The relationship of board duality by comparing directors with their firms performance - Dissertation Example

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Proposal for: A Contemporary Study of the Relationship between CEO Duality and Organisational Performance: A Case Study of Kuwaiti Companies Beforeand After the Credit Crisis [Student Name] [Course title] [Supervisor Name] [Date] Contents Contents 2 Introduction: 4 Research Objectives: 4 Project Aim: 5 Research Hypothesis: 5 Hypothesis 1: 5 Hypothesis 2: 5 Hypothesis 3: 5 Background to the Study: 6 Literature review: 6 The Economic Environment of Kuwait and Duality in Kuwaiti Listed Companies: 6 Duality in North America and Europe: 7 The Theory of Agency vs. Stewardship: 8 The Arabian Gulf Market: 9 The Experience of Asian/Chinese Markets: 9 Proposed Methodology: 11 Correlation Matrix and Regression: 11 Dependent Variable: Financial Performance of Kuwaiti Companies: 11 Independent Variable: CEO Duality 12 Control Variables: 13 Test of Significance: 13 Descriptive Analysis 13 Basis for Analysis 13 Sample Size: 14 Data Collection and Statistical Software 14 Limitations: 15 Conclusion: 15 Time Scale: 16 List of References 17 Proposal for a Contemporary Study of the Relationship between CEO Duality and Organisational Performance: A Case Study of Kuwaiti Companies before and after the Credit Crisis Introduction: Board duality is a situation where one individual holds both positions of Chairperson and CEO (Kwok 1998). This is a phenomenon that has been commonly observed in countries with weaker regulatory and accounting frameworks. There have been various studies in the past around the globe regarding differences in duality within boards of directors and the impact on company performance. Company shareholders assisted with these studies in order to improve understanding and the relationship between board duality and company performance. Duality in board structure is relevant to corporate governance and it includes a wide range of disciplines such as international affairs, economic laws and political science. The purpose of this research is to examine the relationship of board duality by comparing directors with their firms’ performance. This research will provide a literature review of different studies conducted in the past as a validation of this research. Research Objectives: The objectives of this research are as follows: To study the relationship between the duality of CEOs and the performance of their companies during both the pre-recession and post-recession period. To study the positive or negative impacts of duality of board structure on the performance of the firm. Project Aim: In recent years, transparency has become an important aspect of corporate governance that allows investors and shareholders to observe the performance of the company. In this way, investors and stakeholders are aware of the internal conditions and functioning of the company. Brown and Caylor (2004) suggest that the significant relationship between corporate governance and performance is due to the controlling role of the shareholders. They stated that shareholders could elect a board of directors of their choice, which would help them to monitor management performance and enable them to provide suitable suggestions to improve the company’s performance. This research will examine listed companies in Kuwait and it will test whether duality has a positive or negative impact in the performance of these companies. Kuwaiti companies have been selected because there are more than 200 companies listed in the Kuwaiti stock exchange (KSE) and 57 per cent of companies have this dual leadership function (Al-Sultan and Al-Shammari, 2010). Research Hypothesis: Various research hypotheses will be tested from before and after the recent credit crisis. These hypotheses include a correlation test of whether there is a significant relationship between the different variables involved in this research. Three hypotheses for this research are: Hypothesis 1: There is a positive relationship between duality and the performance of firms. Hypothesis 2: There is a negative relationship between duality and the performance of firms. Hypothesis 3: There is no relationship between duality and the performance of firms. Background to the Study: Duality in the boards of Kuwaiti’s listed companies and the performance of these companies has become questionable because of the dual function in leadership. There are many reasons behind this research. However, the foremost purpose of conducting the research is that corporate governance is a relatively new subject in Kuwait and not many people are aware of its company laws and legislation. Another reason is that the issue of duality is not specified in the legislation of corporate governance (Rechner and Dalton 1991). For example, Kuwaiti company law does not specify whether the CEO of the company can also serve as the chairperson. The dual role of CEO/chairperson creates a problem because it can affect the company’s disclosure. A chairperson who is acting as the CEO has the liberty and power to hide from shareholders any information that could damage the standing of the firm. This is a very important issue, which has not been addressed before. The outcome of this research seeks to resolve this problem (Al-Sultan and Al-Shammari 2010). A compounding problem is that families run most of the Kuwaiti companies. Therefore, it is very difficult to remove dual functioning from these companies and the dual role of the company’s owner can have a negative impact for the firm (Omran, Bolbol and Fatheldin 2008). Some studies show the positive relationship between duality and its impact on company performance. Corporate governance regulations recommend that chairperson and chief executive should be separated to improve company performance (Elsayed 2007). Literature review: The Economic Environment of Kuwait and Duality in