“Foreign Independent Directors Across Corporate Boards of Chinese Listed Firms: An Empirical Investigation”

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Faculty of Economics and Business

MSc International Business & Management

Master Thesis

“Foreign Independent Directors Across

Corporate Boards of Chinese Listed Firms: An

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Abstract

This study investigates foreign independent directors (FIDs) across boards of 239 Chinese listed firms from the manufacturing industry. Prior studies in this area have only focussed on developed markets, whereas this study explores FIDs in an emerging market context. Due to different institutional environments it appears that both the prevalence as incentives issues for incorporating FIDs on corporate boards in China are unlike developed markets. The empirical results indicate a fair prevalence of FIDs across Chinese boards, but fail to find significant evidence of a positive relation between FIDs and firm performance. There is significant evidence of a negative relation between state-affiliated ownership and FID presence and firms with higher international involvement are more likely to have FIDs on their boards.

Key words: foreign independent directors, board of directors, firm performance,

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List of abbreviations

BvD – Bureau van Dijk

CSRC – China Security Regulatory Commission

FID – Foreign Independent Director

OECD - Organization for Economic Corporation and Development

POE – Private-Owned Enterprise

ROA – Return On Assets

ROE – Return On Equity

SASAC – Asset Supervision and Administration Commission of the State Council

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1. Introduction

The area of corporate governance has gained a significant amount of attention after the corporate scandals that occurred during the beginning of the 21st century from companies as Enron, originated from the U.S. or elsewhere in the world. The directors of Enron were held responsible for the fraud and had to pay substantial amounts of money to investor plaintiffs (Adams, Hermalin & Weisbach, 2010). Subsequently, it is not very surprising to discover that boards of directors embody a critical element in a firm’s corporate governance system; when things go wrong they become the centre of attention (Masulis, Wang & Xie, 2012).

Corporate governance refers to the structure of rights and responsibilities among the parties that have a stake in a firm and the goal is to ensure that management actions are aligned with the interest of shareholders and other stakeholders (Mueller, 2006). When there is a separation of management and ownership, investors need to be protected from poor management and this is where the board of directors comes in to fulfil their line of duty. The board has two major functions, the first one representing the monitoring role where they have the ability to hire, fire and compensate managers. The second function is the advisory role where they advise managers on important strategic decisions (Adams, Hermalin & Weisbach, 2010). If these two functions are performed well, the effectiveness of boards in corporate decision-making and shareholder value creation will rise (Barroso, Villegas & Perez-Calero, 2011). Literature to data has argued about the best performance of boards in terms of size (Cheng, 2008; Yermack, 1996), gender diversity (Carter et al., 2010; Erhardt, Werbel & Shrader, 2003), and board independence (Bhagat & Black, 2002; Hermalin & Weisbach, 1991; Rosenstein & Wyatt, 1990) to name just a few, and there appear to be inconclusive results among studies from specific areas.

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board membership on firm value and their results suggest that firms with headquarters in Norway and Sweden show significantly higher values when they have outsider Anglo-American board member(s). FIDs signal an improvement in corporate

governance practices and lessen the cross-border information gap. Therefore, value is created by attracting new investors that, in turn, result in a higher share price and a lower cost of capital (Oxelheim & Randoy, 2003). Moreover, FIDs may add value to the board of directors by providing them with international expertise, advice, and tap a network of foreign contacts. However, they might also be viewed as less effective directors due to their lack of monitoring and disciplining (Masulis, Wang & Xie, 2012). The geographical distance can make it more difficult and time-consuming to attend board meetings, which makes it harder to closely monitor management. In addition, firms with FIDs may exhibit significantly poorer performance when they do not have significant business presence in the FID’s home region (Masulis, Wang & Xie, 2012). The latest study of Oxelheim et al. (2013) reveals that there is a

significant positive relation between the degree of internationalizing Nordic firms and internationalized boards. However, in their study they also take into account the independent national directors with international experience.

As stated above, there have been studies focussing on FIDs and their contribution to firm value and performance in the context of developed markets (Masulis, Wang & Xie, 2012; Oxelheim & Randoy, 2003; Oxelheim et al., 2013). Accordingly, this leaves a research gap in the emerging market area and this study attempts to fill this gap to some extent by exploring foreign board membership across Chinese listed firms. The rise and increased importance of emerging markets scattered all around the world has made these environments interesting subjects to test theories formerly developed for developed market firms. Due to the institutional differences of developing markets as opposed to developed markets, it would not be suitable to simply apply Western practices to emerging market firms (Young et al., 2008). It is not suggested that emerging markets are uniform, however, the common

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findings suggest no link between CEO turnover and firm performance for firms with a large domestic shareholder, and for these firms corporate governance appears to be ineffective. In addition, Chen et al. (2011) investigate the effects of OECD-prescribed “good corporate governance practices” in an emerging economy and conclude that these practices do not mitigate the negative effects of controlling-shareholder expropriation. Most corporate governance practices are mainly designed to resolve conflicts between shareholders and managers. However, the main concerns in an emerging market context are the conflicts arising between majority and minority shareholders (Young et al., 2008). Therefore, good corporate governance practices might not work as well in emerging economies as in developed economies.

This paper investigates the role of FIDs on the board of Chinese listed firms. In 2012, China’s foreign direct investment (FDI) inflows has surpassed the U.S. and claimed the position of the world’s largest recipient of global FDI (OECD, 2013). As for FDI outflows, China increased significantly as opposed to the previous year and reached 62.4 billion dollars and positioned itself in the top investing economies worldwide (OECD, 2013). These numbers indicate the importance of international activity and stimulate the incorporation of foreigners on the board. Also, China is actively trying to improve their corporate governance practices. For example, in 2001 the

government required that the board of directors should appoint outside directors as well (Peng, 2004). Taken this together, China would be a suitable country for investigating the role of FIDs on the boards of Chinese listed firms.

The purpose of this study is twofold. First of al I want to define the prevalence of FIDs on the boards of Chinese listed firms. Second, the relationship is explored between FIDs and firm performance. In general, ownership structures differ

significantly for emerging market firms in comparison with developed market firms. The institutional context of an emerging market makes the enforcement of agency contracts more costly and challenging (Wright et al., 2005). Consequently,

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of outside directors (Cho & Kim, 2007). Moreover, higher ownership concentration may require less monitoring from independent directors, this argument is supported by Guest (2008). As FIDs constitute a specific type of independent directors, I thus expect to find a low prevalence of FIDs across boards of Chinese listed firms. More specifically, I expect to find a negative relationship between state-affiliated ownership and FIDs. In Chinese state-owned enterprises (SOEs), Assets Supervision and

Administration Commission of the State Council (SASAC) is in charge of recruiting directors on the boards and the likelihood of SASAC appointing a foreign nationality director is considerably low, since they favour more directors that have affiliations with the state (Chen, 2012). Furthermore, besides the prevalence of FIDs, the incentives for emerging market firms to incorporate foreign board members might also differ from those firms in developed economies. Importing FIDs may be a way to improve governance at the firm level and reduce the firm’s cost of capital by

signalling its willingness to bond itself to the potentially higher governance standards of the FID’s home country (Oxelheim & Randoy, 2003). From this point of view, I expect to find a positive relationship between foreign board membership and firm performance. Empirical results from previous research in developed markets provide inconclusive results regarding this subject (Masulis, Wang & Xie, 2012; Oxelheim & Randoy, 2003; Oxelheim et al., 2013).

