ON THE DETERMINANTS OF CAPITAL STRUCTURE: AN EMPIRICAL STUDY OF VIETNAMESE LISTED FIRMS

A recent report from the International Business Report (IBR), explores the global shift in the number of women at the top of the business world and examines ways to make this growth permanent and parity possible. Key findings from the survey include: women hold 24% of senior management roles globally, a three point increase over the previous year. There has been a sharp rise in China, with 51% of senior management positions held by women, compared to 25% last year. The proportion of businesses employing women as CEOs has risen from 9% to 14%. Education and talent management may work in tandem with flexible work arrangements, which 67% of respondents offer, to increase the number of women in top leadership. Just 19% of board roles around the world are held by women. Although quotas have been put into place around the globe to increase women’s participation in boards, 55% of respondents oppose such quotas.In politics, an increasing number of women won elections: South Korea, for instance, recently swore in its first female president. Approximately 17 countries have women as head of government, head of state or both (a number that, according to the Inter-Parliamentary Union and UN Women, has more than doubled since 2005), and the world average for women in parliament totaled 20.4% as of 1 February 2013.

JEAN MOULIN LYON 3 UNIVERSITY VIETNAM UNIVERSITY OF COMMERCE

MASTERS FINANCE AND CONTROL

THESIS EFFECTED FROM WOMEN ON THE BOARD

I declare that this current research is my own The data and the results in this research arehonest The research content has ever not submitted to any degree in any other university or anyother research work.

Researcher

An Thi Xuan Van

I would like to say thank you to all the people who were beside me during thepreparation of this paper

Especially, I want to say thank you to Prof Laurence Gialdini,my Adviser

She always assists me in my studies and besides during the time I conducted my thesis, sheguided me how to write my thesis and make an excellent power point presentation She would

go the extra mile in reaching out to her advisee and students

To Dr Abadie, Dr Nguyen Hoang and Dr Vu Manh Chien who guided me

and gave me a chance to conduct this current thesis and gave me some ideas for my thesis

To Dr.Duc Khuong Nguyen who gave me advices and ideas during the time I

conducted this current research

To Mrs Bui Viet Thu who has been following our class and give us every

information that we need during this Course

To All my dear professors from Jean Mounlin Lyon 3 and Faculty of internationaltraining in Viet Nam University of Commerce Who always give me useful counsels which help

me to be more confident Gave me orientation for the way which I should follow and now Ihave already overcome step one to enter my life with the knowledge that I get in my course I

am sure that it will help me in my future

To all friends who are always with me during the time I study here in Ha Noi

And lastly, I want to say thank you to my family especially to my parents who gave meopportunity to come here to study They always encourage me and make me become betterperson I am very happy and lucky to have a family like that They follow and research for me; it

is my chance in advancement of my life

Thank you for all the persons who are always beside me

Corporate Governance literature argues that board diver is potentially positive related tofirm performance Current study, the researcher examines with 33 Vietnamese Bank.Objective of the study is to verify the relation between women on the board and bankperformance Quantitative method is applied The quantitative data was taken from annualreports of the sample banks during period 2008 to 2012 and it was analyzed using SPSSsoftware The result shows Women on boardroom of Vietnamese banks have positiverelationship with bank performance measured by return on equity

Keywords: boardroom, firm performance, agency t h e o r y , stewardship theory,

quantitative research, qualitative research.

TABLE OF CONTENTS

Page

TITLEPAGE

1 2

Chapter

2 THEORETICAL PERSPECTIVES, LITERATURE REVIEW AND

STUDIES, RESEARCH QUESTIONS AND HYPOTHESES

14

The link between Woman on the board and firm performance 21

4.4.1 Finding relationship between bank size and bank performance 42

4.4.2 Finding relationship between Leverage and bank performance 43

CONCLUSION, LIMITATION AND SUGGESTION FOR FUTURE RESEARCH 45 REFERENCE 47 APPENDIX 50

List of Tables

1 Proportion of Women on the board in Vietnamese Banks 36

4 Data analysis of relationship between women on board in Vietnamese banks

and bank performance (measure by ROE)

39

5 Data analysis of relationship between women on board in Vietnamese banks

and bank performance (measure by Tobin’s Q)

40

4 Correlation graph between Women on board and Bank performance (Tobin’s Q) 42

5 Correlation graph between bank size and Bank performance (Return on Equity) 43

6 Correlation graph between Leverage and Bank performance (Return on Equity) 44

List of Acronyms

BoC : Board of Commissioners

BoD : Board of Directors

CEO : Chief Executive Officer

CFO : Chief Finance Officer

CG : Corporate Governance

FDIC : Federal Deposit Insurance Corporation

IBR : International Business Report

ICGN : International Corporate Governance Network

KPIs : Key Performance Indicator

OECD : Organization for Economic Cooperation and DevelopmentROA : Return on Assets

