The Board Gender Diversity and Cost of Capital in Hong Kong - Research Proposal Example

Is woman better cost saver? Study on board gender diversity and cost of capital in Hong Kong Table of Contents Introduction 3 Literature Review 4 Agency theory 6 Stakeholder theory 6 Research Question 8 Methodology 8 Research approach 8 Hypothesis 9 Sample selection 9 Data collection procedures 9 Proposed data analysis 12 Statistical approach 12 Plan to Acquire the Necessary Research Skills to Perform the Study 12 Expected outcome and significance 13 Works Cited 14 Bibliography 16 Introduction In past few years, a rapid growth of gender diversity has been witnessed in various firms across the globe. According to management of various companies, gender diversity adds competitive edge to operations and performance of the company. In present business world, women and men are performing equally well yet women are frequently under-represented as leaders and in management areas. However, the male dominated business world has witnessed major changes in terms of gender diversity in workforce due to aging population and manpower shortage. In opinion of shareholders, gender diversity in board of a company is important for increasing its effectiveness. In addition, many organisations witnessed better degree of management and governance with involvement of women workforce in boards and management teams (Farrell and Hersch 85-106; Standard Chartered Bank 1-60). In a number of countries, specifically, Singapore, the United Kingdom, Switzerland and the United States, gender diversity in a company’s board is being given a lot of importance due to its positive impact on the company’s performance (Terjesen and Singh 55-63). The legal and regulatory organisations have become a constant source of encouragement for board diversity. In Europe, jurisdictions have enacted laws that favours gender diversity in company’s board. Similar trend has been noticed in other countries, namely, Australia, Canada, Norway, Singapore and the United States (Grosvold, Brammer and Rayton 344-357; Terjesen and Singh 55-63). In the United States, the Securities and Exchange Commission made it official in 2009 for listed firms to disclose about their board formation, involvement of gender diversity in its boards and its impact (UK Government; Weir and Laing 86-95). In 2012, the Hong Kong Stock Exchange pointed greater emphasis on gender diversity as an important component of corporate governance framework. In Hong Kong, board diversity is considered important by internal as well as external shareholders in various listed companies due to certain reasons: a) Role of board in framing corporate governance of the company b) Impact of board diversity in enhancing the strategic decisions of a company c) Role of a diversified board in increasing the regulatory requirements and expectations of shareholders (Hong Kong Institute of Chartered Secretaries) Notwithstanding that gender diversity on board has gained importance in many countries nowadays, it has been understood so far that all existing literatures have mainly focused on gender diversity in companies located in western countries, while very little research has been done on Asian countries, such as, China, especially in Hong Kong. The aim of the research proposal is to evaluate the degree of gender diversity in the boards of Hong Kong’s listed companies and their impact on firm’s financial performance. In majority of researches related to gender diversity in board of a company, the researchers have employed Tobin Q to determine the performance of company with respect to increasing involvement of female members. However, unlike most existing literature, this paper will use cost of capital as performance measure related to the subject. Literature Review Authors such as Ferreira (225-242) suggest that in a corporation, board is the key decision making body and its members are primarily responsible for approving various strategic decisions of the company. Consequently, it is important to have members who have diversified competencies and perspectives in the board so that decisions can be taken after critical consideration. Various academic studies suggest that flow of gender diversified talent result in better decision making by the board. Moreover, diversification adds to increased governance and problem solving approach. Further, board diversity also improves financial performance of a company (Erhardt, Sharder and Werbel 102-111; Carter et al 396-414). In context of the subject of this report, one of the most frequently mentioned studies is 2007 Catalyst Study. The study ranked all the Fortune 500 companies with respect to the proportion of female members they have in their board composition. The outcome of this arrangement was astounding as it was found that the company with highest number of female members in their board composition has 53% more return on equity that the company with lowest number of female members in the board composition. Not only that, the highest rank holder company outperformed the lowest rank holder by earning 42% return on sales and about 66% more return on invested capital (“The bottom line: corporate performance and women’s representations on boards”). Apart from this study, the other studies conducted in the U. S. also exhibited positive relationship between firms’ performance and board diversity. Erhardt, Werbel and Shrader (102-111), examined 127 companies in their study and supported the positive correlation between higher earnings and female directors. In addition, research undertaken by Carter, Simkins and Simpson (33-53) and Carter et al (396-414) exhibit positive relationship between performance of the firm and board diversity. The authors used panel data for hypothesis testing and implemented three-stage least square regression to frame a system of equations that establishes link between Tobin’s Q to board committee diversity. The authors examined audit reports, executive compensation and director nomination for this purpose. Another study conducted by Adams and Ferreira in 2002 (2-22) found that financial performance of firms with female directors has improved in a number of organisations but negative or neutral relationship was exhibited between board diversity and return on asset in some organisations as well. These studies are not limited to one particular location but similar studies have been conducted in various public companies across the world (Terjesen and Singh 55-63).  