilling the owners interests upmost.
Principal-principal problem
- Expropriation of minority shareholders by majority shareholders. - Majority shareholders have the power to redirect resources or
funds to projects for their benefits at the expense of minority shareholders.
(Source: Eisenhardt, 1989; Jensen, and Meckling, 1976; Lin, and Chuang, 2011)
The Agency theory suggests that the greater the presence of independent directors, the greater the probability for a better firm performance, because of their assumed independence (Jensen, and Meckling, 1976; Peng, 2004). Inside directors may be influenced by the CEO via personal, professional, and economic relationships, and for this reason tend to be less effective monitors of a firm’s management (Johnson et al., 1996). Extending their line of research, independent directors serve as better monitors, as they do not have a direct conflict of interest. According to Johnson et al. (1996) one factor contributing to good governance mechanisms is the presence of independent directors in a firm.
However, empirical research concerning the positive relationship between board independence and firm performance are ambiguous and remain debatable (Masulis et al. 2012; Peng, 2004, Oxelheim, and Randoy, 2003). Moreover, the role of FIDs as better monitors in comparison to inside directors can be questionable. One of the main reasons could be the geographical distance. Due to the geographical distance, there are several reasons why FDIs not necessarily have to be better monitors: (1) oversight costs, (2) attending board meetings
is more difficult, (3) greater information asymmetry. Table 11 gives an overview for
possible causes why FIDs may turn out to be less effective monitors.
Table 11
Causes why FDIs can be less effective monitors
Cause Effect
Geographical distance
- Attending on-sight visits and board meetings become more costly. - Attending board meetings becomes more difficult.
- Time-zone difference. Information
asymmetry
- Ability to closely monitor management may erode.
- Valuable soft information from the local environment becomes more difficult to gather, which erodes FIDs monitoring abilities. (Source: Masulis et al., 2012)
Therefore, it can be concluded that it is more difficult for FDIs to effectively and actively participate in a firm’s governance. As one of the foremost ways for FIDs to effectively monitor a firm’s course of events is to attend board meetings to stay informed. One may think that electronic tools, such as a videoconference may be an alternative to attend board meetings, however, valuable soft information may be inaccessible when being far away. Thus, the expected benefits of having FIDs in a BOD may be more of negative nature to a firm than a contributing one. Perhaps the next theoretical perspective is able to explain the advantages of having FIDs in a BOD in a better way.
2.4.2 Resource Dependence theory
The Resource Dependence theory views organisations as being dependent on their external environment and suggests that organisational effectiveness results not only from the firm’s ability to manage resources but more importantly from its capacity to secure potential and crucial resources from the environment” (Ruigrok et al., 2007:547). Here resources refer to:
1. Tangible resources (e.g. materials or financial capital, for example by attracting investors).
2. Intangible resources (e.g. knowledge and expertise of individuals or firms that are required but not in company hands).
According to the resource-based view (RBV) strategies of EEs have been enriched by the RBV (Barney et al., 2001). For instance, research on RBV has suggested that firms located in EEs should use foreign alliances to acquire advantages over their domestic competitors. According to Hillman, and Dalziel (2003) a firm can acquire board capital either via human capital (knowledge, experience etc.) or relational capital (network ties). Furthermore, complementing the study of Johnson et al. (1996) the study of Hillman, and Dalziel (2003) imply that board capital positively influences the control, service, and provision of resources (see table 3).
from developed economies may be beneficial for emerging economy firms. Table 12 gives a short overview about the Resource Dependence theory.
Table 12
The Resource Dependence theory
Description Outcomes
Resource
Dependence theory
- The organisation is dependent on their external environment, and organisational effectiveness does not only rely on the ability of a firm to manage resources but secure crucial resources from the environment (see above).
- The board members in the BOD are regarded as individuals who extract and secure important resources (knowledge, networks, contacts, etc.).
Possible contributions
- Sustainable competitive advantage
- The presence of FIDs can send a positive signal to investors and attract investors (e.g. financial capital).
- It can be beneficial to have FIDs’ knowledge, experience, and expertise from foreign markets.
(Source: Pfeffer, and Salancik, 1978; Ruigrok et al., 2007)
3
Hypotheses
The first section of this chapter addresses the MRQ, and the hypotheses in this Master Thesis. Furthermore, the development of the hypotheses is presented in the second paragraph of this section. The second section of this chapter presents the conceptual models of this Master Thesis.
3.1 Hypotheses development
The first paragraph presents the MRQ that has been introduced in the introduction of this Master Thesis. In addition, an overview is given about which hypotheses will be tested. The second paragraph presents the development of the hypotheses, based on the theoretical perspectives discussed in the previous chapter. The MRQ has been broken down into hypotheses, in order to be able to give a more detailed answer on the MRQ formulated in this Master Thesis.
Table 13
Explanation of two topics
Topic Description
Origins of the FIDs A distinction between:
- FIDs who are domiciled in developed countries.
- FIDs who are domiciled in emerging or developing economies, other than the BRIC countries.
Liability of Foreignness
- All additional costs that a firm operating in a foreign country incurs that a local firm would not incur.
- One can think of costs such as: spatial costs, costs related to the unfamiliarity with the local environment, costs resulting from the host country environment e.g. lack of legitimacy of foreign firms, etc.
- Implies that foreign firms will have lower profitability than local firms, all else being equal.
(Source: Zaheer, 1995:343; Zaheer, 1995).
3.1.1 Main Research Question and Hypotheses
As introduced in the introduction of this Master Thesis the MRQ of this Master Thesis is:
“To what extend have listed firms that are located in BRIC countries, incorporated Foreign Independent Directors in their Board of Directors and does firm performance increase when these board members are present?