ROE : Return on Equity

ROI : Return on Investments

ROIC : Return on Invested Capital

ROS : Return on Sales

TSR : Total Shareholder’s Retur

1.1 Background

A recent report from the International Business Report (IBR), explores the global shift

in the number of women at the top of the business world and examines ways to make thisgrowth permanent and parity possible Key findings from the survey include: women hold24% of senior management roles globally, a three point increase over the previous year.There has been a sharp rise in China, with 51% of senior management positions held bywomen, compared to 25% last year The proportion of businesses employing women as CEOshas risen from 9% to 14% Education and talent management may work in tandem withflexible work arrangements, which 67% of respondents offer, to increase the number ofwomen in top leadership Just 19% of board roles around the world are held by women.Although quotas have been put into place around the globe to increase women’s participation

in boards, 55% of respondents oppose such quotas

In politics, an increasing number of women won elections: South Korea, for instance,recently swore in its first female president Approximately 17 countries have women as head

of government, head of state or both (a number that, according to the Inter-ParliamentaryUnion and UN Women, has more than doubled since 2005), and the world average forwomen in parliament totaled 20.4% as of 1 February 2013

In 2012, though women comprised over a third of the workforce in the United States,they held a mere 14.3 percent of executive officer positions at Fortune 500 companies andonly 8.1 percent of executive officer top-earner positions2 Of the FTSE 100, women heldonly 15% of board seats and 6.6% of executive positions in 2012 In the Asia Pacific region,the percentage of women on boards was about half that in Europe, Australia and NorthAmerica The IBR survey, which includes both listed and privately held businesses, indicates

a 3% increase in the number of women in senior management positions from 2011 to 2012,with 24% of businesses with women in senior management roles globally in 2012 (compared

to 21% in 2011)

In 2013, China is country which is the highest rate of woman senior management with51% The second country is Poland with 48% Viet Nam is ranking of ninth with 33% ofwoman senior manager

Several researchers have examined the trend and the impact of the change inworkforce diversity, especially in the top management level, on business performance (seefor example Terjesen & Singh 2008; Dejardin 2009) In particular, participation bywomen in top management is expected to have positive impact on firm performance(Robinson 2008)

The attributes that impact on the ability of the board members to effectivelyperform their job include their capabilities and skills (Carter et al 2007), educational andcultural background (Kusumastuti, Supatmi & Sastra 2007), their possible involvement

in multiple directorships, the level of share ownership, and the type of remuneration(Campbell & Vera, 2008) These attributes affect firm performance (Carter et al 2007)

There is no observable performance benefit to adding more women to the board of

directors Out of all the regressions performed not a single one found a significant andpositive relationship between the percentage of women on the board and performance (CarlFagergren & Samuel Hurst, spring 2012).

Prior studies have found differences in the impact of boards on firm performance,this study focuses on testing hypotheses about effected from Woman on the board tofirm performance Further, the study presents results from a qualitative and quantitativestudy of Vietnamese women board members regarding the role they play in enhancingfirm performance The purpose of the study was to throw light on the relationshipbetween woman on the board and performance

1.2 Objectives of the study

An objective of the study is to examine in the Vietnamese bank, the link betweenwomen’s participation in top management and its impacts on the financial firm

The study only focuses on bank and firm performance The underlying assumption ofthis research is that the presence of women boards may impact firm performance A diverseworkforce has been found to be generally beneficial for business (Herring 2009)

In the current study, these competing arguments are examined in the Vietnamesecontext by using several theories as agency, stewardship, legitimacy, and stakeholdertheories Woman on the board is very importance in the context of corporate governance.However, it is still inconclusive whether women on board affects firm performance positively

or negatively Therefore, the principal objective of this study is to test the effect ofwoman in the boardroom on firm performance

1.3 Importance of the study

In transaction economics as Viet Nam, Corporate Governance is still newness withCompany manager To apply the principles of corporate governance to managementpractical is necessary We need to have a research about effecting of factors form corporategovernance to firm performance in order to contribute some ideas and propose policies tomake corporate governance of our nation perfectly

There are so many a numbers of topics and research on gender diversity affectsthe performance of the company but only some study that have used the samples fromdeveloping country as India ( Jackling & Johl 2009) and Malaysia (Marimuthu andKolamdaisamy 2009) and in Viet Nam have no study about woman in the boardroomand firm performance Moreover, most of developed countries already have advancedpolicies regarding affirmative action in corporate governance that support womanrepresentation in the board But in Viet Nam, we haven’t this policy yet Therefore, thisstudy is aimed to add to the literature regarding the link between woman in theboardroom and firm performance It will also provide some suggestion about actionpolicies in the developing countries, specially is Viet Nam

Additionally, World Bank (2010) have argued that a country can sustain itslong-term economic growth and prosperity, improve governance, and increase

living standards by employing more women and narrowing the employment gapbetween men and women This is an indication that women have been acknowledged aspart of the nation’s assets and must be empowered to achieve the national developmentgoals.