Kuwaiti Listed Companies: Kuwait is the sixth major exporter of oil and provides 80 per cent of Kuwaiti’s revenue. While it is a relatively small country in terms of size, Kuwait contains ten per cent of the known oil reserves in the world. Kuwait’s economy is increasing very rapidly because of global oil and production price increases (Central Bank of Kuwait 2008). The Government of Kuwait is continuously trying to attract foreign investors to increase capital investment in the country. The Government has also taken measures to relax limitations on company ownership by foreigners; non-nationals can now own up to 49 per cent of KSE listed companies. The Kuwait Stock Exchange (KSE) was the first stock market in the Arabian Gulf region, established in 1962. The KSE consists of 207 companies divided into eight sectors. Company law limitations are not addressed by the KSE. In the recent years, it has been observed that there is a general acceptance of certain regulatory and corporate governance guidelines by global economies and companies however in Kuwait there is a lack of implementation of global standards regarding the duality of board of directors and there is still a lot to be done to make an impact. Duality in North America and Europe: Studies involving companies from both the US and Europe show that amalgamation of the role of chairperson and president of the board by the CEO affects market performance in a negative manner. This was not the case when the role of Chairperson or president was an additional and separate role. Analysis carried out by Harris and Helfat (1998) comprising of US companies demonstrated that returns might be negatively abnormal for companies where duality exists. According to them, consolidating three titles within one person resulted in a lack of managerial capability and attention in progression planning. These capabilities were needed to effectively guide the firm further than the tenure of the present chief executive. Harris and Helfat (1998) further presented summary of findings of previous studies conducted of US companies during a period from 1978 to 1997 suggesting that these studies showed the negative effects on company performance resulting from board duality. However, these studies had basic issues that might have considerably influenced their outcome. According to Harris and Helfat (1998), there is a possibility of a likely successor on the holding of three titles by one individual after the individual holding all three positions resign or retires. Berge (1978) and Rechner (1991) recorded conflicting outcomes in their efforts to apply different measures of performances. Pi and Timme (1993) stated that there were harmful effects of board duality in the banking industry. This was due to the rise in the agency costs arising from the board duality. The Theory of Agency vs. Stewardship: Donaldson and Davis (1991) developed the stewardship theory of management. The aim of developing this theory was to provide a counter strategy in reply to the agency theory. Both stewardship theory and agency theory focused on the philosophies that were adopted by the CEO or owner of the company. Like all companies, the owner of the company runs and manages the company. When the business grows, the owner transfers his responsibilities to a manager who becomes responsible for running the company. The stewardship theory of management explores the decision of owners over how much control should be given to them and tests the set of assumptions that owners have for their manager and examines the effect of these assumptions in their decision making processes. The agency theory of management assumes that the manager will use their individual autonomy to increase profit for the owner. For example, when the manager takes any decision for the company, the owner of the company assumes that the manager’s decision will be in the best interests of both the company and the owner. To minimise the risk that the manager will place their own interests over those of the company, checks and controls should be put in place to influence managerial behaviour. However, the agency theory has been criticised because of its simple model. Hendry (2002) points out the lack of interest of the manager in agency theory and suggests investing in training to improve the manager’s decision-making skills. From current discussions, the prevailing issue is whether this theory is the most popular theory or not. This theory ensures that shareholders who supervise their investments receive maximum benefit. The stewardship theory compares professional motivation against the cost of agency theory and the manager, who is not an entrepreneur but wants to do a good job (Donaldson and Davis 1991). The Arabian Gulf Market: Chahine and Tohme (2009) observed Arabian markets to view the consequence of duality in company performance and they examined company duality in twelve countries from Asia and the North African region. Their study revealed that duality had negative effect on company value. However, companies with leadership duality showed diminished company value. That is why, in exploring company performance, the role of strategic shareholders is important. The markets in Arab countries are different from those in the US, UK and the Far East. Highly developed financial markets have the capacity to grow their performance. However, the financial markets of Middle East Asian countries and North Africa are still not efficient (Chanine and Nicholas 2009). The Experience of Asian/Chinese Markets: From 1990 to 2008, the country with the highest percentage of growth annually is China: 10.5 per cent as compared with 3.05 per cent globally. According to the World Bank report (2010), the UK has a 2.65 per cent growth rate and the United States has a 2.95 per cent rate. The expansion of the growth rate in China is more than double when compared with the United States. Most of the earlier studies regarding