The research question of this study is as follows:

To what extent have Chinese listed firms integrated foreigners on their board of directors and does the presence of these directors increase firm performance?

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2. Literature review

2.1 Board of directors

The board is a critical element in a firm’s corporate governance system and a great amount of studies have made an attempt to capture the differences across boards and seek to explain whether these differences have an impact on how firms function and perform (Bhagat & Bolton, 2013; Dalton et al., 1999; Elsayed, 2007; Erhardt, Werbel & Shrader, 2003; Hermalin & Weisbach, 1991). The role of the board is to reduce agency problems as a result of the separation between management and ownership. One of the functions of the board is the monitoring role where they have the ability to hire, fire and compensate managers. The other function is the advisory role where they advise managers on important strategic decisions (Adams, Hermalin & Weisbach, 2010; Lasfer, 2006). The effectiveness of boards in corporate decision-making and shareholder value creation will rise when these two functions are performed well (Barroso, Villegas & Perez-Calero, 2011).

An important aspect drawing the focus of empirical research is the structural differences of boards correlating with differences in behaviour. The literature on board structure can be divided into studies on board independence, board size, and CEO duality. The OECD (Organization for Economic Corporation and Development) Principles of Corporate Governance offer explicit guidance for policy-makers,

regulators and market participants in improving the legal, institutional, and regulatory framework that strengthens corporate governance (Jesover & Kirkpatrick, 2005). These principles have become a reference tool for countries all over the world.

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The section below will discuss the FID constituting a specific type of outside director followed with an overview of corporate governance characteristics in China. Then, by looking through the lenses of three different theoretical perspectives an attempt is made to assess the role of the FID on corporate boards of emerging market firms.

2.2 Foreign Independent Directors (FIDs)

Due to the radical changes in the business landscape as an outcome of the ongoing globalization process, an interesting class of directors has arisen – the foreign independent director (FID). It seems that the globalization process has found its way through the boardroom where multinational companies (MNCs) from all around the world are attracting foreigners to their boards to enhance value. A survey conducted by “The Conference Board’s Global Corporate Governance Research Center” (Esser, 2001) analyzed the boards of leading international companies. The results show that the percentage of boards that include at least one non-national director increased from 39% in 1995 to 60% in 1998. The rise of these interesting class of directors need to be examined more thoroughly since there is limited empirical research that examines the effects of FIDs on the boards, especially in an emerging market context.

The structure of the board is typically divided into two groups: inside directors and outside directors (Adams, Hermalin & Weisbach, 2010). Due to the public pressure and regulatory requirements recent years, firms have changed their board structure by incorporating more outside directors resulting in a more independent board (Bhagat & Bolton, 2013). An inside director can be described as a full-time employee of the firm (executive director). A common definition for outside directors is ‘all

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independent outside directors. Their only distinction is that FIDs are domiciled in foreign countries (Masulis, Wang & Xie, 2012).

There are only a few studies that have examined the impact of FIDs on corporate boards. Oxhelheim & Randoy (2003) researched the impact of foreigners on the boards of European firms and their findings provide evidence that Anglo-American directors have a positive effect on firm market value. However, Masulis, Wang & Xie (2012) conducted a similar research based on U.S. corporations and find that firms with foreign directors show considerably poorer performance. The most recent study of Oxelheim et al. (2013) based on Nordic firms reveals that there is a significant positive relation between the degree of internationalizing firms and internationalized boards. The difference of approach in their study is the fact that they also consider independent national directors with foreign experience who can partially substitute for foreigners on the board.

Clearly, the inconclusive results in this area of research need more attention and empirical examination. In addition, this study attempts to extend this line of research by focussing on an emerging market instead of developed markets. Most recently it has been stated that there has been a dramatic change in the geographical composition of foreign direct investment (FDI) in 2010. For the first time in history developing and transition economies accounted for more than half of the world’s FDI (UNCTAD, 2012). This emphasizes the global importance of emerging markets and its rise and importance of international activity. However, the relevance of internationalized boardrooms as a reaction to the increasing global activities remains unclear in this context.

Literature on board of directors incorporates different theoretical explanations for analyzing and justifying the value that the board may bring to the firm. Based on the study of Peng (2004), this study incorporates three different theoretical views for examining the role of FIDs on corporate boards – agency theory, resource dependence theory, and institutional theory. The board carries out several roles at ones and it is therefore meaningful to assess their functioning using different theoretical

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following section I discuss the corporate governance practices in China. This is followed with a debate on FIDs in relationship to the performance of firms in emerging markets based on the above-mentioned three theoretical perspectives.

2.3 Corporate governance in China

2.3.1 China’s economic reforms

Since the introduction of economic reforms in 1978 the Chinese economy has experienced considerable faster economic growth. Before 1978, China maintained a centrally planned economy where the state directed and controlled a large share of the country’s economic output. Centrally controlled state-owned enterprises (SOEs) formed the majority on the country’s industrial production and there were practically no private enterprises or foreign invested firms in China (Sun & Tong, 2003). The economic reforms in China made the country move towards a market-based economy and influenced numerous sectors of economy and society, including the ownership structures. Under the centrally planned regime, China’s industrial and commercial enterprises functioned as workshops and production units along with no independent decision making power (Tam, 2002). The economic reform stimulated the emergence of the company as a basic economic entity, since 1987 the Chinese government allowed productive enterprises to become separate legal persons (Tam, 2002). Since then, corporate governance practices from developed nations became increasingly more important as state-ownership decreased. Nonetheless, the state remains the largest shareholder in its various forms in most Chinese listed companies (Chen et al., 2006). Not until 1990 did China open two official stock exchanges in Shanghai and Shenzhen respectively. Only joint-stock companies with boards are allowed to list shares (Peng, 2004). The traditional SOEs prior to the economic reform did not have board of directors. The reforms to transfer SOEs to joint-stock companies were

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the great institutional differences the solution cannot simply be to copy Western practices and apply them in an emerging market context (Chen et al., 2006; Khanna & Palepu, 1997; La Porta et al., 1998).

