Board Characteristics and Firm Performance: the UK Listed Firms - Research Proposal Example

Board Characteristics and Firm Performance: an empirical study of UK listed firms Research Background In the recent years, especially after the 2008 financial crisis that hit the world, there has been increased concern over the management of the companies and how they are controlled. This has led to debates about the corporate governance of the company. The impact of the corporate governance on firm performance has been studied before and its impact cannot be underestimated. The OECD insists that corporate governance is critical in achieving economic growth (Al-Matari 2012). An important aspect of this governance is the board of directors of that company. The BoD play a critical role in the determination of the firm performance as it influences most of the managerial decisions and the overall confidence that is accorded to the company. In the United Kingdom, all companies are expected to adhere to the Corporate Governance Code, a development of the Code produced by the Cadbury Committee of 1992. The Code defines corporate Governance as the system by which companies are directed and controlled. It further states that the BoD is responsible for the governance of the company in implementing the goals of the company subject to the laws and regulations and accountable to the shareholders (UK corporate Governance Code 2016) .Matthew (2010) in his research on the relationship between board composition and risk taking outlines that BoD are instrumental in the internal controls of the company. This is particularly so in the reduction of the agency conflicts between the management of the company and the shareholders since they act as the representatives of the shareholders ( Wu 2008 pg. 7). Hence the failure of the BoD in monitoring and controlling the management could possibly lead to the firm’s lower financial performance (Matthew 2010). The effectiveness of this role is largely influenced by the board size, diversity, and board culture and information asymmetry (Brenan 2006 in Saha et al 2015). Therefore this research proposal is interested in establishing the relationship between the BoD characteristics and the performance of a company. The research will focus on the listed firms in the United Kingdom. The BoD characteristics generally include the board size, composition, independence of the board and ownership structure of the board. Past research in the subject in UK has focused their research on the Board size and its impact on performance (European Journal of Finance 2009). Purpose of the Research The UK has been described as one of those countries that have had a comprehensive corporate governance structure in the world. Hence an investigation of its compliance to the Code, the BoD characteristics and performance is of interest. There has not been much extensive research on the board composition and performance of UK listed firms. There is however extensive knowledge on the subject matter from other countries. This research therefore seeks to fill in the gap of knowledge by establishing this relationship in a country that has an extensive corporate governance structure. The research also adds in the pool of knowledge by establishing the corporate governance structure in UK, most of which is critical to mangers of small, large, established or new companies. The theoretical framework that guides the managements of a company and its influence on effectives (and ultimately performance) suggest different view. The Agency theory perspectives as developed by Jensen and Meckling (1976) suggest that the inherent conflict of interest between the manger and shareholders is considerably reduced by the BoD management. The implicit of the theory, as suggested by Kiel (2003), is that there need to be more independent board members for effective control. The stewardship theory on the other hand, does not recommend the inclusion of BoD in the management of a company. According to the stewardship theory, mangers can reasonable resolve the conflict of interest and they eventually act within the interest of the shareholders hence BoD should have more internal members that external independent directors. It is for this contradiction in theory that the research seeks to establish which theory is a true reflection of the situation within the British listed company’s management strategy. The research will seek to answer the question, in relation to the listed firms in London stock exchange, does the board of directors composition and characteristics affect the firm performance. These questions will be answered in the following research objectives: Establish the corporate governance environment within the LSE listed firms Establish the relationship between board composition and firm performance establish the correlation between good or bad BoD with the firm value and performance establish whether companies that comply to the Code of Governance and with an optimal board composition have improved performance Literature Review The subject of corporate governance has been under study since the Cadbury Report was released in 1992. The report included a code of governance that guided their management. This code has further been developed by other committee’s into what it is right now: Code