Board characteristics, board responsibilities and firm performance evidence from vietnams stock market

On that Background, the authors offer research model includes independent variables and control variables, There is one explanatory variable which is the responsibility of the Board and

BOARD CHARACTERISTICS, BOARD RESPONSIBILITIES AND FIRM PERFORMANCE: EVIDENCE FROM VIETNAM’S STOCK

MARKET

In Partial Fulfillment of the Requirements of the Degree of

MASTER OF BUSINESS ADMINISTRATION

BOARD CHARACTERISTICS, BOARD RESPONSIBILITIES AND FIRM PERFORMANCE: EVIDENCE FROM VIETNAM’S STOCK

MARKET

In Partial Fulfillment of the Requirements of the Degree of

MASTER OF BUSINESS ADMINISTRATION

In FINANCE MAJOR

by

Mr Nguyễn Thế Hiển ID: MBA02011

International University - Vietnam National University HCMC

Acknowledge

To complete this thesis, I have been benefited from the following my Advisor I would like

to send my sincere thanks to Ph.D Hien Thu Nguyen who took advantage of the guidance, impart knowledge, valuable experience for me during the time of implementation, help me

to be able to complete this thesis

I Would like to thank all of my lecturers from the International University – Vietnam National University Hochiminh City, guided me with valuable knowledge during the period time of attending school of business Administration

Finally, I would like to thank my parents, family and friends for helping, taking care and encouragement me to complete this thesis

Plagiarism Statements

I would like to declare that, apart from the acknowledged references, this thesis either does not use language, ideas, or other original material from anyone; or has not been previously submitted to any other educational and research programs or institutions I fully understand that any writings in this thesis contradicted to the above statement will automatically lead

to the rejection from the MBA program at the International University – Vietnam National University Hochiminh City

List of abbreviations

CGI: Corporate Governance Index

BR: Board ‘s responsibilities

FI Financial Institution

GSO General Statistics Office

HNX Hanoi Stock Exchange

HOSE Ho Chi Minh Stock Exchange

LEV Financial Leverage

OECD Organization for Economic Co-operation and Development

ROA Return on Assets

ROE Return on Equity

MTBV Market to book value ratio

Mbratio Market to book value ratio

D/E Debt to equity ratio

CEO Chief Executive Director

BOD Board of Director

BOUT Number of outside directors on the board (including independent

non-executive directors, non-executive directors, and honorable

directors)

BEXC Number of executive directors on the board

TOP5 Percentage of total outstanding shares held by five largest

shareholders

BOARD CHARACTERISTICS, BOARD RESPONSIBILITIES AND FIRM

PERFORMANCE: EVIDENCE FROM VIETNAM’S STOCK MARKET

ASTRACT:

This thesis examines the relationship between Responsibilities of Board and firm performance To examine mentioned relation, we develop an instrument to assess the Board responsibilities practices that Based on the Asean corporate Governance Scorecard which revised OECD Corporate Governance Principles My sample includes 100 firms listed on HOSE and HNX stock exchange

Based on the extant literature, I develop a conceptual framework and a set of hypotheses to examine the relationship between board Responsibilities and firm performance This thesis also follow Empirical analysis is undertaken by authors Yan-Leung Cheung, J.Thomas Connelly, Piman Limpaphayom, Lynda Zhou from Chulalongkorn University, Thailand and City University of Hong Kong The findings of the study show that board responsibilities were positively related with market based firm performance On that Background, the authors offer research model includes independent variables and control variables, There is one explanatory variable which is the responsibility of the Board and five control variables are firm size, financial leverage, board size, age of the Board of Directors and the Number of women in the Board, All explanatory and control variables are included in the analysis in order to determine the extent of their influence on the firm performance through three dependent variable is ROE, ROA and MBratio

The findings of the study show that board responsibilities were also positively related with Market based firm performance, but there are no relation between Board responsibilities and accounting based firm performance The study contributes to the understanding how important board-Responsibilities in corporate governance and its influence on firm performance, therefore author recommend solutions to improve responsibilities of the board as well as corporate governance practices in Vietnam The findings of my thesis are expected to stimulate scholars for further research to identify the Relation between board responsibilities and firm performance

Keywords: corporate governance, firm performance, Board responsibilities, the board of directors ,

TABLE OF CONTENTS

ASTRACT……….iv

CHAPTER 1: INTRODUCTION……… 1

1.1 Overview ………1

1.2.Rationale for the thesis & Research Questions………2

1.3.Research Objectives……….3

1.4.Research Objects & Scopes……… 3

1.5.Research Significance………3

CHAPTER 2: LITERATURE REVIEW- RESEARCH MODEL AND HYPOTHESIS… 4

2.1 Agency theory and The Responsibilities of the Board………4

2.2 Role and responsibilities of the Board of Directors in Vietnam………7

2.3 Firm performance………12

2.4.Factors impact on firm performance………12

2.5 Previous Research Summary……… 18

2.6 Research Model and Hypothesis Development………21

CHAPTER 3: RESEARCH DESIGN AND METHODOLOGY………27

3.1 Research Design………27

3.2 Sample and Data sources……… 27

3.3 Variables Measurement Design………27

3.4 Methods and Data Collection………29

3.5 Data Analysis Methods 30

3.6 Data Analysis Process 31

CHAPTER 4: RESULTS AND DISCUSSION ……… 32

4.1 Descriptive Statistics 32

4.2 Correlation Analysis 35

4.3 Regression analysis and testing hypotheses 36

4.4 Testing Statistical Hypothesis 40

CHAPTER 5 :SUMMARY AND CONCLUSION ……….42

5.1 Summary of findings Conclusions 43

5.2 Suggestions and Recommendations……… ………44

5.3 Limitations and Next Research……… ……….47

REFERENCES……… ……… 49

APPENDIX 1……… ……… 51

According to corporate governance, the Board is considered a core element, plays a crucial role in building and maintaining effective governance principles The criteria for assessment of corporate governance is built on the basis of the OECD corporate governance principles, including (A) the rights of shareholders and the basic property functions , (B) equal treatment for shareholders, (C) the role of the stakeholders, (D) disclosure and transparency, (E) the responsibility of the board (Board), in which two factors (D) and (E) are of crucial importance