2.3.2 Characterizing ownership structures

Chinese firms are characterized as having high concentrated ownership structures and high levels of state-ownership or state-influences. La Porta et al. (1998) suggest that strong legal protection of investor interests make diffused ownership feasible in countries located in developed areas, whereas concentrated ownership is usually the outcome of poor investor protection. On average, the state owns about 30% of the shares of Chinese listed firms (Chen et al., 2006). Approximately another 30% of shares are held by legal entities and these shares are referred to as legal person shares. These shares are held by domestic institutions such as non-bank financial institutions, stock companies, and SOEs, which are usually fully or partially owned by different levels of government (Hovey, Li & Naughton, 2003). Both state shares and legal person shares are not legally tradable. The most important difference between the two is the interest they have in the firm. The interest of the state might be more political (for example maintaining employment levels), whereas the interest of institutional shareholders is more profit-oriented and they are more likely to monitor the firm (Wei, Xie & Zhang, 2005). A consequence of these concentrated ownership structures is the uncommon agency problem – the principal-principal conflict (Young et al., 2008). In China, the issue is not the separation between management and ownership that causes principal-agent conflicts, but the exploitation of minority shareholders by majority/controlling shareholders (Young et al., 2008). The problems resulting from the conflicts of interest between these two groups of shareholders were intensified because the shares of listed firms were separated into non-tradable shares that were held by controlling shareholders and tradable shares that were held by minority shareholders (Yang, Chi & Young, 2011). On average, around 40% of the shares of a listed firm are owned by private individuals and private institutions (A-shares) and are tradable on the stock exchanges (Chen et al., 2006). These types of shares are

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shares are the shares designated for foreigners (B-shares, H-shares, and N-shares) and about 10% of listed firms have issued these (Chen et al., 2006).

2.3.3 Board of directors in China

As stated above, the board of directors was only introduced and became a requirement during the formation of joint-stock companies and the opening of the two official stock exchanges in China. Another corporate governance mechanism introduced by the China Security Regulatory Commission (CSRC) in order to improve the level of corporate governance of Chinese listed firms was the inclusion of independent directors on the boards. In 2001, CSRC demanded listed firms to have at least two independent directors on their boards by 30 June 2002. They further increased this guideline by requiring firms to have at least one-third of the board members to be independent directors by 30 June 2003 (Chen & Al-Najjar, 2012; Yang, Chi & Young, 2011). Typically, the board of directors consists of three different segments: (1) the executive board, (2) the non-executive board, and (3) the independent board (Chen, 2012). The primary occupation of the non-executive board lies outside the focal firm and serves as part time. The independent directors are a type of outside directors who are expected to contribute to the board with their expertise in law, accounting, or financing. The difference between the latter two groups is that

members of the independent board cannot hold shares in the focal company (Chen et al., 2006). Another interesting fact about Chinese boards is the process of director recruitment in SOEs as opposed to private-owned-enterprises (POEs). According to the information resulting form the interviews conducted by Chen (2012), the

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managers of SOEs. The inclusion of independent directors is supposed to protect the interests of shareholders (Peng, 2004) and increase transparency. In addition, in SOEs the independent directors also monitor the executive board to protect the interests of the government (Chen, 2012). Furthermore, there are no explicit requirements concerning the size of the board other than suggesting that it should range from 5 to 19 directors (Chen & Al-Najjar, 2012). In addition, Company Law and CSRC regulations do not treat CEO duality as an issue. CEO duality occurs when the chairman of the board also holds the position of CEO. The OECD Principles of Corporate Governance favour a separation between the positions of chairman and CEO in order to enhance board independence and increase the ability to challenge the CEO in case of managerial expropriation.

Chinese boards have features of both the Anglo-American and the German models, while also being characterized by having its own attributes (Chen & Al-Najjar, 2012; Tam, 2002). Even though it seems that Chinese boards resemble German and

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2.4 FIDs through the lenses of three theoretical perspectives

2.4.1 Agency theory

The separation of corporate ownership and control can lead to a conflict of interest between principals (shareholders) and agents (managers), also referred to as the principal-agent conflict, which needs to be controlled for (Jensen & Meckling, 1976). According to the agency theory, the key activity for boards is to monitor management on behalf of shareholders in order to prevent managers from acting in their self-interest at the expense of profit maximization (Eisenhardt, 1989). Consequently, effective monitoring can increase firm performance by reducing agency costs. Emerging market firms are known to have high concentrated ownership structures that are a consequence of poor investor protection (La Porta et al., 1998). This distinguishable feature of emerging market firms as opposed to developed market corporations causes conflicts between controlling shareholders and minority

shareholders, also referred to as the principal-principal conflict (Young et al., 2008). Outside directors provide a means to reduce conflicts of interests in the case of a separation between management and ownership and increase a board’s independence (Jensen & Meckling, 1976). In this case, the main purpose of outside directors is to monitor the board and protect minority shareholders from expropriation by majority shareholders. The control of corporate assets by majority shareholders can potentially expropriate minority shareholders by redirecting resources for their personal use or by executing funds to unprofitable projects that offer private benefits (Lemmon & Lins, 2003). The presumed independence of outside directors should result in higher incentives to monitor management, as they are less dependent on the

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For the reasons stated above, foreigners on the board fulfil the role of outside

directors and have higher incentives to monitor management and challenge the CEO to a higher extent. This may particularly be true for directors domiciled in countries with stricter governance practices where directors are accustomed to stricter

monitoring practices (Oxelheim et al., 2013). Generally, corporate governance mechanisms in emerging market countries are relatively weak compared to the developed world and specifically for those firms it could be beneficial to incorporate foreigners from developed markets as a commitment to increased governance

practices.

Nevertheless, their role of better monitors as opposed to inside directors can be questionable. The director’s geographical distance from headquarters can raise difficulties and higher costs for attending on-site visits and board meetings. This can make it especially more complicated for smaller firms to attract foreign directors. In order for outside directors to effectively participate in a firm’s governance, it is of great necessity to attend board meetings, as these are the most prominent way for them to stay informed of a firm’s operations, business conditions, and managerial decision making. Masulis, Wang & Xie (2012) tested the monitoring effectiveness of FIDs from a sample of U.S. corporations and the findings indicate that 4.7% of FIDs attend less than 75% of board meetings. For domestic independent directors this percentage is only 1.9%, a difference of 2.8% resulting in a statistically significant difference at the 1% level. Directors who regularly miss board meetings are often criticized as being ineffective monitors (Cai, Garner & Walkling, 2009). Their ability to oversee management actions decreases, which weakens a board’s monitoring and disciplining role (Masulis, Wang & Xie, 2012).

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2.4.2 Resource dependence theory

Besides the monitoring function of the board, another key activity is to advice managers on important strategic decisions, referred to as the advisory role. The advisory role is rooted in the resource dependence theory where in this case the board functions as a provider of resources. The unique resources provided by directors may be regarded as part of the intangible resource base of the firm and adds to the

capabilities of the organization (Hillman & Dalziel, 2003). The consequently

sustained competitive advantage and increased firm performance is derived from the integration of these resources in unique ways that are difficult for competitors to replicate (Barney, 1991; Barroso, Villegas & Perez-Calero, 2011). There is empirical evidence that offers support for this claim (Dalton et al., 1999). The resource-based view refers to board capital as being either human capital (experience, expertise etc.) or relational capital (network ties), which will lead to the provision of resources to the firm (Hillman & Dalziel, 2003). Some examples of the specific activities provided by the board include adding legitimacy to the public image of the firm, providing

expertise and advice, facilitating access to resources such as capital, acting as a link to significant stakeholders or other important bodies, and building external relations (Barroso, Villegas & Perez-Calero, 2011; Hillman & Dalziel, 2003). Hillman & Dalziel (2003) have combined both the agency theory and the resource dependence perspective in a theoretical model and propose that board capital positively influences all the functions of the board including service, monitoring, and the provision of resources.