CHAPTER 2

THEORETICAL PERSPECTIVES, LITERATURE REVIEW AND STUDIES,

RESEARCH QUESTIONS AND HYPOTHESES

2.1 Introduction

This chapter presents the concepts and theoretical perspectives adopted for thestudy It includes the definitions of Banking, Board, Women in the boardroom andfirm performance, and the descriptions of the theories used to explain therelationships between the two constructs Woman on the board and firm performance.Agency theory and stewardship theory are used to define the relationships betweengender diversity in the composition of the board and firm financial performance Thetheoretical framework is presented in the last part of this chapter

This chapter also reviews the previous research that has examined the linkbetween gender diversity of board members and firm performance The reviews include thestudies conducted in the context of both developed and developing countries

2.2 Board and Women in the boardroom

The board is an important part of the overall corporate governance mechanism within

a firm As a body responsible for overall policy and strategic direction, the boardessentially drives the overall performance of the firm As a consequence, boardcharacteristics and board composition that includes, for example, the number ofindependent boards, the tenure of boards, the size of the board, as well as boarddiversity in terms of gender, age, ethnicity, nationality, educational background,industrial experience and organizational membership, may influence firm performance(Campbell & Vera 2008) For the current study, it will be interesting to examine whetherwomen in the boardroom enhances firm performance

Board members can be divided into three categories:

* Chairman – Technically the leader of the corporation, the chairman of the board isresponsible for running the board smoothly and effectively His or her duties typically includemaintaining strong communication with the chief executive officer and high-level executives,formulating the company's business strategy, representing management and the board to thegeneral public and shareholders, and maintaining corporate integrity A chairman is electedfrom the board of governors

* Inside Directors – These directors are responsible for approving high-level budgetsprepared by upper management, implementing and monitoring business strategy, andapproving core corporate initiatives and projects Inside directors are either shareholders orhigh-level management from within the company Inside directors help provide internalperspectives for other board members These individuals are also referred to as executive

directors if they are part of company's management team.

* Outside Directors – While having the same responsibilities as the inside directors indetermining strategic direction and corporate policy, outside directors are different in that theyare not directly part of the management team The purpose of having outside directors is toprovide unbiased and impartial perspectives on issues brought to the board ManagementTeam

As the other tier of the company, the management team is directly responsible for theday-to-day operations (and profitability) of the company

* Chief Executive Officer (CEO) – As the top manager, the CEO is typicallyresponsible for the entire operations of the corporation and reports directly to the chairmanand board of directors It is the CEO's responsibility to implement board decisions andinitiatives and to maintain the smooth operation of the firm, with the assistance of seniormanagement Often, the CEO will also be designated as the company's president and thereforealso be one of the inside directors on the board (if not the chairman)

* Chief Operations Officer (COO) – Responsible for the corporation's operations, theCOO looks after issues related to marketing, sales, production and personnel More hands-onthan the CEO, the COO looks after day-to-day activities while providing feedback to theCEO The COO is often referred to as a senior vice president

* Chief Finance Officer (CFO) – Also reporting directly to the CEO, the CFO isresponsible for analyzing and reviewing financial data, reporting financial performance,preparing budgets and monitoring expenditures and costs The CFO is required to present thisinformation to the board of directors at regular intervals and provide this information toshareholders and regulatory bodies such as the Securities and Exchange Commission (SEC).Also usually referred to as a senior vice resident, the CFO routinely checks the corporation'sfinancial health and integrity (http://www.cfo.vn/forum/viewtopic.php?f=26&t=409)

The Board of Directors (the “Board”) of the Corporate Executive Board Company (the

“Company”) has developed these corporate governance principles (the “Principles”) to help

it fulfill its responsibilities to the Company and its shareholders The Board plays the centralrole in the Company’s corporate governance and oversees the work of management and theexecution of the Company’s business strategies on behalf of the Company’s shareholders The board of directors is an important mechanism in the governance of moderncorporations Fama and Jensen (1983) view the board as the apex of the internal decisioncontrol systems of organizations To date, the often-researched mechanism has been the board

of directors (Dalton et al 1998; Zahra & Pearce 1989)

A board of directors is expected to play a key role in corporate governance The Boardhas the responsibility of endorsing the organization’s strategy, developing directional policy,appointing, supervising and remunerating senior executives, and ensuring accountability ofthe organization to its investors and authorities

Board of Directors elected by the shareholders, the board of directors is made up of twotypes of representatives The first type involves individuals chosen from within the company.This can be a CEO, CFO, manager or any other person who works for the company on a dailybasis The other type of representative is chosen externally and is considered to beindependent from the company The role of the board is to monitor the managers of acorporation, acting as an advocate for stockholders In essence, the board of directors tries to

make sure that shareholders' interests are well served.