Theoretical framework In the same context, it is important to briefly discuss the agency theory and the stakeholder theory mentioned by Hill and Jones (131-154), in this research proposal because these two theories present contrasting view point regarding influence of women directors on performance of organisations. Agency theory The agency theory suggests that women as external stakeholders, foreign party to a company and ethnic minorities have a tendency to add new perspective on complex problems, which helps in solving strategic problems. However, such an explanation may not prove sufficiently credible as it overlooks certain important factors such as leadership skills and style that are necessary for managing the organisation. In an elaborate manner, it can be said that gender implication is not sufficient to govern a corporate organisation (Francoeur, Labelle and Sinclair-Desgagné 83-95). It is important to employ right person keeping in view the ongoing economic condition and leadership style required in the organisation (Hillman and Thomas 383-396). It can be suggested from the above discussion that the agency theory supports neutral or negative relationship between gender diversity in board and organisational performance. The agency theory has been supported by many authors. For instance, Farrell and Hersch (85-106) applied Poisson regression to investigate upon role of female member in board of a company and its impact on the organisational performance in Fortune 500 and Service 500 companies but their research established neutral relationship. In this context, the authors examined proxy statements of the companies to determine board composition. Similarly, author such as Shrader, Blackburn and Iles (355-372) concluded from their study that female directors have no impact on profit margin, return on equity and asset. In this research study, the authors collect sample data on ‘women in management’ from articles published in Wall Street Journal by Sharpe and Foldessy and classified them in various independent and dependent variables. The authors applied hierarchical regression technique and developed a correlation matrix with means and standard deviations (Shrader, Blackburn and Iles 355-372). In this regard, it is important to mention that all these researches were conducted on the U.S. firms. Stakeholder theory The standpoint of this theory is that the pressure of appointing female members in the board or in senior management teams is created by various stakeholders such as institutional investors, consumers, governing bodies, shareholder activists and politicians. The stakeholder theory analyses the statement and tries to understand its implications. The stakeholder theory is widely accepted as part of management theories because of its accuracy, normative validity and instrumental power (Francoeur, Labelle and Sinclair-Desgagné 83-95). This theory has been supported by various well-known studies such as those by 2011 Conference Board (Lisa) and Catalyst 2004 (“The bottom line: corporate performance and gender diversity”). According to this theory, gender diversity is necessary for firm’s development because their commitment has been appreciated from organisational purview (N. Smith, V. Smith and Verner 569-593). From instrumental point of view, it has been observed that when women are given greater authority in stakeholder management, other aspects remaining constant, greater degree of success has been observed (Dobbin and Jung 809-838). The supportive reasons in this regard can be strong purchasing and negotiation power of women, their ability to understand and foster desired organisational structure, ability to recognise and recruit greater intellectual capital and commitment towards organisational goals and objectives (Dobbin and Jung 809-838; “The case for women on boards SXSW 2014”; International Financial Corporation). In addition, studies by Credit Suisse and Bloomberg found that companies that has greater number of women in their board have rather risk-averse stocks and show significant reduction in their debt over time. In both these studies, patterns of debt reduction as well as that of debt equity ratio of the companies in MSCI ACWI Index were studied and trends were developed. In Bloomberg report, it was stated that debt-to-equity ratio was at least 2% lower for companies with female board members (48%) compared to companies that have all male board members (50%) (Perlberg, “Stocks perform better if women are on company boards”). According to the report of Credit Suisse, not only in Europe, the U.S. and emerging Asia but also in developed Asia such as Hong Kong, Japan and New Zealand, the involvement of women on the board has increased significantly. In Hong Kong, the growth was found to be increased from 28.8% in 2005 to 51.6% in 2011 on average while the companies that were brought under the purview of research in Hong Kong were randomly selected from MSCI AC World index; these organisations are large as well as small firms with female representation in board ranging from zero to more than one (Credit Suisse Group). Figure 1 (Source: Author’s creation) Research Question The question that the research aims to answer is: how does gender diversity in board of public listed companies