Due to the lack of empirical research in emerging markets, it remains unclear what the role of the foreign director is on these boards (Masulis, Wang & Xie, 2012; Oxelheim & Randoy, 2003; Oxelheim et al., 2013). However, drawing from the resource

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directors domiciled in developed markets are accustomed with ‘good’ corporate governance practices and emerging market firms can benefit from this. Not only are these FIDs able to monitor managers according to Western ‘good’ corporate

governance practices, they also send a positive signal to investors. Emerging market firms are characterized by concentrated ownership, and investors may be willing to pay a higher premium for firms with better corporate governance mechanisms (Bai et al., 2004; Cheung, Stouraitis & Tan, 2010). On a different note, another advantage for the firm is that they extend their pool of suitable candidates to sit on their boards enormously. There may be a limited pool of board candidates in an emerging country that lacks a well-established educational system. Through the incorporation of foreign candidates this problem can be solved and more qualified members may fulfil the positions.

2.4.3 Institutional theory

According to the institutional theory, FIDs may be appointed for a selection of several reasons. By using the three institutional pillars identified by Scott (1995), including regulative, normative, and cognitive pillar, a clearer image is created for

understanding the underlying dynamics.

The regulative pillar includes the formal rule system and enforcement mechanisms endorsed by the state (Peng, 2003). In this case, there are no legal requirements forcing Chinese firms to have foreigners on the board. However, since 2001, firms do need to appoint outsiders to their boards. Because this does not apply to foreign directors, the regulative pillar is not applicable.

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(Sanders & Carpenter, 1998). In order for firms to attract foreign equity the pressure of foreign investors should impact the decisions of the firm to create more

transparency and incorporate FIDs.

The cognitive pressures are not that apparent just like the regulative pressures. This pillar refers to the internalized norms that are taken for granted and guide firm behaviour (Peng, 2004). Chinese firms are characterized by concentrated ownership structures and family businesses. Therefore, ownership and control are often not separated causing a principal-principal conflict instead of a principal-agent conflict. It was only until public and regulatory pressures when firms where forced to become more transparent and less insider-dominated. This indicates that firms were not in favour of outside directors monitoring their behaviour and challenging CEOs and this behaviour does not favour the inclusion of more foreigners on the board. On the other hand, due to the geographical distance and difficulties of foreign directors to attend board meetings and monitor management, it may be likely that boards favour FIDs. However, these intentions do not take advantage of the positive influence FIDs may bring to the boards and thus from this point of view do not increase firm performance.

3. Hypotheses development

Previous research suggests that the quality of monitoring and decision-making carried out by the board of directors affects the value of the firm (Shleifer & Vishny, 1997). This implies that the role of the board as a corporate governance mechanism is of great importance and its influence should not be underestimated. In addition, investors are willing to pay a higher premium for firms with better corporate governance

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describes the hypotheses development based on the corporate governance characteristics in China and incorporates agency perspectives, the resource dependence theory, and institutional theory.

3.1 Ownership structures – state-affiliated ownership

As discussed in the literature review, a general characteristic of emerging market firms is that they have a high level of ownership concentration, which is in

consistency with Chinese firms (Bai et al., 2004). In addition, Chinese firms differ from other transition economies as they exhibit high levels of state-ownership or state-influences. Even though China is signalling its commitment to support more market-oriented policies, the government has maintained control in the majority of Chinese listed firms in the form of different types of state shares (Jia, Sun & Tong, 2005). Consequently, China’s corporate governance reforms in listed companies have shown inefficiencies (Qiang, 2003). On average, the state owns about 30% of the shares of Chinese listed firms (Chen et al., 2006). Approximately another 30% of shares are held by legal entities and these shares are referred to as legal person shares. These shares are held by domestic institutions such as non-bank financial institutions, stock companies, and SOEs, which are usually fully or partially owned by different levels of government (Hovey, Li & Naughton, 2003). Both state shares and legal person shares are not legally tradable. Furthermore, SASAC is in charge of recruiting directors on the boards of SOEs and the likelihood of SASAC appointing a foreign nationality director is considerably low, since they favour more directors that have affiliations with the state (Chen, 2012).

Firms that are governed by large shareholders have demonstrated a resistance to incorporate governance reform through such means as the introduction of outside directors (Cho & Kim, 2007). Empirical evidence is provided by Chen & Al-Najjar (2012), who study the determinants of board size and independence across Chinese boards. They find a negative relationship between ownership concentration and state ownership in relation to board independence, which suggests that firms with higher state ownership might be more likely to resist hiring outside directors. Higher

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this argument is supported by Guest (2008). In addition, boards that are characterized with high ownership concentration will tend to be mostly comprised of directors who represent the interests of the owner-manager (Lefort & Urzua, 2008).

The arguments represented in the discussion above do not favour board independence and do not send a signal that invites foreigners on Chinese corporate boards. The typical concentrated ownership structures, state-affiliated ownership, and the fact that SASAC is in charge of appointing directors to the board further decrease the

likelihood of FID presence. Therefore, I expect to find a negative relationship between state-affiliated ownership and FIDs.

Hypothesis 1: There is a negative relationship between state-affiliated ownership and foreign independent directors.

3.2 FIDs and firm performance

Based on the arguments presented in the theoretical perspectives section, it can be stated that foreign board membership can have both positive and negative influences on the performance of firms in emerging markets. On the positive side, FIDs from developed markets are accustomed with stricter governance practices and can be more effective monitors, increase investor protection, reduce agency costs and increase firm performance (Klapper & Love, 2004). In addition, FIDs provide valuable and unique resources that add to the capabilities of the company and establish sustained

competitive advantage (Oxelheim et al., 2013). FIDs’ experience, expertise and network ties contribute value to the advisory function, which has a positive influence on the performance of the firm (Masulis, Wang & Xie, 2012). On the negative side, FIDs might also be considered as ineffective monitors due to the geographical distance from the director’s home country and the emerging market firm’s

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Hypothesis 1 suggests that firms with state-affiliated ownership will be more reluctant to incorporate FIDs on their boards. However, firms that do incorporate FIDs on their boards take advantage of the additional resources provided by foreign board members (resource dependence theory), as well as the positive signal it sends out to investors as they increase their corporate governance by including board members that are

accustomed to stricter governance practices (Sanders & Carpenter, 1998). FIDs provide a means to overcome the severe agency problems due to the absence of strong legal protection between controlling insiders and outside investors (Lemmon & Lins, 2003) and may increase the trust of minority shareholders. Furthermore, Klapper & Love (2004) provide evidence of firms across 14 emerging markets that better corporate governance is highly correlated with better firm performance (measured as return on assets) and market valuation (measured as Tobin’s Q). One could suggest that investors in countries with weak legal protection will more likely reward a firm that established a good corporate governance framework. Little improvements relative to other firms will already make a big difference for investors and will lead to

improved firm performance and a decrease in the cost of capital (Klapper & Love, 2004). I therefore hypothesize a positive relationship between FIDs across boards of Chinese listed corporations and firm performance.