Worldwidely, there is evidence that the implementation of poor corporate governance

or improper performance will lead to bankruptcy and collapse, for example, corporations names such as Enron, WorldCom (U.S.), Baring (UK), Informatics, Citiraya (Singapore) , did not practice or violated true high standards of corporate governance Violation of corporate governance are the differences and diversity, but its general effect potentially leads to bankruptcy and collapse This, unfortunately, is a practical example of corporate governance in Vietnam

In Vietnam, through scandals relating to Bach Tuyet Cotton, Tuong An Vegetable Oil we see the role of the Board of Directors - the driver how much important to businesses Responsibilities of the Board of Directors is considered very important as the members of the Board of Directors are expected to set the overall strategy for the company, monitor risk management, monitor the results of management, ensure the integrity of the financial statements, and train and create personnel succession plan for senior management positions

In general, the role and responsibilities of the Board is of paramount importance for the future of a business Good corporate governance and Board members have responsibility not only to help enterprises responsible for the failures mentioned above that make businesses grow Research results from the Corporate Governance Scorecard project by international financial institutions (IFC) of the World Bank (WB), the Global Corporate Governance Forum (GCGF) and the State Securities Commission (SSC) last published in 2010 showed that corporate governance and evaluation of the market always correspond to each other Accordingly, 25% of firms with the highest corporate governance scores has high market to book value of 2.5 times And the corporate governance of the companies with average and poor corporate governance have on average market to book value ratios at 1.7 and 1.6 times, respectively This is a signal that corporate governance is important and is priced by the market

Around the world, there are many studies about the impact of the Board of Directors

on the effectiveness of enterprise, such as Othman research (2010), which is about the impact of the structure of the Board of Directors and published information on enterprise performance in Africa Study of Rashid et al (2010) explored the composition of the board of Directors and efficiency enterprises in Bangladesh Bathula (2008) studied the relationship between characteristics such as the percentage

of ownership of the executive board, the board size, the part-time executive director, the gender of the Board of directors and enterprise performance

However, as per the understanding of materials collected, there has not been a study conducted to explore the effects of the responsibilities of the Board of Directors on firm performance in Vietnam Therefore, the author chooses the theme "The Impact

of the responsibility of the board on firm performance: evidence from stock market of Vietnam" to find out how is the impact of the responsibility of the Board of Directors

on the firm performance From there, the research helps companies to have a proper look at the role and responsibilities of the Board of Directors, be able to enhance the role and responsibilities of the Board of Directors in order to increase firm performance

1.4 RESEARCH OBJECTS & SCOPES:

The object and scope of the study: The study was conducted on a sample of 100 companies with the largest market capitalization listed on the stock exchanges in Vietnam including Ho Chi Minh City Stock Exchange (HOSE) and Hanoi Stock exchange (HNX) in 2011 Data is collected for the fiscal year ended in 2011

1.5 RESEARCH SIGNIFICANE

The thesis contributes evidence on the impact of the role and responsibilities of the Board of Directors for firm performance Practical significance: The research results help companies and investors better understand the role and responsibilities of the Board of Directors in Vietnamese enterprises, and the impact of the Board's responsibility for the firm performance

To achieve the research objectives, the thesis is organized in layout consists of five chapters The specific content of each chapter is as follows:

Chapter 1 presents the reasons for forming the subject, the urgency of the research, then presents research objectives, identify the object and scope of the research as well

as practical significance that researchers can achieved, finally announced the presentation layout of the thesis

Chapter 2 presented the basic theoretical concepts related to the responsibilities of the Board of Directors and firm performance, and then summarize and discuss previous research related to the one in this thesis and recommendations research model, the research hypothesizes

Chapter 3 presentation of the study process, define the variables studied, the steps to build the scale of the independent variables, thereby setting the research model Collection methods and data processing, methods and tools used to analyze the research data will also be introduced in this chapter

Chapter 4 presentation and discussion of the results of data analysis included descriptive statistics, correlation analysis, multivariate regression analysis to test the research hypotheses

Chapter 5 presents the conclusions of the research results obtained, made a number of recommendations for corporate governance implications in policy and strategy to increase the responsibilities of the Board of Directors The final chapter presents limitations exist and further research

CHAPTER 2:

LITERATURE REVIEW- RESEARCH MODEL AND HYPOTHESIS

This chapter presented the basic theoretical concepts related to the responsibilities of the Board of Directors and firm performance, and then summarize and discuss the literature related to research in the thesis Proposed model and research hypothesis

2.1 AGENCY THEORY AND RESPONSIBILITIES OF THE BOARD

This section reviews some major theoretical perspectives of boards and governance mechanisms that are considered relevant for this study