In the context of the working environment, gender diversity refers to the proportion

of men and women in the workplace that may affect the way people communicateand work with each other in that area, and influence the organization’s performance(Herring 2009) Specifically, gender diversity in the context of the boardroom refers to thepresence of women as board members (Dutta & Bose 2006)

2.3 Banking and how is Bank work?

According to “A Lawful Organization” StudyMode.com Retrieved 07, 2011, Bank is alawful organization, which accepts deposits that can be withdrawn on demand It also lendsmoney to individuals and business houses that need it Banks also render many other usefulservices – like collection of bills, payment of foreign bills, safe-keeping of jewellery and othervaluable items, certifying the credit-worthiness of business, and so on Banks accept depositsfrom the general public as well as from the business community Anyone who saves money forfuture can deposit his savings in a bank Businessmen have income from sales out of whichthey have to make payment for expenses They can keep their earnings from sales safelydeposited in banks to meet their expenses from time to time Banks give two assurances to thedepositors

a Safety of deposit, and

b Withdrawal of deposit, whenever needed

On deposits, banks give interest, which adds to the original amount of deposit It is agreat incentive to the depositor It promotes saving habits among the public On the basis ofdeposits banks also grant loans and advances to farmers, traders and businessmen forproductive purposes

Thereby banks contribute to the economic development of the country and well being of thepeople in general Banks also charge interest on loans The rate of interest is generally higherthan the rate of interest allowed on deposits Banks also charge fees for the various otherservices, which they render to the business community and public in general Interest received

on loans and fees charged for services which exceed the interest allowed on deposits are themain sources of income for banks from which they meet their administrative expenses

Types of Banks: There are several types of banking institutions, and initially they werequite distinct Commercial banks were originally set up to provide services for businesses.Now, most commercial banks offer accounts to everyone Savings banks, savings and loans,cooperative banks and credit unions are actually classified as thrift institutions Each originallyconcentrated on meeting specific needs of people who were not covered by commercial banks.Savings banks were originally founded in order to provide a place for lower-income workers tosave their money Savings and loan associations and cooperative banks were established duringthe 1800s to make it possible for factory workers and other lower-income workers to buyhomes Credit unions were usually started by people who shared a common bond, like working

at the same company (usually a factory) or living in the same community The credit union'smain function was to provide emergency loans for people who couldn't get loans from

traditional lenders These loans might be for things like medical costs or home repairs.

How does it work? The funny thing about how a bank works is that it functions because

of our trust We give a bank our money to keep it safe for us, and then the bank turns aroundand gives it to someone else in order to make money for itself Banks can legally extendconsiderably more credit than they have cash Still, most of us have total trust in the bank'sability to protect our money and give it to us when we ask for it Why do we feel better abouthaving our money in a bank than we do having it under a mattress? Is it just the fact that theypay interest on some of our accounts? Is it because we know that if we have the cash in ourpockets we'll spend it? Or, is it simply the convenience of being able to write checks and usedebit cards rather than carrying cash? Any and all of these may be the answer, particularly withthe conveniences of electronic banking today

Why does it work?

Banking is all about trust We trust that the bank will have our money for us when we

go to get it We trust that it will honor the checks we write to pay our bills The thing that's hard

to grasp is the fact that while people are putting money into the bank every day, the bank islending that same money and more to other people every day Banks consistently extend morecredit than they have cash That's a little scary; but if you go to the bank and demand yourmoney, you'll get it However, if everyone goes to the bank at the same time and demands theirmoney (a run on the bank), there might be problem

Even though the Federal Reserve Act requires that banks keep a certain percentage oftheir money in reserve, if everyone came to withdraw their money at the same time, therewouldn't be enough In the event of a bank failure, your money is protected as long as the bank

is insured by the Federal Deposit Insurance Corporation (FDIC) The key to the success ofbanking, however, still lies in the confidence that consumers have in the bank's ability to growand protect their money Because banks rely so heavily on consumer trust, and trust depends onthe perception of integrity, the banking industry is highly regulated by the government

as, the board, managers, shareholders and other stakeholders, and spells out the rules andprocedures for making decisions on corporate affairs By doing this, it also provides thestructure through which the company's objectives are set, and the means of attaining thoseobjectives and monitoring performance

Corporate governance involves a set of relationships between company’smanagement, its board, its shareholders and other stakeholders It provides a structurethrough which objectives of a company are set as well as means of obtaining these objectivesand monitoring performance is determined (OECD Principles of Corporate Governance

April, 2004).