Hypothesis 2a: There is a positive relationship between foreign independent directors and firm performance.

Furthermore, in this study I want to put emphasis on the origin of FIDs. More specifically, a differentiation is made between FIDs domiciled in developed markets and FIDs that are domiciled in other developing markets besides China. From a resource dependence perspective, the experience of FIDs from developed markets in relationship to well-developed corporate governance practices makes these directors more efficient monitors as they are used to stricter monitoring practices and have a better ability to challenge CEOs. This argument does not hold for FIDs from countries with weak corporate governance mechanisms. Also, FIDs from developed markets as opposed to developing markets appear to have another advantage. Emerging market firms that include these specific class of foreigners on their boards signal a

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1998). This argument is supported by the research conducted by Oxelheim & Randoy (2003), who investigate the impact of outsider Anglo-American board members in a sample of 225 firms with headquarters located in Norway and Sweden. This paper argues that Anglo-American board membership represents a value statement that signals openness to foreign investors and a commitment to corporate transparency. Consequently, the cost of capital will be reduced and the firm profits from a value increase. Based on these arguments I expect to find the presence of developed market FIDs to have a greater impact on firm performance than developing market FIDs.

Hypothesis 2b: Foreign independent directors domiciled in developed markets have a greater impact on firm performance than foreign independent directors domiciled in other developing markets.

3.3 FIDs and a firm’s international involvement

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The study of Oxelheim et al. (2013) emphasizes the link between board

internationalization and the degree of international activity of the firm. Their findings suggest an overall positive association between the internationalization of a firm and the internationalization of its board. Therefore, I hypothesize to find more FIDs on boards of Chinese listed firms that have more international activities. In addition, in relationship to firm performance, I assume that FIDs have more impact on firm performance in firms that have a greater degree of international activity as compared to firms with a lower level. Two measures are used to capture a firm’s international activity: (1) international cross listing, and (2) foreign subsidiaries.

Hypothesis 3a: Firms that are listed on a foreign stock exchange have a higher level of foreign board membership than firms that are only listed on a domestic stock exchange.

Hypothesis 3b: Foreign independent directors have a greater impact on firm

performance in firms that are cross-listed on a foreign stock exchange as compared to firms that are not cross-listed on a foreign stock exchange.

Hypothesis 4a: Firms with foreign subsidiaries have a higher level of foreign board membership than firms with no foreign subsidiaries.

Hypothesis 4b: Foreign independent directors have a greater impact on firm performance in firms that have foreign subsidiaries as compared to firms with no foreign subsidiaries.

4. Methodology and data

4.1 Sample and data collection

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selection of several criteria, including Chinese listed firms with an active status

containing available data for the previous five years excluding the financial industries, a sample of 1,310 firms were left over. However, after crosschecking the board of director’s information with the company’s annual reports, it turned out that the information presented in the companies’ reports in Orbis was inaccurate. Therefore, the information that is needed for this study concerning the board of director’s characteristics needs to be extracted from the companies’ annual reports. This information is of great importance to this study and needs to be precise. In order to reduce the amount of 1,310 Chinese listed firms due to time constraint issues, one industry is chosen that will be the focus of this study: the manufacturing industry categorized as “NAICS 2007 33. Manufacturing industry”. 489 firms in the Orbis database meet the requirements within this industry. The probability of FIDs on Chinese boards is posited to be low. Therefore, a substantial data set is required in order to test the hypotheses that only concern those firms that do have FIDs on their boards. In order to decrease the amount of 489 firms due to time constraint issues, but still keeping a substantial amount of sample firms left, an additional criterion is added that only includes firms with more than 1,000 employees. After deleting the firms with missing data, the final sample of this study represents 239 Chinese listed firms.

As stated above, Orbis functioned as the primary data source for accessing a firm’s financial variables. This database also provides information relating to ownership concentration, which is indicated as the BvD Independence Indicator. Consequently, this measurement is used to determine the level of ownership concentration of the firms in this study. The companies’ annual reports were used to identify data about the board of directors, stock data, and the amount of state affiliation within the firm. It appeared that this data was either missing, or inaccurate in Orbis. Annual reports were gathered from either the companies’ websites or through other web-based sources. The names, surnames and additional descriptions of the directors are used to identify directors’ nationalities. In some of the cases the nationalities of the directors were already given in the board of directors’ description section of the annual reports. Chinese names have their specific characteristics, which made the process of

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non-Chinese nationality. In case of any uncertainties, other web-based sources are used to ensure the nationalities of the directors.

4.2 Variables and measures

4.2.1 Dependent variable

Firm performance is the dependent variable of this research and studies use several measures to define the performance of the firm. Tobin’s Q is a widely used measure for firm value and previous research has shown it to be a reliable proxy (Agrawal & Knoeber, 1996; Black & Kim, 2012; Choi, Park & Yoo, 2007; Hermalin & Weisbach, 1991; Oxelheim & Randoy, 2003; Yermack, 1996). Tobin’s Q can be defined as the sum of the market value of common stock and book value of preferred stock and debt divided by the book value of total assets (Choi, Park & Yoo, 2007). However, due to the fact that capital markets are not well developed in China, market-based measures may not be a suitable approach to establish a firm’s true performance (Peng, 2004). Therefore, this study applies the accounting-based measures return on assets (ROA) and return on equity (ROE) as the performance measures, both are common

measurements in previous research (Carter et al., 2010; Chen & Al-Najjar, 2012; Dalton et al., 1999; Erhardt, Werbel & Shrader, 2003). ROA is calculated as the ratio of net income to total assets and ROE is calculated as the ration of net income to total equity.

4.2.2 Independent variable

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4.2.3 Moderating variables

Hypothesis 3b and Hypothesis 4b posit a relationship between foreign board

membership and firm value and adds a moderating variable representing the intensity of foreign involvement of the firm. In this study, foreign involvement is measured by using two proxies. One of the most common measures of foreign involvement is the ratio of foreign sales to total sales (Oesterle, Richta & Fisch, 2013). Unfortunately, the Orbis database does not contain this information and therefore other measures are used to determine a firm’s foreign involvement. The first one is whether or not the firm has foreign subsidiaries. Dummy variables will be used denoted as “1” if a firm owns foreign subsidiaries, and “0” if a firm has no foreign subsidiaries. The second proxy is foreign cross-listing and again dummy variables will be used denoted as “1” for firms that are cross-listed on a foreign stock exchange, and “0” for firms that are only listed on a domestic stock exchange.