board director duality focus on American and European companies and these studies did not focus on China and other Asian Countries (World Bank 2010). Because the government owns and controls the large organisations, the success of these companies cannot be properly taken into account. The early transitional period of the Chinese economy focused on the privatisation of government-owned companies to joint ownership with different investors are being involved (Peng 2004). Chinese companies can be classified into five groups according to their shareholder structure, those with: “state-shares, tradable “A” shares, legal-person shares, foreign investor shares and employee shares” (Qi, Wu and Zhang 1999). The analysis of these groups was conducted in the Shanghai Stock Exchange in which the selected companies were listed from 1991 to 1996. The results reveal that the firm where state ownership is higher has a negative impact on company performance (Peng and Shujan, 2007). Peng, Zhang and Li (2007) reviewed the data of 403 companies in 2010 and those public listed companies covered 1,202 company years between them. Their research concluded that unity of command is provided by duality and therefore it is better. A significant role was played by the Chinese institutional reforms, which differ considerably from the Western capitalist style. There are not very many qualitative empirical studies in the developing economies and they mainly focus on Asia, Africa and Latin America. Bangladeshi companies are mostly privately owned where the head of the family has complete control over the company and all company affairs without consulting any other person. The owner is not only the CEO of the company but also the chairperson of the company. On the other hand, in Egypt, Khalid Elsayed (2007) investigated 92 publicly listed companies in Egypt, which represented 19 different sectors. The results of this study show that the impact of CEO duality depends on the industry in which companies are operating and the results split between support for the agency theory and stewardship (Elsayed 2007). Proposed Methodology: For the proposed research, two possible approaches are available: qualitative or quantitative methodologies (Hooloway 1997). Based on the proposed objective of investigating the relationship between the board duality and the financial performance of Kuwaiti companies, this objective may be best served if a positivist paradigm is followed which permits the quantitative analysis of information gathered. However, this approach depends on the accuracy and precision of the numerical data in order to be a useful instrument in evaluating the hypothesis of research (Marlow and Boone 2011). For the proposed study, three hypotheses are set out; these will be tested using a correlation matrix and multivariate linear regression (Balgati 1995). The quantitative approach suggested for the proposed study is justified on the basis of similar methodologies being adopted for previous studies by Rechner and Dalton (1991); Chen, Lin and Yi(2008), James and Gregg (1997) and Daily and Dalton (1994). Correlation Matrix and Regression: The results of the correlation matrix will be the coefficients, which will suggest the direction and strength of the relationship between variables. The resulting equation from the linear regression will be achieved as follows: Financial Performance of Kuwaiti Companies = ?0 + ?1*Duality of CEO + ? Where ?0 = Coefficient of Constant ?1 = Coefficient of Slope ? = Control Variables Dependent Variable: Financial Performance of Kuwaiti Companies: This proposed research will use financial performance accounting measures for Kuwaiti companies. The use of accounting measures are justified based on previous studies by Rechner and Dalton (1991), Daily and Dalton (1994) and Chen, Lin and Yi(2008) who used various accounting performance indicators to evaluate company performance. For the proposed study, two accounting measures (including the Dupont ratio and Earnings per Share (EPS)) will be used to estimate the financial performance of Kuwaiti companies (Chen et al., 2008). The Dupont analysis helps to analyse company returns on shareholders equity and it is measured as a composition of profit margin, asset turnover and equity multiplier, a measure of assets over equity of an organization. On the other hand, EPS is the measure of return per share (Fridson and Alvarez 2011). The distinction between both ratios to be used for measuring the financial performance of companies is that EPS is based on market price of companies stocks and thus, it can be considered as measure of market performance of the company as compared to DuPont ratio, which is based on historical data published by companies (Fridson and Alvarez 2011). The accounting method has both advantages and disadvantages, which will be taken into consideration when the actual research will be performed. The use of market measure such as Tobin Q may not be suitable for companies operating in emerging and developing countries, as the information required for it may not be available. Therefore, in this proposed research only accounting measurements as discussed above will be used for determining the financial performance of Kuwaiti companies. Independent Variable: CEO Duality Duality in the board structure is the main independent variable in the research. The proposed study will follow the system of binary variables in which if the chairperson of the company is also holding the CEO position, then it is assigned a value of 1 and a value of 0 in those companies where these two positions are segregated (Chen et al., 2008). Control Variables: The induction of control variables in the analysis is due to the understanding that the relationship between financial performance and board duality is not straightforward. Therefore, it will be important to include other factors which also have an influence on the company’s financial