This view is based on the idea that in a modern corporation, there is separation of ownership (principal) and management (agent), and this leads to costs associated with resolving conflict between the owners and the agents (Berle & Means, 1932; Jensen & Meckling, 1976; Eisenhardt, 1989) The fundamental premise of agency theory is that the managers act out of self-interest and are self centered, thereby, giving less attention to shareholder interests For example, the managers may be more interested

in consuming perquisites like luxurious offices, company cars and other benefits, since the cost is borne by the owners The managers who possess superior knowledge and expertise about the firm are in a position to pursue self-interests rather than shareholders (owners) interests (Fama, 1980; Fama & Jensen, 1983) This pursuit of self-interests increases the costs to the firm, which may include the costs of structuring the contracts, costs of monitoring and controlling the behavior of the agents, and loss incurred due to sub-optimal decisions being taken by the agents Shareholder interests can clearly be compromised if managers maximize their self-interest at the expense of organizational profitability, i.e., the managers expropriating shareholders interests In essence, the managers cannot be trusted and therefore there

is a need for strict monitoring of management by the board, in order to protect shareholder’s interest Further, in a large corporation with widely dispersed ownership, small shareholders do not have a sufficient payoff to expend resources for monitoring the behavior of managers or agents Eisenhardt (1989, p 58) explains that agency problem arrives when “(a) the desires or goals of the principal and agent conflict and (b) it is difficult or expensive for the principal to verify what the agent is actually doing” Consequently, the monitoring of management activities is seen as a

fundamental duty of a board, so that agency problems can be minimised, and superior organisational performance can be achieved

Agency theory as posited by Jensen and Meckling (1976) assumes that agency problems can be resolved with appropriately designed contracts by specifying the rights belonging to agents and principals Fama and Jensen (1983, p 302) refer to such contracts as “internal rules of the game which specify the rights of each agent in the organisation, performance criteria on which agents are evaluated and the payoff functions they face.” However, unforeseen events or circumstances require allocation

of residual rights, most of which end up with the agents (managers), giving them discretion to allocate funds as they choose (Shleifer & Vishny, 1997) The inability or difficulty in writing perfect contracts, therefore, leads to increased managerial discretion which encapsulates the same agency problem Further, when principals monitor agents to ensure that agents act in the best interests of the principals, they incur monitoring costs, which further reduce the value of the firm

Given the problems in mitigating agency problems through the use of contracts, scholars have suggested various governance mechanisms to address the agency problems Agency theory thus provides a basis for firm governance through the use of internal and external mechanisms (Weir et al., 2002; Roberts et al., 2005) The governance mechanisms are designed to “protect shareholder interests, minimise agency costs and ensure agent-principal interest alignment” (Davis et al., 1997, p 23)

Two important governance mechanisms used for this purpose are board of directors and compensation schemes to align the interests of both the agent and the principal Fama (1980) considers the board a low-cost mechanism of management compared to other alternatives such as, for example, takeovers The literature on board, as a governance team, is mainly focused on issues such as board size, inside versus outside directors (also known as executive versus non-executive directors), separation of CEO and Chair positions, etc (Dalton et al., 1998; Coles & Hesterly, 2000; Daily et al., 2003) with an aim to improve the effectiveness of oversight Executive compensation concentrates on the degree to which managers are compensated in ways that align their interests with those of shareholders (Davis et al., 1997; Tosi, Brownlee, Silva & Katz, 2003) Such incentivized compensation schemes are particularly desirable when

the agents have a significant informational advantage and monitoring is difficult Many scholars have relied upon agency theory to examine the role of boards and other related governance aspects in affecting firm performance (Cadbury, 1992; Vienot, 1995; Hampel, 1998; OECD, 1999; ICGN, 1999; King, 2002)

The corporate governance framework should ensure the strategic guidance of the company, the effective monitoring of management by the board, and the board’s accountability to the company and the shareholders Board structures and procedures vary both within and among OECD countries Some countries have two-tier boards that separate the supervisory function and the management function into different bodies Such systems typically have a “supervisory board” composed of non-executive board members and a “management board” composed entirely of executives Other countries have “unitary” boards, which bring together executive and nonexecutive board members In some countries there is also an additional statutory body for audit purposes The Principles are intended to be sufficiently general to apply to whatever board structure is charged with the functions of governing the enterprise and monitoring management

Together with guiding corporate strategy, the board is chiefly responsible for monitoring managerial performance and achieving an adequate return for shareholders, while preventing conflicts of interest and balancing competing demands

on the corporation In order for boards to effectively fulfill their responsibilities they must be able to exercise objective and independent judgment Another important board responsibility is to oversee systems designed to ensure that the corporation obeys applicable laws, including tax, competition, labor, environmental, equal opportunity, health and safety laws In some countries, companies have found it useful to explicitly articulate the responsibilities that the board assumes and those for which management is accountable

The board is not only accountable to the company and its shareholders but also has a duty to act in their best interests In addition, boards are expected to take due regard of,

and deal fairly with, other stakeholder interests including those of employees, creditors, customers, suppliers and local communities Observance of environmental and social standards is relevant in this context

VIETNAM:

Currently, Concepts of corporate governance practices is quite early stage so the implementation of the corporate governance principles; Responsibilities of the Board are not interested or incomplete implementation and still face many limits and problems The situation of corporate governance practices and responsibility of the Board of Directors in Vietnam may roughly the following content:

a Corporate governance principles is not a widespread propaganda; Responsibilities of the Board in firm not go into the standard and still arbitrary form:

In Vietnam, the legal framework of corporate governance initially applied through the Enterprise Law 2005, the Securities Act of 2006 and Decision No 12/2007/QD-BTC

of Finance Minister on promulgating the Regulation corporate governance applicable

to listed companies In each firm domain, most companies issued company Charter as well as specific corporate governance regulations In terms of the regulatory framework for corporate governance as well as defines the responsibilities of the board has been issued relatively complete, the form of the above provisions nearly refer to OECD principles of corporate governance However application documents are incomplete, not properly applied the usual paradigm, the model according to the international standards

The Responsibility of the Board in corporate governance in Vietnam is still spontaneous, many listed companies still go beyond the regulations issued and these companies implemented corporate governance in their own way The basics of the board of directors in corporate governance (such as the relationship between the Board of directors and Executive Committee, the real role of the Supervisory Board, transparency, publicity, etc.) are not fully understood, the applied according to international standards is inadequate The reason of this situation is that corporate

governance issues are quite early stage and has not been widely propaganda by authorities In business, the implementation of the principles of corporate governance have not been given proper attention

b Activities of the Board of Directors have been affected by state own enterprises

or by heavy family rule:

Practice in Vietnam showed that after equalization of state own enterprise, these companies has not yet reached the Corporate governance principles One of the biggest features of corporate governance in Vietnam is the corporate governance model of state own enterprises still dominate, especially in the enterprise that the state still holds keep most direct and control through representatives as members of the Board of Directors

For non-state own enterprises, joint stock company grow from the family company model, board structure remains the largest shareholder in the family as his wife, father, mother, brother Thus, corporate governance is still heavily nepotism Talented personnel in the company and participate in board run away because they can not bear how to manage a family of companies Finally, the company also

developed to a certain extent and then stop

c Board activities in the direction of centralized power and exist a corporate governance mechanism of 3 in 1:

Legally, the Board defined "business agency ", have a right in the name of the business to exercise all the rights and obligations of the business, except under the authority of the General Meeting of Shareholders In fact, in most of the joint stock companies, board members hold dominant shares or representatives of the major shareholders in the firm So ordinary members of the Board of Directors are directly involved in the business operations of the business Therefore, in the above companies, there is no clear separation between ownership and management, and executive management Chairman of the Board is also Chief Executive Officer and is usually the legal representative of the firm

Board of Supervisors are often designated by the group of major shareholders and usually should not be taken as independent, formal only Position of the Board of Supervisors has always been overlooked and largely fail to fulfill their duties In many companies, the inspectors become document staff for the dominant shareholders in some case of necessity

d There is no clear demarcation between the Board of directors- Board of management - Supervisor Board - shareholders

In some companies, the actual role of the Board and the executive are not yet clearly distinguishable This can lead to two possibilities: first, that the Board of directors does not receive the main flow of information on the operation of the business to build and monitor the strategic objectives and risk-protection decisions Second, the Board of directors has not fully implemented its role in corporate governance The director board members had to concentrate more on the administration, and little or no attention to the role of strategic direction and oversight, ensure appropriate business development strategies In addition, director board members are often influenced more by the interests of them rather than to serve the firm interests and others related

Board-quality is to ensure that fair decisions, independence be considered at meetings

of the Board of Directors and in the process of decision making Therefore, the presence of independent members of the Board of Directors play an important role Also, they can take advantage of external relations in favor of business "There is evidence that the higher participation rates of the independent members of the Board

of Directors, the higher director Board of the company quality has been improved."

Circular 121/2012/TT-BTC corporate governance regulations applicable to public companies, the structure of the Board members should ensure a balance between the operating time members and the non-executive members, of which at least one third (1/3) of the total number of Board members must be non-executive members Although there are at least 1/3 of the members of the Board of Directors is independent, non-operating participants, limited part-time board member positions in

the executive apparatus, but the actual survey results only 4 % of enterprises have at least 1/3 of the members of the Board of directors are independent

f Capacity of director Board is not high:

In fact, the operation of the Board is not effective in the past Activities Rule did not follow the standard and most have not been clearly defined For example: "For a long time, at the meeting of the Board of Directors annually held formally and was not quality, the early hours of the meeting, members attended the tea party and the exchange of social stories, then heard the report about 30 minutes Finally, party was held at restaurant and the all members received bonus shares there

In addition, the Corporate governance of the Board of Directors by the way of convenience rather than scientific management has made the role of the director Board and corporate governance capacities are more weak Basic characteristics of convenience governance is selected, appointed manager and assigning depend on personal beliefs This means that the familiar relationships and personal trust is the basic criteria for appointment and assignment to someone So, who was appointed as board members usually are not professional managers, professional qualifications and corresponding professional experience with the content and requirements of the job they have to do In the above management, even if professional managers are employed, they do not promote their capabilities Because the application of processes and procedures to address the jobs are streamlined become unfamiliar in this case

There are two reasons for this situation, Firstly, the business is not to evaluate the effectiveness or results of operations of the Board of Directors In addition, common evaluation criteria and mechanisms for assessing the performance of the Board and each member of the director Board is also not issued yet Secondly, the legal system

of Vietnam is still no sanctions to penalize a public company which fails to comply with the provisions of the structure independent members of the board, as well as effective measures to end speed superior board performance better its functions and obligations

g Status of the specialized committees and committees under the Board of director and Current status of the internal control system in the firms:

In fact, the establishment of specialized committees under the Board of Directors at the company in Vietnam has not been adequate attention and not be considered as a really necessary model for business development only a numbers of large scale corporate enterprises established committees As for small-medium enterprises, have

no concept of the committee under director Board Particularly in the field of banking and finance, banks have set up committees under the rules and regulations of the Law

on Credit Institutions, but the role and activities of these committees are weak and do not effectively advice to the Board of Directors Furthermore, the Supervisory Board

is currently inefficiencies and did not play a right role, Because many of the board of Directors appointed chief of supervisor board, decided the rights of the Supervisory Board, or Board of Supervisors also were nominated, and then do nothing