4.2.4 Control variables

The control variables used in this study can be separated into general corporate governance variables and general control variables. To start with the general corporate governance variables, a set of five variables is applied to control the influence on firm performance.

Board size. Board size is measured as the number of directors on the board. This

characteristic of the board is one of the attributes revealed by previous research to have an impact on the effective functioning of a board and the subsequent influence on a firm’s performance (Lasfer, 2006). Larger boards increase communication problems and agency issues such as director’s free riding, which makes it easier for the CEO to influence and control the board (Cheng, 2008). The study of Yermack (1996) supports this argument and finds an inverse relationship between board size and firm value among 452 U.S. firms.

Board independence. The level of independence of the board of directors is measured

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into three different segments: (1) the executive board, (2) the non-executive board, and (3) the independent board (Chen, 2012). However, while reviewing the

companies’ annual reports, it can be concluded that not all firms use this

categorization and only distinguish between inside and outside directors. Therefore, this study does not distinguish between executive directors and independent non-executive directors. Previous literature has provided inconclusive results regarding this characteristic and whether a more independent board may increase firm value (Bhagat & Black, 2002; Hermalin & Weisbach, 1991; Rosenstein & Wyatt, 1990). Hermalin & Weisbach (2003) reviewed the empirical literature on primarily U.S. boards and conclude that board composition is not related to corporate performance. However, the proportion of outside directors is related to better decision-making concerning issues as executive compensation and CEO turnover.

CEO duality. CEO duality occurs when the position of the CEO and the chairman are

fulfilled by the same individual. A dummy variable is used that denotes “1” in the case of CEO duality and “0” otherwise. One of the main tasks of the board is to monitor the performance of top management. This ability is significantly reduced when the position of the chairman is fulfilled by the CEO, resulting in poorer performance. In contrast, according to the stewardship theory, CEO duality may increase a firm’s performance due to the unity of command it represents (Peng, Zhang & Li, 2007). The paper of Peng, Zhang & Li (2007) studies the relationship between CEO duality and firm performance in Chinese firms and offer support for stewardship theory arguments.

State-affiliated ownership. Chinese firms are characterized by having high

concentrated ownership structures with considerable influences of the state. On average, the state owns approximately 30% of the shares in Chinese listed firms and another 30% is held by legal entities, such as SOEs (Chen et al., 2006). So again, the state plays a great role as these entities are ultimately owned by the state. An

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hypothesis 1 will be testing the relationship between state-affiliated ownership and FIDs. In order to accumulate this information a firm’s owned shares and state-owned legal person shares were calculated. According to the Company law (SAIC, 2005), a significant shareholder holds more than 1/3 of the total shares in the company. Therefore, I use a 30% cutoff to determine whether or not a firm is state-affiliated and the state is the actual controller, which will be indicated as “1” and “0” otherwise.

Ownership concentration. This variable is measured as the percentage of biggest

share owned by a shareholder amongst every other substantial shareholder. As stated above, the Company Law suggests a significant shareholder to hold more than 1/3 of the total shares. In developed countries with strong governance management

researchers often use a cutoff of 5% to indicate owner-controlled firms (Dharwadkar, George & Brandes, 2000). However, these low levels of ownership concentration are not effective in the context of weak governance regimes, where limited protection is given to minority shareholders (Dharwadkar, George & Brandes, 2000).

Orbis uses the Bureau van Dijk (BvD) Independence Indicator to indicate a firm’s level of ownership concentration (Bureau van Dijk, 2013). Since the BvD

Independence Indicator does not distinguish between shareholders owning more than 1/3 of the total shares, I will be using a 50.01% cutoff to distinguish between

concentrated and non-concentrated firms. A dummy variable will be assigned to firms with a proprietary shareholder owning more than 50% of the shares denoted as “1” (BvD independence indicator C and D), and “0” otherwise.

Finally, literature suggests that managerial ownership is another aspect that should be controlled for (Hermalin & Weisbach, 1991). However, in the case of China,

employee shares are too diffuse and insignificant to have any collective effect on the value of the firm (Hovey, Li & Naughton, 2003; Wei, Xie & Zhang, 2005). Therefore, this factor is not included in the set of control variables.

General control variables. Regarding the general control variables, this research

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previous years’ ROA and ROE from 2008 until 2011. Firm size is measured by using two indicators: number of employees and the logarithm of total assets. Firm age is based on the incorporation date of the firm. IPO age is another measurement for firm age, however not incorporated in this study due to inaccurate information in Orbis.

4.3 Data analysis

The main statistical method that is used in this study is the multiple regression analysis. This type of regression analysis is used to estimate the relation between a dependent variable and a set of independent variables. In this case, I test whether foreign board membership is positively related to firm performance on the dataset of 239 firm based observations (hypothesis 2a). In addition, I use control variables (board size, board independence, CEO duality, state ownership and concentrated ownership, previous performance, firm size, and firm age) that might influence the dependent variable – firm performance. A correlation matrix was conducted in order to test the correlations between the incorporated variables independently. As for the hypotheses 2b, 3b, and 4b, a subset is used containing only the firms that have foreigners on their boards (n=49). The variance between two different groups as discussed in the hypothesis is measured using the analysis of variance (ANOVA).

5. Descriptive results

The sample of this study consists of 239 Chinese listed firms from the manufacturing industry. There are in total 2,187 directors sitting across 239 different boards of which 89 directors (4.07%) have a foreign nationality. Among these 239 firms there are 49 firms (20.5%) that included FIDs on their boards. To further investigate the

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across Chinese listed firms appears to be higher for firms that have considerably lower state influences. In addition, 12 (24.49%) out of the 49 firms with foreign board members appear to have a concentrated ownership structure, which is in this case measured as firms with a shareholder owning more than 50%. Subsequently, most of the FIDs in this subset appear to be in firms with a lower degree of concentrated ownership.

Table 1 provides information about the nationalities of FIDs on the boards of Chinese listed firms. Most FIDs are from Hong Kong and the U.S., Taiwan comes in third and the other countries have considerably less input as compared to the top three. The nationality of one FID remains unknown. However, according to the characteristics of the director’s first name and surname, as well as the description in the company’s annual report, it is assumed to be a developed market nationality (name of the

director: Marc Vereecke, Hunan Valin Steel). Consequently, all the FIDs included in this study have a developed market nationality and there is a lack of data to test hypothesis 2b that differentiates between FIDs from developed markets as opposed to developing markets.