Principles of Corporate Governance (OECD, April, 2004):

- Ensuring the Basis for an Effective Corporate Governance Framework - The corporategovernance framework should promote transparent and efficient markets, be consistentwith the rule of law and clearly articulate the division of responsibilities amongdifferent supervisory, regulatory and enforcement authorities

- The Rights of Shareholders and Key Ownership Functions - The corporate governanceframework should protect and facilitate the exercise of shareholders’ rights

- The Equitable Treatment of Shareholders - The corporate governance framework shouldensure the equitable treatment of all shareholders, including minority and foreignshareholders All shareholders should have the opportunity to obtain effective redress forviolation of their rights

- The Role of Stakeholders in Corporate Governance - The corporate governance frameworkshould recognise the rights of stakeholders established by law or through mutual agreementsand encourage active co-operation between corporations and stakeholders in creatingwealth, jobs, and the sustainability of financially sound enterprises

- Disclosure and Transparency- The corporate governance framework should ensure thattimely and accurate disclosure is made on all material matters regarding the corporation,including the financial situation, performance, ownership, and governance of the company

- The Responsibilities of the Board:

The corporate governance framework should ensure the strategic guidance of thecompany, the effective monitoring of management by the board, and the board’saccountability to the company and the shareholders

A Board members should act on a fully informed basis, in good faith, with due

diligence and care, and in the best interest of the company and the shareholders

B Where board decisions may affect different shareholder groups differently, the board

should treat all shareholders fairly

C The board should apply high ethical standards It should take into account the interests of

stakeholders.

D The board should fulfil certain key functions, including:

1 Reviewing and guiding corporate strategy, major plans of action, risk policy,annual budgets and business plans; setting performance objectives; monitoringimplementation and corporate performance; and overseeing major capitalexpenditures, acquisitions and divestitures

2 Monitoring the effectiveness of the company’s governance practices andmaking changes as needed

3 Selecting, compensating, monitoring and, when necessary, replacing keyexecutives and overseeing succession planning

4 Aligning key executive and board remuneration with the longer term interests of thecompany and its shareholders

5 Ensuring a formal and transparent board nomination and election process.

6. Monitoring and managing potential conflicts of interest of management, boardmembers and shareholders, including misuse of corporate assets and abuse inrelated party transactions

7. Ensuring the integrity of the corporation’s accounting and financial reportingsystems, including the independent audit, and that appropriate systems ofcontrol are in place, in particular, systems for risk management, financial andoperational control, and compliance with the law and relevant standards

8 Overseeing the process of disclosure and communications

E The board should be able to exercise objective independent judgement on corporate

affairs

1 Boards should consider assigning a sufficient number of non-executive boardmembers capable of exercising independent judgement to tasks where there is apotential for conflict of interest Examples of such key responsibilities areensuring the integrity of financial and non-financial reporting, the review ofrelated party transactions, nomination of board members and key executives,and board remuneration

2 When committees of the board are established, their mandate, composition andworking procedures should be well defined and disclosed by the board

3 Board members should be able to commit themselves effectively to theirresponsibilities

F In order to fulfil their responsibilities, board members should have access to

accurate, relevant and timely information

2.5 Firm performance

Firm performance is a relevant construct in strategic management research andfrequently used as a dependent variable (Juliana Bonomi SantosI & Luiz Artur, LedurBritoII, May 2012) Measures of firm performance – such as productivity, value-added andprofit,…(Lazear, The economic Journal 116 June, 1995) Performance measures as Catalyst(2007) and McKinsey (2007) were return on equity (ROE), return on sales (ROS) and return

on invested capital (ROIC), while McKinsey’s (2007) financial performance measures werereturn on equity (ROE), operating result (EBIT) and stock price growth As in the McKinsey(2007) include total shareholder return (TSR) as a financial measure together with theaccounting measures Form those prior researches; the researcher used ROE to measureVietnamese bank performance It based on accounting financial of bank

Another way to characterize performance is to distinguish between financial and financial performance (Ittner, 2008) The financial performance is often measured usingtraditional accounting KPIs such as ROA, ROS, EBIT, EVA® or Sales growth (Ittner &Larcker, 1997; Fraquelli & Vannoni, 2000; Crabtree & DeBusk, 2008) The advantage ofthese measurements is their general availability, since every profit oriented organization

non-produces these figures for the yearly financial reporting (Chenhall & Langfield-Smith,2007) However, balance sheet manipulations and choices of accounting methods may alsolead to values that allow only limited comparability of the financial strength of companies The non-financial performance can be measured using operational KPIs Market share,innovation rate or customer satisfaction are prominent examples (Hyvönen, 2007) Tangen,(2003) provides an overview of frequently used performance measures Many researchersalso use self reported measures to operationalize performance (Evans, 2004; Chenhall &Morris, 1995; Henri, 2006; Ittner, Lanen, & Larcker, 2002) Others combine both, theaccounted financial KPIs and self reported measures in their reports (Cadez & Guilding,2008) Langfield-Smith, (1997) writes that there are various ways non-financial performancecan be measured; however the performance can be hardly assessed without the link tocorporate strategy The consequence for the researcher is simple: it is first to decide what theresearch question should be, then a performance definition can be created So that, theresearcher used Tobin’s Q to measure bank performance It is market-based