performance. These control variables will include the presence of independent directors, CEO age, and number of board meetings, board size and ownership of companies (Breusch and Pagan 1980). Test of Significance: The analysis will also test the significance of the relationship between the independent variable - duality of CEO position and the dependent variable - financial performance using t-test. This test will be conducted by making a comparison of the t values for each variable with the values present in the t distribution table at a significance level of 95% (Newman and Benz 1998). This analysis will result in conclusions on whether the relationship between CEO duality and financial performance of Kuwaiti companies is significant or not. Descriptive Analysis In addition, descriptive analysis of data consisting of mean, standard deviation, maximum and minimum values will also be included. Basis for Analysis The analysis of the relationship will be performed for a period covering 2005 to 2011. This will allow the study to test results during periods classified as before and after the recent financial crisis. Conclusions will be made regarding the differences in financial performance of Kuwaiti companies before and after the recent global financial crisis. Based on this approach, the above prescribed data testing will be performed for two periods: from 2005 to 2007 and from 2008 to 2011. This approach should yield interesting findings and discussion. It has been noted that the Kuwaiti corporate sector has been very much affected by the recent financial crisis and companies have cut back their investment plans. The repercussions of poor global economic conditions have had a negative impact on the financial performance of companies (Capital Standards 2010). This study will also result in conclusions on whether those companies with CEO duality have performed better than companies without board duality. Sample Size: The selection of an appropriate sample is important for any research in order to achieve the objectives of the study in an appropriate manner. General characteristics of the wider population are represented in the sample size which helps to evaluate the overall attributes of the population (Lenth 2001). The sample size suggested for the proposed research comprises Kuwaiti companies listed on the KSE. There are 207 companies in the KSE of which 153 have board duality and the remaining 54 do not. The percentage of Kuwaiti companies that have board duality is 73.91% and the percentage of companies without duality is 26.08%. By using random sampling, 25 companies with duality will be selected and 25 companies without. Therefore, the sample size for the proposed research is 50 companies. That is considered sufficient as it reflects 16% and 48% respectively of both types of companies. Data Collection and Statistical Software The data will be collected from the KSE website. This provides information such as annual reports, board size and the duality status of the various companies selected for data collection. Financial data will be collected from banks’ annual reports and Thomson Reuters database. Information on institutional ownership will be collected from the Aljoman Canter for Economic Consultancy website. The statistical software that will be used for compiling and analysing the different statistical models discussed above is the SPSS17 Student Package. Limitations: Due to the shortage of data, the precise measurement of market performance is held back which has been used by several previous studies in addition to the accounting measures. The complete measurement of control variables is prevented due to data limitations affecting companies particularly the ones that have family ownership. Although, the quantitative approach that has been proposed is based on previous established methodologies on similar research topic however it has certain limitations, which need to be considered: 1. The outcome of quantitative research may be difficult to interpret by its users. 2. This type of research often leaves out the descriptive discussion of results which may be necessary for better understanding of the study. 3. The sample size of companies can be considered small for quantitative research. 4. In addition, time and cost of research may also be considered as restrictive factors affecting the outcome of the study. Conclusion: There is a need to add further variables in carrying out research on CEO duality. These variables relate to individual, capital or managerial capabilities. Detailed analysis reflects the dynamics of the market and their effects on managerial practice. According to some researchers, there is a negative relation between board duality and company performance. However, some researchers also find that this relation is positive. Since 57 per cent of the companies in the KSE have board duality, this is an ideal market to test board duality. The aims and objectives of this research is to explore the relationship between duality of directors and the performance of company. The literature review covers and debates the various merits of the steward theory and the agency theory. The research methodology, which entails data collection methods and sample size, is also explained in this research paper. Time Scale: Task \ Time Jan Feb Mar Apr May Jun Jul Aug Sep   1 - 30  1 - 30 1 – 31 1 - 30 1 - 31 1 - 30 1 – 29 1-31 1-30 Literature research and review               Methodology and findings             Writing up the first draft               Revising the first draft                 Writing up the final draft                 Submission               List of References Al-Sultan, W. and Al-Shammari, B., 2010. Corporate Governance and Voluntary Disclosure in Kuwait. International Journal of Disclosure and Governance, 7. Balgati, B., 1995. Econometric Analysis of Panel Data. New York: John Wiley and Sons. 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