TABLE 1

Nationality of foreign independent directors in Chinese listed firms

Country Number of FIDs

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Table 2 provides the means and standard deviations of all the variables included in this study. Out of the data sample of 239 Chinese listed firms, 9% appears to be cross-listed on a foreign stock exchange and 24% report to have one or more foreign

subsidiaries. Almost 30% of the sample firms have either owned shares, state-owned legal person shares, or both, which together exceed 30% of all shares of the firm. This does not imply that the other firms do not have governance involvement; the other firms simply have lower governance influences. As mentioned previously, on average, the shares of Chinese listed firms are divided in 30% state-shares and 30% legal person shares that are usually fully or partially owned by the state (Hovey, Li & Naughton, 2003). In this study dummy variables are used to indicate high state-affiliated ownership and the mean of 28% ‘state-state-affiliated ownership’ should not be misinterpreted. This does not imply that, on average, the state holds 28% of all shares of the firm. For example, the same dummy value (‘1’) is given to a firm that has 60% state-owned legal person shares as to a firm that has 35% state-owned legal person shares. This misinterpretation also holds for the percentage of ownership

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TABLE 2

Descriptive statistics of variables (n=239) Variables Mean Standard Deviation Percentage FIDs 0,04 0,11 ROA 3,02 5,53 ROE 0,59 63,51 Foreign listing 0,09 0,29 Foreign subsidiary 0,24 0,43 State-affiliated ownership 0,28 0,45 Ownership concentration 0,22 0,41 Board size 9,15 1,85 Board independence 0,39 0,09 CEO duality 0,40 0,49 Prior ROA 5,28 5,52 Prior ROE 9,82 11,23 Number of employees 5876,66 14235,54 Total assets (ln) 13,09 1,09 Firm age 14,28 5,82

6. Testing hypotheses

6.1 Correlation matrix

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correlation implies that the higher the state-affiliated ownership rate will be, the lesser foreign directors will be present in a board. Thus, hypothesis 1 is supported.

Hypothesis 2a posits a positive relationship between FIDs and firm performance. This study incorporates two measures for firm performance – ROA and ROE. The former is measured as the ratio of net income to total assets and the latter is measured as the ratio of net income to total equity. FIDs accustomed to better corporate governance practices are supposed to be more able to monitor and challenge the CEO and add transparency to the board (Peng, 2004). In addition, enhanced transparency results in an improvement of corporate governance practices, which is correlated with better firm performance (Klapper & Love, 2004). However, the relationship between FIDs and firm performance appears to be insignificant for both ROA as ROE (ROA: r = .006, p = .464, n = 239; ROE: r = .024, p = .354, n = 239). Therefore, hypothesis 2a is not supported. It is interestingly to notice that state-affiliated ownership is

significantly negative related to both ROA and ROE (ROA: r = -.199, p = .001, n = 239; ROE: r = -.148, p = .011, n = 239). This is consistent with the findings of Sun & Tong (2003), who find a negative relationship between state ownership and firm performance. Furthermore, foreign listing and total assets (ln) are significantly negative related to ROA. Apart from prior performance, the other control variables appear to have a non-significant effect on firm performance as measured by ROA and ROE.

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TABLE 3 Correlation matrix of all variables 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 1.Percentage FIDs Correlation Sig. (1-tailed) 1 2.ROA Correlation Sig. (1-tailed) .006 .464 1 3.ROE Correlation Sig. (1-tailed) .024 .354 .353** .000 1 4.Foreign listing Correlation Sig. (1-tailed) .178** .003 -.128* .024 .007 .455 1 5.Foreign subsidiary Correlation Sig. (1-tailed) .117* .035 -.014 .414 .036 .289 .326** .000 1 6.State affiliated ownership Correlation Sig. (1-tailed) -.118* .034 -.199** .001 -.148* .011 .088 .088 -.054 .202 1 7.Ownership concentra- tion Correlation Sig. (1-tailed) .014 .412 .005 .467 .029 .329 .078 .116 .056 .193 .139* .016 1

8.Board size Correlation Sig. (1-tailed) -.064 .163 -.064 .162 .051 .215 .202** .001 .086 .092 .240** .000 .061 .172 1 9.Board indepen- dence Correlation Sig. (1-tailed) .120* .032 -.003 .482 -.018 .388 .617** .000 .232** .000 -.032 .309 .112* .041 .051 .215 1 10.CEO duality Correlation Sig. (1-tailed) .053 .205 .006 .463 -.074 .128 -.025 .352 -.046 .241 -.101 .061 -.018 .389 -.136* .018 -.086 .092 1 11.Prior ROA Correlation Sig. (1-tailed) .173** .004 .501** .000 .278** .000 -.048 .229 .082 .104 -.262** .000 -.035 .296 -.068 .146 -.038 .277 .049 .227 1 12.Prior ROE Correlation Sig. (1-tailed) .143* .013 .477** .000 .509** .000 -.036 .289 .080 .108 -.264** .000 .029 .326 -.096 .070 -.038 .278 .030 .324 .820** .000 1 13.Number of employees Correlation Sig. (1-tailed) .134* .020 -.057 .192 .006 .463 .331** .000 .278** .000 .030 .320 .061 .175 .047 .236 .383** .000 .081 .107 -.043 .256 .024 .355 1 14.Total assets (ln) Correlation Sig. (1-tailed) .110* .045 -.144* .013 -.003 .479 .348** .000 .283** .000 .258** .000 .270** .000 .267** .000 .236** .000 -.067 .152 -.078 .114 .045 .245 .580** .000 1

15.Firm age Correlation Sig. (1-tailed) -.046 .238 .000 .500 .045 .243 .104 .054 .038 .278 .038 .278 -.003 .483 -.077 .118 .115* .038 .010 .436 -.133* .020 -.035 .298 .108* .048 .123* .028 1 N=(239)

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Foreign listing (r = .178, p = .003, n = 239) and foreign subsidiary (r = .117, p = .035, n = 239) are both positively correlated to the percentage of FIDs, although it appears to be weak in strength. The relationship between board independence and a firm’s international involvement appears to be much stronger and more significant (r = 617, p = .000, n = 239; r = 232, p = .000, n = 239). In sum, these findings offer support for hypotheses 3a and 4a.

6.2 One-way ANOVA analyses

Hypotheses 3b and 4b are different from the other hypotheses since they focus on a subset of the sample – only the firms that have FIDs (n = 49). Hypothesis 3b discusses the impact of FIDs on firm performance amongst foreign listed firms and

domestically listed firms. Furthermore, hypothesis 4b resembles 3b, but replaces foreign listed firms with firm with foreign subsidiaries. A one-way ANOVA is performed to test these hypotheses (see table 4 and 5). The ANOVA analyses reveal that there are no statistically significances between the groups within foreign listing and between the groups within foreign subsidiary. This is not surprising, since the correlation matrix already showed no significant relationship between FIDs and firm performance (ROA and ROE). Therefore, hypotheses 3b and 4b are not supported.