of Governance 2003 amended in 2016. Therefore the research will adopt the definition of corporate governance as established in the Cadbury Report 1992 and as adopted by the UK corporate Governance Code. Previous research on the impact of the code on performance has shown little or no correlation (Doble 1997). The board characteristics to be examined will be the board size, Board size Past research has shown that board size has a positive correlation with the performance of the company. The size of the board is however dependent on the size of the company and its financial outlay. The choice of the appropriate size of the board involves a cost benefit analysis of monitoring costa and the benefits from a large board size (Raheja 2005). Kiel and Nicholson (2003) I their research on corporate governance in Australian firm, found that there is appositive correlation between firm size and firm performance. However in research on UK firms, Conyon and Peck (1998|) show that the relationship between firm performance and board size is negative. This relationship could be due to the fact that the large group no longer have cohesive and unity in decision makings. Wang et al (2013) found that board size is negatively related with variation in performance. The notion is further supported by the research results by Yermack (1996) that suggest that a smaller board is better and effective in its role playing. When the number of board members is high there is reduced performance due to the lack of coordination and communication in the decision making. Matthew (2010), in an empirical research of UK firms showed that if the firm size of reasonable increased then the risk of the firm is reduced. Board independence Board independence refers to whether the board is composed of internal members or independent member. Agency theory advocates that the more independent a board is the ore effective the board is and firms with separate chairperson and CEO are effective. The research on Australian firm by Kiel and Nicholson (2003) confirmed the legitimacy of this theory. The logic of the positive relationship is that when firm have little influence from the management can be reasonable and fair in the decision making process (Wu 2009). Klein (2002) in his research showed that a firm with large independent directors has a lower chance of financial mismanagements and manipulation. The same findings were found in an empirical analysis of Taiwanese firms by Chiang and Lin (2011 pg. 22). On the contrary, Yermack (1996) found that there is negative relationship between the independence of the firm and its performance as measured by Tobin Q. the inclusion of internal board members with sufficient knowledge on the operations of the company would make the board efficient in the handling of decisions (Wu 2009 pg. 38). However, several researches have established that here is actually no relationship between the performance of the firm and the independence of the board. In a research of several US firms, Klein (1998) established that there was no difference between those companies that more internal BoD member and those that showed a higher degree of independence. CEO Duality CEO duality is the situation in which a company has the same CEO substitute ads the chairperson of the board. CEO duality is supported by the stewardship theory that advocates for more internal controls of management, though through the agency theory, this system of management can present conflict of interest and hence a hindrance to the performance of the firm. Chiang and Lin (2011) showed that the performance of the Taiwanese firms was negatively related with the degree of duality of the firms, mainly because the arrangement increases the agency costs of the company. This result is reinforced by research findings of Yermack (1996) which showed that a company with different persons for the CEO post and the chairperson increases the company’s value and performance. The problem with having duality in managements arises when the CEO of the company cannot be dismissed or actions taken against such person by the board since they also chair the board. In this regard, having the CEO as the chairperson could potentially causes impediments in the efficiency of the company’s undertakings However research has also alluded to the fact that having the same person as CEO and chairperson reduces costs and hence affects the value of the firm (Halpem 1993). On an analysis of Kuwait firms, (Al-Matari et al 2012), the regression analysis showed that there is a positive and strong correlation between CEO duality and the performance of the firm. The impact and relationship between the CEO duality of accompany and its performance has had inconsistent results. Research (also found that in some instances there was no relationship between the CEO duality and the performance of a firm. The support for the duality aspect of firm engagements is a reflection of the stewardship theory of management that advocated for more internal control and management. The argument is that when the role is played by one person, then this gives the opportunity for the CEO/Chairperson an opportunity to monitor and control all aspect of the firm. Research Design Previous research has applied the use of quantitative design. The research on the firm performance