Corporate governance has attracted the attention of major investors in the business word over the recent times. This can be observed in the increasing amount of corporate issues on newspaper reporting space, rising cases of corporate conduct and governance, and the new legislations directly addressing corporate governance. The attention is also replicated in literature where researchers have paid a lot of attention of the aspect of governance in different firms. A key mechanism of governance that determines the efficiency and functionality of a firm is its board of directors. A study by Agrawal and Knoeber (1996) reveals that there the board of directors is very significant study area as it determines the governance arrangement in a firm, and aids in the maximization of shareholders’ wealth. Poor contractual relationship between shareholders and the board of directors may hinder the achievement of firm goals. Furthermore, the conflict within the corporate structure may result in transfer pricing in which company assets are sold to other companies by few individuals for profit purposes.
An effective corporate governance always ensure appropriate use of the firm’s resources, thereby guaranteeing shareholders great values in terms of capital access and investor confidence. Denis and McConnell (2003) argue that a functional structure of the board of directors enhance better decision making at the firm, and prevents expropriation of resources, thus, resulting in the improved performance. Although there are a lot of research that has been done over the years regarding the impact of board structure on the firm performance, the studies have majorly concentrated on the developed countries like the US and the UK. However, little information addresses the Asian states, particularly in Hong Kong where there are different aspects of economic and cultural influence on the business arena. This study, thus, addresses the relationship between the structure of the board and its impact of firm performance in Hong Kong. The study will focus on the size of the board, weather the chairperson has duality as being the Chief Executive Officer (CEO) and the percentage of Non-executive Director (NED).
Research Questions and Objectives
Board of directors are the most important mechanisms of corporate governance. Liu and Fong (2010) stated that a good board of directors enhances independence of a company, and ensures accountability in every decision made. The directors also have the responsibility of resolving conflicts between firm shareholders and the managers. As such, corporate governance frameworks must ensure that strategic leadership of the company is effective. With the development of Hong Kong market, and due to the rising companies in the region, it is necessary to ensure the board effectiveness of these companies to enhance performance. Most family owned firms in the country are currently run through duality, having the same person as the CEO and the chairman of the board.
Clearly, the impact of the board of directors on firm performance is a salient consideration. Thus, the key objective of the study is to determine the impacts of the board structure on firm performance in Hong Kong. In addition, it will address whether duality matters in the firms, and if NEDs help to improve the performance of a company. The research questions to address the study include:
1. What are the impacts of the board size on the company performance?
2. What is the impact of duality on company performance?
3. How does NED affect financial performance of a firm?
There are fundamental roles of the board of directors at the firm including monitoring the managerial aspect of the company and maintaining shareholder-managers relationship. In this sense, the directors of the board act as monitoring agents; if the interests of both the managers and shareholders are aligned, then agency functionality is achieved. Consequently, the board has the powers to dismiss, engage, or compensate the top-level managers to monitor important decisions at the firm. According to Bhagat and Black (2002), the board of directors are considered a tool to oversee the firm’s decisions. They are expected to offer effective advice regarding corporate governance, thus, ensuring performance. Aguilera and Cuervo-Cazurra (2009) further state that the directors, through the resource dependency theory, act as mechanism for calibrating the company with external factors. Thus, the board has significant roles in ensuring that the firm performs at its best.
The concept of board size is relevant in addressing its functionality. It may be assumed that a larger board size is preferable to brine different areas of expertise. However, the larger the size, the more the problems of effectiveness in monitoring, coordination, and communication (Combs, Ketchen, Perryman, and Donahue 2007). Larger boards are also faced with the challenge of criticizing the top management and analyzing the firm performance seriously. Guest (2009) found that a larger board size has a significant negative effect to the firm performance after studying more than 2,500 sample in duration of 20 years of the UK listed companies. He also states that the board of UK firms usually plays a rather weak monitoring character but do more in advisory. There may be differences in the Hong Kong Case due to the differences of company culture. In addition, the requirement and expectation towards the board may change after these years, it is worth to further investigate the relation between board size and firm performances of Hong Kong companies.
Another key determinant of effectiveness of board functionality is the CEO duality. This refers to the leadership structure of the board in which the CEO and the chairman is considered to be the same person or not. The agency theory posit that there is need to separate chairmanship with CEO in order to ensure that board independence is maintained from the management; this can enhance overseeing and monitoring components of the board. In another study, Tuggle, Sirmon, Reutzel and Bierman (2010) investigated the relation between the firm performance and CEO duality and the attention of board member to monitor. They suggested that a better firm performance and the duality of CEO may lower the attention of board member to monitoring. Bhagat and Black (2001) claim that there is no relation between the % of independent director and the company performance. Based on the companies in the US, their study revealed that increasing the independency of the board does not guaranty low-profitability firms to improve their performance.
This study investigates the impact of the structure of the board of directors on the performance of Hong Kong companies. With the difficulty of obtaining data through survey methods in different companies, the study chooses to use deductive positivism approach to address the topic. This will involve relying on the pre-existing theories from which hypotheses are developed. The findings will demonstrated whether the formulated hypotheses are true or false. In order to achieve this, the study will consider regression as a tool for analysis in which positivist understanding will be pursued through the methodological processes selected. Data from A report from Forbes by Schaefer and Murphy (2016) reveals the top Global 2000 leading companies in the world, from which a total of 49 Hong Kong based companies. These companies will be considered the samples of study; their annual reports will be reviewed and analysis conducted. With less data on the 2016 annual reports, the study will majorly focus on the 2015 annual reports which would be located online.