With regard to the MRQ, the following hypotheses will be tested in this Master Thesis:
H1a: The presence of Foreign Independent Directors in listed firms that are located in one of
the BRIC countries is positively related to firm performance.
H1b: The higher the percentage of Foreign Independent Directors in a Board of Directors of
a listed firm located in one of the BRIC countries, and who are domiciled in developed economies have a greater impact on firm performance than Foreign Independent Directors who are domiciled in other emerging or developing economies.
H2a: Foreign Independent Directors have a greater impact on firm performance in firms that
are listed both on the domestic and foreign stock exchanges than firms that are only listed domestically.
H2b: Foreign Independent Directors have a greater impact on firm performance in firms that
have foreign subsidiaries than firms with no foreign subsidiaries.
H3a: Firms that are listed both on a foreign and domestic stock exchanges have a higher
level of Foreign Independent Directors than firms that are only listed on the domestic stock exchange.
H3b: The level of Foreign Independent Directors in a Board of Directors is higher in firms
with foreign subsidiaries than firms with no foreign subsidiaries.
3.1.2 Foreign Independent Directors and firm performance
Based on the theoretical perspectives discussed in the previous chapter, it is safe to say that the presence of FIDs in emerging economy firms can have both a positive and negative influence on firm performance. Klapper, and Love, (2004) mention that the presence of FIDs from developed economies bring along the following characteristics:
• “Good” governance practices • Effective monitors
• Increased investor protection • Reduce agency costs
• Increase firm performance
Existing research argues that firm value is affected by the quality of monitoring and decision-making by the BOD (Shleifer, and Vishny, 1997). This indicates the significance of a BOD as a governance mechanism. Cheung, Stouraitis, and Tan (2010) mention that corporations that have good corporate governance practices in place can attract investors who are willing to pay a higher premium. Especially for firms that are located in EEs it may be of great importance, as these economies generally have weaker legal systems in place (Klapper, and Love, 2004). Furthermore, FIDs can bring along unique resources to the firm that can lead to sustainable competitive advantage (Barney, 1991; Barroso et al., 2011). Moreover, the knowledge, experience and expertise of FIDs can help the BOD by giving better advice, which can lead to greater firm performance (Hillman, and Dalziel, 2003).
governance practices. Furthermore, investors in weak legal protected economies are more likely to invest or reward a firm with good corporate governance mechanisms in place. In addition, the correlation of good corporate governance practices, market valuation and firm performance matters more in countries with weaker shareholder protection and institutions in place (Klapper, and Love, 2004). Therefore, the following hypothesize has been formulated:
H1a: The presence of Foreign Independent Directors in listed firms that are located in one of
the BRIC countries is positively related to firm performance.
In addition, this Master Thesis focuses on the origins of the FIDs (see table 13). Both inside (dependent) and outside (foreign independent) directors of a BOD bring unique resources to a firm that can be incorporated in a firm’s internal processes. However, FIDs can bring additional resources to the firm, which are their international expertise, first-hand knowledge of foreign markets, and the FIDs network ties because of their presence of being abroad (Masulis et al., 2012). This could help a firm to make better operating decisions and to access foreign resources, which otherwise would not have been that easily accessible or would not have been accessible at all (Oxelheim et al., 2013). Firm expansion by going abroad can bring several risks and firms often have to overcome the liability of foreignness (see table 13). But the expertise, knowledge and connections of FIDs can decrease these risks of expanding abroad. However, a distinction should be made between FIDs from developed economies and FIDs from EEs. In line with the Resource Dependence theory, FIDs from developed economies are usually accompanied with “good” well-developed governance practices, which allow them to monitor and challenge the MT and CEO more explicitly. This appears to be less likely for FIDs from economies with relatively weaker governance practices in place.
than FIDs who are domiciled in EEs other than in one of the BRIC countries. Therefore, the following hypothesize has been formulated:
H1b: The higher the percentage of Foreign Independent Directors in a Board of Directors of
a listed firm located in one of the BRIC countries, and who are domiciled in developed economies have a greater impact on firm performance than Foreign Independent Directors who are domiciled in other emerging or developing economies.
3.1.3 International involvement of a firm
The article of Barney (1991) is in line with the Resource Dependence theory that sustained competitive advantage can be obtained by the integration of unique resources that are difficult to imitate by competitors. Both inside directors and outside (independent) directors of a BOD provide resources to the firm that can be integrated within a firm’s internal processes and create firm specific competencies. As mentioned in paragraph 3.1.2 the distinguishing factor is that foreign directors can bring is their knowledge, expertise and network ties of their foreign markets to a firm. Hence, this could lead to better investments and enhanced operational decisions, as well as the access to foreign resources, which may lead to new business opportunities (Oxelheim et al., 2013). This provision of resources by the FIDs can be especially valuable for BRIC firms that wish to internationalise or already have foreign activities in place. According to Luo (2005) the presence of FIDs may reduce the liability of foreignness problem because more culturally diversified corporate boards have greater processing capacity. Luo (2005) also mentions that the greater the presence and hence proportion of foreign directors in a BOD can increase the local acceptance and reduce the liability of being foreign. Expansion into foreign markets may bring along risks and the characteristics of these foreign economies may be largely different from their domestic economy. However, general international experience can be provided by FIDs, which can enhance MNCs ability to expand internationally, and enables it to evaluate global market opportunities more objectively (Luo, 2005). However, it should be noted that these resources and capabilities are only valuable if a firm carries out international actions.