Currently, Vietnamese enterprises have not realized the importance of internal control, whether or not to build their own effective internal control system This is easy to understand because many firms are in transition to a new operating system or new business activities are face with challenge of daily life in a business environment and due to limited resources, firms are given priority to become more essential in stead of setting up internal control system

Empirical researches on CG use either market-based measures or accounting-based measures to assess firm performance Klein (1998) uses return on assets (ROA) and

Lo (2003) uses return on equity (ROE) as an operating performance indicator Brown and Caylor (2005) use ROE and ROA as their two operating performance measures

We can measure the operating performance of a firm through the ROA ratio which shows the amount of earnings have generated from an invested capital assets (Epps & Cereola 2008) Managers are directly responsible for the operations of the company and therefore the utilization of the firms’assets Thus, ROA allows users to assess how well a firms’ CG mechanism is in securing and motivating efficient management of the firm ROE is a measure that shows an investor how much profit a company generates from the money invested from its shareholders

The MTBV provides an estimate of the total value of a firm (including intangible assets such as monopoly power, goodwill, high-quality managers, and growth

opportunities) and reflects firm performance (Tobin and Brainard, 1968) MTBV is considered a better measure of firm performance than accounting measures (e.g., ROE

or ROA) because it is based on market value, not just accounting earnings and is not affected by earnings management or accounting manipulations

2.4.FACTORS IMPACT ON FIRM PERFORMANCE

a Responsibility of the director Board impact on firm performance

According to agency model, the separation of ownership and control creates an inherent conflict of interest between the shareholders (Principal) and the management (Agent) (Aguilera et al., 2008) Although managers are said to be rational, but cannot

be trusted to remain faithful by always acting in the best interest of the principal since they are also presumed to be self-interested (Williamson, 1975; Padilla, 2002) Therefore, managers must be controlled to avoid “moral hazard” using some risk-bearing and monitoring mechanisms that checkmate their deviant behaviors (Jensen, 1983; Filatachev et al 2007) In order to effectively address the agency problem, the theorists acknowledged the crucial role or responsibility of the director board as an instrument of owners in subduing the opportunistic behavior of managers (Stiles and Taylor 2001)

b Firm Size and Profitability :

Economic theory prescribes that increasing firm size allows for incremental advantages because the size of the firm enables it to raise the barriers of entry to potential entrants as well as gain leverage on the economies of scale to attain higher profitability The higher the barrier to entry, the lower will be the threat of potential competition, and the higher the profits that existing firms can earn without inducing entry (Chrystal & Lipsey, 1997)

Much of the early works that tried to prove that size does matter was based on markets in the U.S and the U.K in the early 1960s and 1970s Among the pioneering studies conducted in this field is attributed to Hall and Weiss (1967) Their empirical analysis of Fortune 500 Industrial Corporations for the years 1956–1962 aimed at testing the relationship between profit rates and other appropriate variables such as firm size, concentration, leverage and growth Results of the study showed that firm size (proxies by the log of firm assets) exhibit a positive relationship with profitability

[represented by Return on Equity (ROE) and Return on Assets (ROA)] They concluded that large firms have all the options of small firms, and, in addition, the capability of harnessing economies of scales and access to capital markets from which small firms are excluded, thus leading to higher profit rates

However, many of the recent studies that consider the size-profitability relationship tend to show non significant results In fact, in a meta-analysis conducted by Capon et

al (1990), firm size was considered not significant and further confirmed in an ANCOVA analysis Poensgen and Marx (1985), for example, test the relationship between firm size and profitability for a sample of 1,478 German manufacturing firms

in 31 industries Results reveal weak size-profitability correlations that are unstable over the study period These results suggest that firm size is not the major determinant

of profitability and that profitability would depend largely on how well firms cope with size and exploit the opportunities associated with it

Whittington (1980) even found a negative association between firm size and profitability for U.K based listed manufacturing companies covering the time period from 1960 to 1974 While no suitable reasoning can be used to explain such a link, organizational theory may perhaps solve part of this quandary Downs (1967) suggests that larger firms can lead to increased coordination requirements, which in turn, makes the managerial task more difficult leading to organizational inefficiencies and lower profit rates Further, it has been suggested that increased size tends to be associated with higher bureaucratization (Ahuja & Majumdar, 1998) Larger firms may have overly bureaucratic management structures, thereby inhibiting swift and efficient decision-making process It is also possible that with the additional management layers needed to organize an increasingly large and diverse workforce, management may be affected by the agency problems

Based on previous literature, it is difficult to make a clear, let alone a final prediction

of the overall effects of the firm size- profitability relationship From the studies carried out, the association appears to differ depending on the industry under analysis Given this ambiguity, it seems prudent to empirically resolve, independently, the association between firm size and profitability on a case-by-case basis and avoid the tendency to generalize

c The impact of financial leverage on firm performance:

There are studies on the relationship between leverage and corporate performance is linked to the agency costs literature As mentioned by Jensen and Meckling [1976], significant agency costs can indeed arise from conflicts of interest between categories

of agents (managers, shareholders, and debt holders) These authors identify in fact two types of conflicts that have different implications leading to opposite theories on the link leverage-performance Firstly, agency costs result from the conflicts of interest between shareholders and managers The key problem is here the moral hazard behavior of managers that can waste firm resources or minimize their effort rather than increasing firm value, as they have their own objectives In this way, debt financing raises the pressure of managers to perform (meaning to reduce their waste

of resources and to increase their effort) as it reduces “free cash-flow” at the disposal

of managers (Jensen [1986])