For this research, firm performance will be measured by includes financialperformance To measure firm financial performance, accounting-based and market-basedcalculations are used And date will be gotten from annual report of bank

2.5.1 Financial performance

The word ‘Performance is derived from the word ‘parfourmen’, which means ‘to do’,

‘to carry out’ or ‘to render’ It refers the act of performing; execution, accomplishment,fulfillment, etc In border sense, performance refers to the accomplishment of a given taskmeasured against preset standards of accuracy, completeness, cost, and speed In otherwords, it refers to the degree to which an achievement is being or has been accomplished Inthe words of Frich Kohlar “The performance is a general term applied to a part or to all theconducts of activities of an organization over a period of time often with reference to past orprojected cost efficiency, management responsibility or accountability or the like Thus, notjust the presentation, but the quality of results achieved refers to the performance.Performance is used to indicate firm’s success, conditions, and compliance

Financial performance refers to the act of performing financial activity In broadersense, financial performance refers to the degree to which financial objectives being or hasbeen accomplished It is the process of measuring the results of a firm's policies andoperations in monetary terms It is used to measure firm's overall financial health over agiven period of time and can also be used to compare similar firms across the same industry

or to compare industries or sectors in aggregation

Firm financial performance is generally defined as a measure of the extent towhich a firm uses its assets to run the business activities to earn revenues It examines theoverall financial health of a business over a given period of time and can be used tocontrast the performance of identical firms in similar industries or between industries ingeneral (Atrill et al 2009) The main source of data for determining firm financialperformance is the financial statements, the product of accounting, which consists of thebalance sheet which shows the assets, liabilities and equities of a business, the incomestatement that records the revenues, expenses and profits in a particular period, the cashflow statement which exhibits the sources and uses of cash in a period, and thestatement of changes in the owners’ equity that represents the changes in owner’s

wealth

Moreover, firm financial performance generally may also be reflected inmarket-based (investor returns) and accounting-based (accounting returns) (Griffin &Mahon 1997) as the ratios are the return on assets (ROA), return on equity (ROE) andreturn on investments (ROI) which are calculate the firm’s profitability (Atrill et al.2009) Market-based indicators to measure firm financial performance are price per shareand Tobin’s Q which indicate the market value or the share value of the firm as well as thefinancial prospects of the firm in the future Alternatively, accounting-based measures,including profitability, efficiency, liquidity, gearing, and investment ratios, arecalculated using the figures from the financial reports and may represent a firm’s financialperformance In contrast, the market-based measure is believed to be more objective because

it relies on market responses to particular decision made by a firm (Griffin & Mahon1997) This study is used accounting-based measure is ROE and market-based measure isTobin’s Q

2.6 The link between Woman on the board and firm performance

Several theories that one can draw upon to explain the association between genderdiversity in the boardroom and firm performance are discussed in this section The roles

of board members, as well as the effect of gender diversity of board members on firmperformance, are described in the theories The agency theory and stewardship theory areparticularly used to define the relationship between gender diversity in the boardroomand a firm’s financial performance

2.6.1 Agency theory

Agency theory has been very popular in explaining the role of boards in mitigating theagency costs (Jensen & Meckling, 1976, Fama & Jensen, 1983) Specifically, this theorydescribes the relationship between the principal or the owners of firms and the agents or themanagers that should be well managed so that they may act in the best interest of theprincipal Jensen & Meckling (1976) define the term ‘agency relationship’ as a contractunder which one or more (principals) engage another person (the agent) to perform someservice on their behalf This relationship involves delegating some decision-makingauthority to the agent It is hypothesized that the principal will assume that the agent(and all individuals) will be driven by self-interest as the wealth maximize (Jensen andMeckling, 1976) Therefore, the principal will anticipate that the agent, unless restrictedfrom doing otherwise, will choose to pursue individual self-interest that could have anegative impact on the principal’s economic welfare

The fundamental premise of agency theory is that the managers act out of self-interestand are self centred, thereby, giving less attention to shareholder interests For example, themanagers 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 possesssuperior knowledge and expertise about the firm are in a position to pursue self-interestsrather than shareholders (owners) interests (Fama, 1980; Fama & Jensen, 1983).