TABLE 4

One-way ANOVA analysis for hypothesis 3b foreign listing (n = 49)

Firm value (ROA)

Sum of squares

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Firm value (ROE)

df Mean Square F Sig. Between groups Within groups Total 55.761 5755.920 5811.681 1 47 48 55.761 122.466 .455 .503 TABLE 5

One-way ANOVA analysis for hypothesis 4b foreign subsidiary (n = 49)

Firm value (ROA)

df Mean Square F Sig. Between groups Within groups Total 57.781 1561.896 1619.677 1 47 48 57.781 33.232 1.739 .194

Firm value (ROE)

df Mean Square F Sig. Between groups Within groups Total 25.226 5786.455 5811.681 1 47 48 25.226 123.116 .205 .653 6.3 Regression analyses

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TABLE 6

Regression analyses: ROA and ROE as dependent variables

Variables ROA ROE

Beta Sig. Beta Sig. Constant Percentage FIDs Foreign listing Foreign subsidiary State-affiliated ownership Ownership concentration Board size Board independence CEO duality Prior ROA Prior ROE Number of employees Total assets (ln) Firm age -.060 -.140 -.019 -.052 .058 .032 .105 -.022 .506 .041 -.115 .083 .466 .310 .071* .760 .409 .332 .598 .167 .701 .000*** .590 .150 .154 -.038 .051 -.015 -.041 .038 .120 -.048 -.090 .524 .057 -.106 .081 .771 .520 .508 .807 .512 .519 .053* .527 .120 .000*** .448 .188 .159

Adj. R-square .256 Adj. R-square .253

N 239 N 239

*** Significant at level p < .01 (1-tailed). **Significant at level p < .05 (1-tailed). Significant at level p < .10 (1-tailed).

It is not surprising to see that the correlations impacting ROA and ROE are

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Table 7

Regression analysis: Percentage FIDs as dependent variable

Variables Beta Sig

(Constant) Foreign listing Foreign subsidiary State-affiliated ownership Ownership concentration Board independence CEO duality Board size ROA ROE Number of employees Total assets (ln) Firm age .175 .034 -.124 -.005 -.016 .038 -.101 .009 .012 .029 .101 -.083 .956 .049** .623 .080* .946 .851 .571 .152 .896 .865 .736 .271 .204 Adj. R-square .026 N 239

*** Significant at level p < .01 (1-tailed). **Significant at level p < .05 (1-tailed). Significant at level p < .10 (1-tailed).

Another regression is conducted with percentage FIDs as the dependent variable (see table 7). The correlation matrix and the previous regression analysis provide

convincing evidence that FIDs and firm performance are not significantly related to each other. Hypothesis 1 relates state-affiliated ownership to FIDs and the correlation matrix provides evidence of a significant negative relationship between state-affiliated ownership and percentage FIDs. Consequently, a multiple regression is conducted to further establish the reliability of this relationship. According to the regression,

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have lost its significance with percentage FIDs ( = .034, p = .623, n = 239). This might be the consequence of multi-collinearity between other variables. For instance, according to table 3, foreign subsidiary has significant correlations with board

independence and firm size. Furthermore, none of the other variables seem to explain percentage FIDs.

7. Conclusion & discussion

7.1 Conclusion

This study explores foreign board membership across Chinese listed firms. Literature to data failed to research this topic in an emerging market context and the aim of this paper is to contribute to this line of research by providing empirical evidence

concerning the prevalence of FIDs across Chinese boards and whether or not FIDs have a positive relationship with firm performance. The descriptive results of this study imply that a fair amount of firms have incorporated foreigners on their boards (20.5%). However, based on all the directors included in this study, only 4.07% have a foreign nationality (89 directors).

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potential value in relation to firm performance. As stated in the introduction, the international activities of Chinese firms are increased significantly as opposed to previous years and the board of directors was only introduced in the period when the two stock exchanges opened in China in the 1990s.

The study of Oxelheim et al. (2013) investigate board internationalization of Nordic firms and find a significant positive relation between the internationalization of the board and the degree of internationalization of the firm itself. This study provides empirical evidence that supports this argument. Based on the correlation matrix (see table 3), the relationship of both foreign listing and foreign subsidiary are

significantly positively related to percentage FIDs. The regression results still offers support for foreign listing, however foreign subsidiary lost its significance. This might be the cause of multi-collinearity between it and other variables.

Out of all firms with FIDs, most of the directors were found in firms with

state-affiliated ownership lower than 30% (40 out of 49 firms) and ownership concentration of less than 50.01% (37 out of 49 firms). The regression results provide further

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7.2 Implications

The theoretical implications of this study are important additions to the existing literature on FIDs and corporate governance. This is the first study to address FIDs on the board of directors in an emerging market context. It has become clear that FIDs are a relatively under-researched topic as part of the corporate governance literature related to the board of directors, even in a developed market area. Additionally, the inconclusive results from prior research (Masulis, Wang & Xie, 2012; Oxelheim & Randoy, 2003; Oxelheim et al., 2013) emphasize the need for empirical research in both developed and developing markets. Compared to studies investigating Western firms, this study has put forward different incentives and probabilities of FID presence amongst boards of Chinese listed firms and enriched our knowledge regarding these matters.

The implications of this study for practice indicate that in emerging markets where the state still exerts significant control over firms, it remains difficult for outsiders who have no former ties with the state to become insiders. As the state still exercises its influence in majority of firms, foreigners may experience difficulties in accessing these firms. I discussed already the fact that in Chinese SOEs, SASAC is in charge of appointing outsiders to the board and they will favour more directors that have high affiliations with the state (Chen, 2012). The state appears to have the most influence in firms from industries that operate in energy, public utilities, finance, and

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7.3 Limitations & future research

Even though this study contributes knowledge to our understanding of FIDs on boards of Chinese listed firms, there are certain limitations that need to be identified for future research purposes. First, an important limitation of this study is the sample size. The total sample consists of 239 firms, however, only 49 of these firms reported to have FIDs, and this formed the subset of sample firms for hypotheses 3b and 4b. A greater sample might have offered more evidence to establish a significant

relationship for FIDs and firm performance.

Another imperative limitation of this study is the measurement of certain variables. Due to lack of data, often in combination with time-constraint issues, not for every case were the optimal measurements used to define specific variables. Orbis was used as the primary data source for this research. Along the way, more and more data in this database appeared to be inaccurate or missing. Subsequently, annual reports were used to gather the inaccurate and/or missing information. However, the time-span of writing this thesis is limited and data collection for 239 firms takes considerable amounts of time. Decisions were made as for what measurements were used, while also considering the available time that was left. For instance, for ownership concentration I used the BvD Independence Indicator with a very strict cutoff of 50.01%, because they do not incorporate a measure of 30% or 33.33%. In order for ownership concentration to be a more precise control variable, defining the exact percentages of shareholdings would have been a more suitable approach. This also counts for state-affiliated ownership. A percentage measurement of state-owned shares and state-owned legal person shares would have provided us with more detailed information. For example, the correlation matrix (see table 3) indicates a significant negative relationship for state-affiliated ownership and percentage FIDs. However, no significant relationship is found for ownership concentration and

percentage FIDs, despite the fact that state-affiliated ownership is also concentrated at the same time.