Indeed, debt implies interest payment obligations that must be satisfied by managers, under the threat of a bankruptcy if these obligations are not satisfied Grossman and Hart [1982] also argue that debt financing provides better incentives for managers to perform as they aim to avoid the personal costs of bankruptcy Consequently there should exist a positive influence of leverage on corporate performance Secondly, agency costs also arise because of the conflicts of interest between shareholders and debt holders Indeed shareholders have incentives to take actions that benefit themselves at the expense of debt holders, and consequently that do not necessarily maximize firm value This divergence of interests has two manifestations On one hand, it gives incentives to shareholders to invest in riskier projects than those preferred by debt holders (Jensen and Meckling [1976]) This “asset substitution’ comes from the asymmetry of gains for shareholders: if an investment provides returns above the debt value, gains are for shareholders Whereas if the investment fails, losses are shared between debt holders that do not receive the repayment and shareholders that suffer from the loss of capital, because of limited liability for shareholders On the other hand, conflicts between shareholders and debt holders can also create underinvestment, as demonstrated by Myers [1977] As a result, the agency costs resulting from the conflicts of interest shareholders-debt holders suggest that a higher leverage is correlated with a lower corporate performance To sum it up,

theoretical literature provides opposite arguments on the relationship between leverage and corporate performance Whereas theories based on signaling and the agency costs resulting from the conflict of interests shareholders managers provide arguments in favor of a positive relation, the stream of research analyzing the agency costs from the diverging interests between shareholders and debt holders suggests a negative relation

d The impact of board characteristics on firm performance:

There are many researches that clarify the impact of the of the Directors Board characteristics on firm performance Specifically the Bathula research (2008) found the relationship between board characteristics such as board size, CEO duality , Gender diversity and firm performance in New Zealand Yammeesri and Herath Research (2010) on the characteristics of the Directors Board and firm performance in Thailand have found a link between non-executive board members, the size of the Board, duality CEO and firm performance Thus the characteristics of the Board may affect the firm performance Through surveys of previous research related to board characteristics affect the performance of the firm, the author outlines the characteristics affect the firm performance and put them into control variables impacting on the firm performance model in this research thesis

Board size

In a research survey conducted by Hermalin and Weisbach (2003), board size is found

to have a negative relationship with firm performance Firms with small boards are found to perform better than firms with large boards Kiel and Nicholson (2003) supported the summarized arguments of Dalton et al (1999) by contradicting the findings of Yermack (1996) and Eisenberg et al (1998) After controlling for firm size they found that board size is positively correlated with firm value measured as Tobin’s Q Interestingly, they found no correlation between board size and an accounting-based measure of firm performance, measured as return on assets In a study by Coles, Daniel and Naveen (2008) the relationship between board size and firm performance was found to be approximately “U”-shaped, with a small or large board being optimal This finding, however, turned out to be due to small, “simple” firms having a negative relationship between board size and firm performance and larger and more “complex” firms, having a positive relationship between board size

and firm performance Coles et al (ibid.) argued that CEOs of larger firms, diversified firms and high-debt firms require more advice from the board of directors and therefore require larger boards

As we can see, studies on board size come to different conclusions Some see a positive relationship between board size and firm performance, some the opposite Dalton et al (1999) therefore conducted a meta-analytical study of board size in relationship to firm performance A sample size of 131 samples and a total ‘n’ of 20,620 was used The conclusion was that there was a non-zero, positive, true population relationship between board size and firm performance The relationship between board size and firm performance was also found to be stronger in small firms

in comparison with large firms

Age diversity

In a study performed by Wegge et al (2008), the effect of age diversity upon

performance was examined Reviewing previous studies on age and gender diversity,

they found the familiar mixed results Based upon this they theorized that the complexity of the task could have a moderating effect upon the influence of diversity Various theoretical frameworks from work psychology give reasons why diversity could have negative as well as positive influences - the similarity-attraction and social identification models (the desire of the individual to emulate and become part of the group) both predict negative effects of diversity while the model for decision making

in teams make the opposite predictions Wegge et al (ibid.) speculate that which one

of these conflicting effects will be dominant depends upon the task complexity,

defined as strong demand for complex decision making A field study was then conducted by Wegge et al (ibid.) on work groups amongst some 4000 employees in the public sector Age heterogeneity improved the ability of groups to solve tasks with high complexity For groups working on simple tasks, however, age heterogeneity increased the number of self-reported health problems - which in turn indicates that groups of diverse ages should be utilized particularly for innovation or solving complex problems We believe that these results can be extended to the board of a public company, considering the tasks at hand involve complex decision making Wegge et al (ibid.) further explain some of the positive results of age diversity as being the result of extended job tenure of the participants Of course, in order to

extend job tenure it is necessary to start early and stay around As far as we know, the only empirical study of the relationship between age diversity on the board of

directors and firm performance is McIntyre et al (2007) Their review of relevant

literature on the role and function of the board particularly notes the increasing use of organizational behavior theory to predict board function and improve board processes From this they argue that governance research should concentrate on “creating and testing a theoretically sound model of Board effectiveness, rather than trying to relate team attribute variables to firm performance” (ibid., p550)