Eisenhardt (1989, p 58) explains that agency problem arrives when “(a) the desires orgoals of the principal and agent conflict and (b) it is difficult or expensive for the principal toverify what the agent is actually doing” Consequently, the monitoring of managementactivities is seen as a fundamental duty of a board, so that agency problems can be minimised,and superior organizational performance can be achieved

The agency theory has also been the underlying concept of corporate governance thatanalyses the relationships among shareholders, boards, managers, and employees Itemphasizes the responsibilities of managers as the agents of owners and the roles

of boards as the representatives of owners (Jensen & Meckling 1976) Improvedmonitoring of decisions and activities of managers by the boards will result in thegreater protection of shareholders (Ragothaman & Gollakota 2009)

Specifically, based on the concept provided by the OECD (2004), corporategovernance includes a set of relationships between a firm’s management, its board, itsshareholders and other stakeholders that provide the structure through which theobjectives of the firm are set, and the means of attaining those objectives andmonitoring performance are determined Furthermore, according to the principles ofcorporate governance (OECD 2004), good corporate governance should provideproper incentives for the board and management to pursue objectives that are in theinterests of the firm and its shareholders and should facilitate effective monitoring Then,based on these principles, the corporate governance framework should ensure thestrategic guidance of the firm, the effective monitoring of management by the board, andthe board’s accountability to the firm and the shareholders

Since one of the board’s obligations is to ensure that management prioritizes theinterests of shareholders, agency theory has suggested that a more diverse boardmonitors managers better because board diversity increases board independence(Carter et al 2007)

The proponents of gender diversity in the boardroom believe that women members,minority members, or independent board members bring unique and importantinformation and knowledge to the board and managers, encourage different and innovativeinsights in decision making and problem solving, and create an open communication amongboard members and staffs for topics that have not yet been discussed (Carter et al 2007,Grosvold, Brammer & Rayton 2007; Verboom & Ranzijn 2004; Fama & Jensen 1983a) Two important governance mechanisms used for this purpose are board of directors andcompensation 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 versusnon-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 ofoversight Executive compensation concentrates on the degree to which managers arecompensated in ways that align their interests with those of shareholders (Davis et al., 1997;Tosi, Brownlee, Silva & Katz, 2003) Such incentivised compensation schemes are

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

2.6.2 Stewardship theory

While Agency theory assumes that principals and agents have divergent interests andthat agents are essentially self-serving and self-centred, Stewardship theory takes adiametrically opposite perspective It suggests that the agents (directors and managers) areessentially trustworthy and good stewards of the resources entrusted to them, which makesmonitoring redundant (Donaldson 1990; Donaldson & Davis, 1991; Donaldson & Davis,1994; Davis et al., 1997)

The stewardship perspective views directors and managers as stewards of firm Asstewards, directors are likely to maximise the shareholders’ wealth Davis et al (1997) posithow stewards derive a greater utility from satisfying organisational goals than through self-serving behaviour Davis et al (1997) argue that the attainment of organisational success alsosatisfies the personal needs of the stewards Stewardship theory suggests that managersshould be given autonomy based on trust, which minimizes the cost of monitoring andcontrolling behaviour of the managers and directors

Furthermore, according to Muth and Donaldson (1998) the stewardship theoryindicates that higher level management also has non-financial motives that includethe demand for achievement and recognition, the intrinsic satisfaction of successfulperformance, respect for authority and the work ethic Additionally, when the boardsare insiders (those who were previously the managers or the employees of the firms)they are empowered to behave as stewards and to manage companies’ assetsaccountably Furthermore, Muth and Donaldson (1998) state that when the boards andmanagers work together and acknowledge the obligation to enhance a firm’sperformance in the future, this develops trust and empowerment, the depth ofexperience, technical expertise, and ease of communication required for effective boardfunctioning

When applied in the context of a boardroom, stewardship theory considersthat board members are motivated by more than personal motivations (Nordberg 2008) The stewardship theory, supported by Maslow and ERG theories, argues that boardmembers may look after the interests of someone or something larger than their personalself- interests (Nordberg 2008) The board members also have their own needs to havemeaningful interactions with the management By having board members who have thesecharacteristics,

it is expected that they may perform better to safeguard the firms’ assets Anexample of stewardship theory is a statement given by Peter Weinberg, an executive

of a bank, that serving on a board is not, and should not be, a wealth creationopportunity but a chance to play a role in the proper environment of the marketplace(Weinberg 2006 in Nordberg 2008) Stewardship theory then is believed to be able to helpboard members when making economic decisions for firms

From the stewardship theory perspective, superior performance of the firm waslinked to having a majority of the inside (executive) directors on the board since theseinside directors (managers) better understand the business, and are better placed to governthan outside directors, and can therefore make superior decisions (Donaldson, 1990;Donaldson & Davis, 1991) Stewardship theory argues that the effective control held byprofessional managers empowers them to maximize firm performance and corporateprofits.