requires quantitative aspects and analysis. The qualitative research design is instrumental in the achievement of the research objectives, all of which require an analysis of data. The relationship between the board characteristics and firm performance can only be established using quantitative approach. The research will also include aspects of qualitative research as one of the objectives of the study is to contribute to the pool of knowledge on the subject matter. In addition the analysis of our research will adopt the deductive strategy. This is based on the fact that this strategy focuses on already established theory and the object of the study is to establish whether this theoretical relationship between firm performance and board structure exists. There are already set theories that guide fir, performance and board structure: agency theory and stewardship theory of management. Therefore the research question and objectives will be to establish which of these theories hold true for firms in UK. .furthermore, the deductive strategy will be employed in order to achieve the objectives because it requires less time for study and the amount of literature available is sufficient (Research Methodology ). Since this will be an empirical research, the use of deductive reasoning will be reasonably appropriate in order to find the yes or no answers to the research objectives and questions (University of Southern California: Libraries n.d). The application of quantitative research requires that the data and resources that will ensure the credibility and validity of the results. Previous research (Al-Matari et al 2012; Wand et al 2013) have all adopted the deductive research method. The data that will be used, just like the in Matthew (2010), will be adopted from the London Stock Exchange database. Since the sample for the research will include all listed firms, all of which publically reported their annual statements, then the annual reports will be resourceful in providing information about the board structure, composition and CEO duality. The variable for use will therefore be the chosen and measured as presented by Abdullah and Sage (2009). The research will also adopt the same proxy for the firm performance variable to be measured in Tobin Q. various research (Al-Matari et al 2012; Abdullah and Sage 2009) have adopted regression analysis in the interpretation. The sampling criteria will be those companies that have been listed on the London Stock Exchange: this will be purposefully to attain reports that have been approved. Moreover the research variables of board size, board composition and CEO duality will be determinants of the listed companies that will be analyzed. Further to this, firms in compliance of the UK Corporate Governance Code will be considered. Since the data to be relied upon is dependent on the annual reports of the various companies, there is the concern that there could be data manipulation in their reporting. There is also the ethical concern of figure falsification in punished data. To over such problems with the data sources, the research will use only annual reports and accounts that has been approved by the regulatory authorities. The data will be crosschecked severally. The same procedure will be accrued out for the analysis results that will be used. Given the complexities and bulk of data that will be available for analysis for the chosen research period of 10 years, then care will be taken that the data used is sufficiently checked. References Abdullah A and Page M 2009 Corporate Governance and Corporate Performance: UK FTSE 350 Companies the Institute of Chartered Accountants of Scotland Al Matari Y, Al Swidi A and Bt Fadzil F 2012 the Impact of Board characteristics on Firm Performance: Evidence from Non-Financial Listed Companies in Kuwaiti Stock Exchange Chiang H T and Lin M C 2011 EXAMINING board composition and firm performance international Journal of Business and Finance Research vol 5 no. 3 Conyon J and Peck S 1998 Board Size and Corporate Performance: evidence from European Countries I the European Journal of Finance pp291-304 Halpem M, Fennel M and Alexander J 1993 Leadership instability in hospitals: the influence of board-CEO relations and organizational growth and decline Kiel G and Nicholson G 2003 Board Composition and Corporate Performance: how Australian experience informs contrasting theories of corporate governance Corporate Governance: an International Review Vol. 11 Issue 3 pp189-205 Klein A 1998 Firm Performance and Board Committee Structure Journal of Law and Economics pp 275-303 Klein A 2002 Board of Directors characteristic, and earnings management Journal of Accounting and Economics Raheja C 2005 Determinants of board size and composition: a theory of corporate boards Journal of Financial and Quantitative Analysis Research Methodology: Deductive Approach [online] available from: www.research-methodology.net/research-methodology/research-approach/deductive-approach-2/ UK Corporate Governance Code 2016 Financial Reporting Council Wang Y, Tsai J and Lin W 2013 the influence of Board structure on firm performance the Journal of Global Business Management Vol. 9 June 2013 Yermack D 1996 Higher market valuation of companies with a small board of directors Journal of Financial Economics pp185-212 Read More