Gender diversity

In corporate world, women representation on boards is very limited Due to glass ceiling, many women do not have opportunity for extensive experience in the corporate-world, and hence they are likely to be non-executive directors However, as boards’ size increased steadily through 1980s and 1990s, more women got opportunities to be represented on the boards Further, scholars have argued that it makes good business sense to have women on board as “60 per cent of all purchases [in the US] are made by women” (Daily et al., 1999, p 94)

In a recent study, Smith, Smith and Verner (2006) found that women on board of directors have significant positive effect on firm performance With most of them having non-corporate background, women are far more likely to hold valuable, unique, and rare information because they have been excluded from the traditional development paths of corporate directorships Letendre (2004) brings up the idea of

‘value in diversity’ and suggests that female board members will bring diverse viewpoints to the boardroom and will provoke lively boardroom discussions Bilimoria and Wheeler (2000) suggest that, on an average female board member is younger than her male counter part, and so the board benefits from infusion of new ideas and approaches to deliberations Women may have different views, values and ways to express and communicate their opinions As a result, women are more likely

to question the conventional wisdom and to speak up when concerned about an issue

or a particular managerial decision through more questioning and open discussion (Fondas & Sassalos, 2000; Huse & Solberg, 2006) Even if gender diversity causes disagreement, Latendre (2004) suggests such disagreements are valuable to the board

as it leads to better board dynamics and decision making

The effect of women directors was empirically examined by Carter, Simkins and Simpson (2003), Fields and Keys (2003), Bonn (2004) and Farrell and Harsch (2005) Carter et al., (2003) found a positive relationship between gender diversity and firm performance Bonn (2004) found a positive relationship between the ratio of women directors and firm performance Some studies have examined the effect of women on board committees and found a positive effect on firm performance (Bilimoria & Piderit, 1994)

There are many researches on the impact of the Board of Directors on firm performance and evidence from many countries around the world The research revolves around the element structural characteristics of the Board of Directors as the Board of Directors, the number of independent members, number of members, the qualifications of members of the Management Board effective impact on how businesses

List of previous Researches examining the relationship between Director Board characteristics and firm performance:

Board Functions and Firm

Performance: A Review and

Directions for Future Research

By Chin Huat Ong and

Doard of directors and firm

performance: integrating agency and

resource independent perspectives

Amy I Hillman Thomas Daziel

2003

Gender Diversity in the Boardroom and

Firm Performance: What Exactly

Constitutes a “Critical Mass”?

Jasmin Joecks*, Kerstin Pull*, Karin Vetter* 2006

Board size, Board composition and

Property firm performance

By Dr Roselina Shakir 2006

Boards of Directors and Firm

Performance: Is there an Expectations

Board composition and firm

performance: a quantitative study on

Chinese listed companies

Board Structure and Firm Performance:

Evidence from India’s Top Companies

Beverley Jackling and Shireenjit Johl

2009

Board Structure and Corporate

Performance in Malaysia

Zubaidah Zainal Abidin 2009

Composition and Configuration of the

Board and Firm Performance in

Financial Services Industry in Sri Lanka

Board Composition and Firm

Performance: Evidence from

Board diversity and firm performance:

the Indonesian evidence

Board Composition and

Firm Performance in the

Netherlands

Outsiders on the board of directors and

firm performance: Evidence from

Spanish non-listed family firms

Blanca Arosa *, Txomin Iturralde, Amaia Maseda

and Annuar Md Nassir

2010

Does Board of Director’s

Characteristics Affect Firm

& Mohd Shahidan Shaari

Board of Directors, Audit Committee

Effect of board composition on firm’s

performance: a case of Pakistanian

listed companies

Aamir Khan (Corresponding author)

Dr Sajid Hussain Awan

Most previous researches focused on the relationship between the characteristics of the directors Board and firm performance Research on the relationship between the responsibilities of the directors board and firm performance was not officially announced yet

A research of the authors Yan-Leung Cheung, J.Thomas Connelly, Piman Limpaphayom, Lynda Zhou from Chulalongkorn University, Thailand and City University of Hong Kong may refer to a Research on the relationship between corporate governance and firm performance, which has extensive research five survey sub-indices of CG with firm performance GC sub-indices including (1) Rights of shareholders, (2) Equitable Treatment of shareholders (3) Role of stakeholders in CG, (4) Disclosure and Transparency, (5) Responsibilities of the Board

Firstly, the research examine the relation between the overall CGI scores and firm performance Secondly, the research examine the relation between each of the five sub-indices of the CGI and market valuation to test whether any one of these sub-components is more significantly driving the relation To perform the analyses, the overall CGI scores are replaced in the regression models with the scores from the five survey sub-indices Regression results for market performance (market-to-book value)

A series of regression analyses are performed using both accounting performance and market performance as dependent variables The regression model is given by:

The dependent variable is a proxy of market valuation, the MTBV This ratio provides

an estimate of the total value of a firm and reflects firm performance MTBV is considered a better measure of firm performance than accounting measures (e.g., ROE

or ROA) because it is based on market value, not just accounting earnings and is not affected by earnings management or accounting manipulations The explanatory variable of interest is the CGI The control variables used include financial measures

such as portability (ROA) and firm size (total assets or TA), and risk factors as described by the current ratio (Current) and debt to equity ratio (D/E) Other explanatory variables include board characteristics such as the number of outside (BOUT) and executive directors (BEXC) on the board Ownership concentration is captured by the variable TOP5, the percentage of shares owned by the top five shareholders Lastly, a series of corporate governance dummy variables are included

as indicators of whether the CEO is also the Chairman, whether the firm has audit or compensation committees, whether the company has American depositary receipts (ADRs) trading outside of Hong Kong, whether the company is a constituent of a Morgan Stanley Capital International Index (MSCI) index, and whether the company

is an H-share or Red Chip firm To check for robustness of the results, the model is run replacing MTBV with firm portability as measured by ROE

re-2.6 RESEARCH MODEL AND HYPOTHESES DEVELOPMENT

In general, theoretical studies as well as review previous researches have shown the relationship between the board characteristics and firm performance, this study suggested a model study the relationship between the responsibilities of the Directors Board and firm performance In which firm performance is the dependent variable, the responsibilities board as explanatory variable, control variables include firm size, leverage and characteristics of the Board include the number of Board members, BOD age, Board gender; other board characteristics such as independent board members, executive Board members were excluded from the model due to the questionnaire survey in Asean CCG scorecard included

Independents variable Board responsibilities

Firm Performance Market performance

 MBratio (MTBV)Accounting performance

 ROE

 ROA

Control variables Firm size

Leverage

No of BOD BOD age

No of female in BOD

Thesis use the regression analysis method to check hypotheses about the relationship between the responsibility of the Directors Board and firm performance General form of the regression model is defined as follows

Yi =β0+ ∑ Bi*Xi + εi

Yi: Independent Variable measuring firm performance of Company i

Xi: Independent variables and control variables impact on the firm performance of company i

β0: Constants of the regression model

βj: The regression coefficients of the variablesXi

εi: Error of the regression model

HYPOTHESES DEVELOPMENT

According to corporate governance principles, the Board of Directors plays a central role in the corporate governance structure, responsible to shareholders for the operation of the firm Board of Directors is responsible for the final adoption of the firm’s strategic plan Board is responsible for supervising the firm’s business Board

is responsible for risk management, identification and evaluation of risk, policy risk management and establish procedures to monitor and periodically report on the risk management process Board of Directors is responsible for the planning staff, replace planning the senior management staff including the Director-General Board of Directors is responsible for building information to communicate with the investors and shareholders, Building a relation and communication policy in accordance with the shareholders Board of Directors is responsible for ensuring internal control systems and adequate management information to support firm activities, ensure the providing timely reliable information for control monitoring reports Board is responsible for assessing the performance of the committee and members of the subcommittee to review the implementation of the tasks set out requirements

The responsibility of the Directors Board is very large and will greatly affect to firm performance One of the results brought by the responsibilities of the Directors Board

is that minimize agency costs thereby increasing the firm performance Therefore the

research hypothesis is stated as follows:

Hypothesis H 1.1 : There exists a positive relationship between responsibilities of the Directors Board and accounting based firm performance

Hypothesis H 1.2 : There exists a positive relationship between responsibilities of the Directors Board and market based firm performance

Firm size greatly influenced the financial firm performance and The firm develop better if It have the advantage of scale as well as the skills of managers The Zeitum study and Tian (2007), Imam (2007) showed a positive relationship between firm size,

as measured by the natural logarithm of total assets, and firm performance However the Belkhir study (2009) found a negative relationship between firm size and firm performance On this basis, the second hypothesis in this study is stated as follows

Hypothesis H 2: There exists a relationship between firm size and firm

performance

The reason why the firm use debt instead of equity is that the interest pay to the creditors or debtors shall be exempt, while the dividend or other common forms of dividend pay to shareholder shall be taxed In principle, if we use debt instead of equity would reduce corporate taxes to pay, increase the firm performance At the same time the use of debt is cheaper than equity, thereby increasing it will reduce the cost of capital and increase the firm performance, but not able to increase debt too high because the firm will fall into an unhealthy financial situation, increase the firm

risk Research Ratha (2003), Zeitunva Tian (2007) has pointed out financial leverage has a negative impact firm performance Thus the use of financial leverage will affect

the firm performance On this basis, the hypothesis in this study is stated as follows

Hypothesis H 3: There exists a relationship between Leverage and firm

performance

Role of Board size has been a matter of continued debate from different perspectives (Jensen 1993; Yermack, 1996; Dalton et al., 1999; Hemalin & Weisbach, 2003) While some have suggested maller boards enhance firm performance (e.g.,Lipton & Lorsch, 1992; Jensen 1993; Yermack, 1996) others have suggested larger boards are better for improving firm performance (Pfeffer, 1972; Klein, 1998; Adam & Mehran, 2003; Anderson et al., 2004; Coles et al., 2008)

Scholars have argued for smaller boards on grounds of easy co-ordination, cohesiveness and communication (Jensen, 1993) and to avoid social loafing and free riding (Lipton & Lorsch, 1992) As the size of the board increases, interpersonal communication becomes less effective As the board size increases, problems of communication and coordination manifest and are likely to develop factions and conflict (O’Reilly et al., 1989) Empirical studies by Yermack (1996) and Eisenberg

et al (1998) provide evidence that smaller boards are associated with higher firm value

On the other hand, large boards may be more useful to firms on grounds such as advice to CEO and greater monitoring of management (Pfeffer, 1972; Klein, 1998; Adam & Mehran, 2003; Anderson et al., 2004; Coles et al., 2008) Klein (1998) argues that the need for advice for CEO will increase with organizational complexity Klein further suggests that the advisory needs of CEO increases with the extent of firm’s dependence on environmental resources So, increasing board size helps businesses to manage the environment (Pfeffer, 1972; Pearce & Zahra, 1992)

Hypothesis H4: There is a significant relationship between board size and firm performance