Several studies in the corporate governance area which have used thestewardship theory as Ranasinghe (2011), Rovers (2009), Singh, Terjesen andVinnicombe (2008), Bernardi, Bean and Weippert (2002), and Marimuthu andKolandaisamy (2009) and whether the boards can maintain their independency althoughthey come from inside the firms and they tend to be involved in managers’ activities(Nicholson & Kiel 2007) Muth and Donaldson (1998) compared the predictions of agencytheory with that of stewardship theory and found support for stewardship theory being a goodmodel of reality Bhagat and Black (1999) have also found that firms with boards consisting

of a greater number of outside directors (representing agency theory perspective), performworse than firms with boards with less number of outside directors

2.7 Related Studies with the same problem:

It includes a review of the results found in prior Studies It is not only positive link,but also negative, curvilinear and even no relationship

John Puthenpurackal & Arun Upadhyay (2006) found that the performance impact ofwomen directors depends on firms’ information environments as well as their priorexperience Specifically, women directors appear to be more beneficial in less opaque firms.Women directors with senior corporate experience are associated with higher firmperformance relative to women directors with lower level corporate and non-corporateexperience Consistent with these valuation effects, they fiound that firms appear to take intoaccount their information environment while deciding on appointing women directors BillFrancis – Iftekhar Hasan – Qiang Wu (2012) suggested that when independent directors as

outside directors who are less connected with current CEOs, a measure we call true

independence, there is a positive and significant relationship between this measure and firm

performance Board meeting frequencies, director attendance behaviors, and director age alsoaffect firm performance during the crisis Nina Smith,Valdemar Smith, Mette Verner ( 2005 )found that the proportion of women in top management jobs tends to have positive effects onfirm performance, even after controlling for numerous characteristics of the firm and direction

of causality The results show that the positive effects of women in top management depend

on the qualifications of female top managers Results of Annu Kotiranta – Anne Kovalainen– Petri Rouvinen(2007) indicate that a company led by a female CEO is on average slightlymore than a percentage point – in practice about ten per cent – more profitable than acorresponding company led by a male CEO This observation holds even after taking intoaccount size differences and a number other factors possibly affecting profitability The share

of female board members also has a similar positive impact Luca Flabbi, Mario Macis,Fabiano Schivardi (2012) the interaction between female leadership and female workers at thefirm has a positive significant impact on firm performance Our results show that firms with

women directors perform better than those without women on their boards, MijntjeLu¨ckerath-Rovers (2011) Beate Elstad & Gro Ladegård suggested that a significant positivelinear relationship between proportion of women and individual influence We conclude thatincreasing the female ratio in a board is a necessary but not sufficent condition for increasedinfluence for women Australia (Bonn 2004), Norway (Gregoric et al 2009), Denmark(Smith, Smith & Verner 2006), Spain (Vera & Martinez 2010), Canada (Francoeur, Labelle

& Desgagne 2008), the UK (McKinsey & Company 2011), and the Netherlands (Rovers2011) also confirm that women in the boardrooms impact positively on financialperformance Women directors provide mentoring and networking opportunities for morejunior women to develop their careers (Bilimoria, 2000) Women directors are good atnetworking with other women (Catalyst, 1995) and often act as speakers at networking events,which women find very inspiring, and an opportunity to ask how the director had overcomethe career and work/family challenges that attendees are experiencing (Singh, Vinnicombeand Kumra, 2006) These interactions increase the potential for women to find a wider variety

of female role models, enabling them to emulate behaviors from a number of women as well

as men, which Ibarra (1999) suggests is more beneficial than drawing on a single role model

But there are many studies with result are nagative between gender diversity and firmfinancial performance Bohren and Strom (2006) find that gender mix in theboardroom is negatively related to financial performance of non-financial firms listed

on the Oslo Stock Exchange and almost always in a statistically significant way.Adams and Ferreira (2009) obtained similar results from the US firms; that the averageimpact of gender diversity on firm performance is negative which may be driven bygender quota and firms’ fewer takeover defenses Carl Fagergren & Samuel Hurst (2012)the regressions performed not a single one found a significant and positive relationshipbetween the percentage of women on the board and performance These results suggest that

if Canada decides to implement a gender quota for public corporations, they should notexpect to observe any increase in firm performance Shrader et al (1997) analyse the 200largest US firms and they are unable to find any significantly positive relationship betweenthe percentage of female board members and firm performance (measured by ROA andROE) They even find significantly negative relations in some cases Kochan et al (2003)also find no positive relations between gender diversity in management and firmperformance for US companies

Carter et al (2010) reveal that in the context of major US firms there is nosignificant relationship between gender diversity in the boardroom and firm financialperformance Similarly, Shrader, Blackburn and Iles (1997), using a sample of 200 USfirms, conclude that there is no link between the proportion of women on boards and firmaccounting-based financial performance Farrell and Hersch (2005) additionally find

no association between the addition of women in the boardrooms of Fortune 100firms and market reaction on this addition Reasons underlying this result are varied.Linh Chi Vo(2010), By focusing on the companies listed in US Fortune 100 and FrenchSBF 120 stock market index in 2010, we show that firm performance is not significantlylinked to female directorship despite important differences in firm’s attributes and boardcharacteristics across studied countries

Yeney Widya Prihatiningtias (2012) surprisingly, the result of the quantitative analysisshows that gender diversity has both positive and negative influence on firm financialperformance, which was measured by using ROA and Tobin’s Q respectively There is no link