affect its cost of capital? Methodology Research approach In this research proposal, Positivist approach has been applied as the aim is to gather information related to role of female board members in Hong Kong’s listed companies based on observed data instead of introspection. Hypothesis The hypothesis that is to be tested in this proposal is that organisations with female directors experience comparatively low cost of capital in context of Hong Kong. The hypothesis will be tested using fixed-effects panel regression analysis. Sample selection For sampling purpose, 5 public listed companies from each sectors classified under Hang Seng Industry Classification System (HSICS) will be selected by the researcher, and therefore the data comprises 150 firms (the “sample firms”). The rationale lying under this decision is to ensure that the sample is uniformly distributed across various industries and to study the impact of female board members on companies which engage in industries that have relatively diverse workforce as compared to those with highly concentrated (men or women) workforce. In the sample data, the male and female composition ratio of the company board along with the cost of capital of the company will be considered for six years (2009-2014). The main reason behind selecting the mention period is that post 2008 financial crisis the importance of gender diversity gained sufficient momentum and an inclination towards appointment of greater number of female directors was noticed in various organisations (International Financial Corporation). Alongside, in 2013, the detailed disclosure regarding board diversity policy in public sector was made compulsory in Corporate Governance Code and Corporate Governance report in Hong Kong (Hong Kong Exchanges and Clearing Limited 3-31). Data collection procedures The data for the below variables on the sample firms will be extracted from their respective annual reports, published between 2009 and 2014 on the website of Hong Kong Stock Exchange, and the Bloomberg terminal. Independent variables: Gender and Age Gender: the variable can be measured by two methods, that is, either by calculating the proportion of female representation on the board or by using dummy variable where one stands for at least one female board member and zero stands for none (Carter, Simkins and Simpson 33-53). Age: the variable will be measured through age dispersion using coefficient of variation (Carter, Simkins and Simpson 33-53). Control variables: Firm size, Board size, Firm’s financial leverage and Firm’s growth opportunity. Firm size: The researcher will be calculating the firm size by apply natural logarithm of total assets (Lang and Stulz 20-38). Board size: the board size will be measured using natural logarithm of the number of directors in the firm’s board (Carter, Simkins and Simpson 33-53). Firm’s financial leverage: To determine the firm’s financial leverage, the researcher will use the ratio of debt to shareholders’ equity. Firm’s growth opportunity: the growth opportunity will be calculated in this paper by computing the average change in the total asset of the firm. Dependent Variables: Cost of capital Cost of capital can be defined as the minimum adjusted average rate of all the capital sources. The researcher will be measuring overall cost of capital of different listed companies in Hong Kong using the weighted average cost of capital (WACC). The WACC statistic of each sample firms will be obtained from Bloomberg terminal, which is calculated using Capital Asset Pricing Model. The data will be obtained from Bloomberg terminal because it is an authentic database that presents highly reliable data. Bloomberg is well-known for presenting unswerving financial data of various multinationals as the data are consistently updated with respect to market changes. Cost of capital is an important measure of performance as it is the minimum rate of return that a firm must achieve so as to continue its operations. In this context, it is important to note that the cost of capital is neither a cost nor a return rate but an average of both that a firm needs to achieve to survive (to be at breakeven or above the same). The main reason behind the researcher selecting cost of capital over Tobin Q as performance measure is that Tobin Q has certain weaknesses such as neglecting stock value fluctuation while calculating future value of capital. In addition, as cost of capital is related to stakeholders’ value maximisation, an organisation would be able to maximise its shareholders’ value if it could achieve a return higher than its WACC value (Lang and Stulz 20-38). Proposed data analysis In context of Hong Kong’s public organisations, the researcher will be comparing the cost of capitals of the selected companies with respect to the male and female composition of the board in the data analysis. Furthermore, inter-industry as well as intra-industry analysis will be also conducted so as to have a better understanding of the role of greater diversity in the board on performance of the organisations. During the data analysis the nature of the industry will be taken in consideration as in certain industry it is less practicable to appoint female members in the board. Statistical approach The statistical model that will be implemented in this paper is the fixed-effects (FE) panel regression analysis. The fixed-effects panel regression analysis is being considered suitable for this proposal because a data set that combine time series and cross sections will be analysed in this research paper, which are either predictor or outcome variable within the given entity, that is, the sample organisations. The rationale behind implementing FE is to analyse the impact of female board members on the cost of capital of the companies. In this regard, the cost of capital will act as predictor while the number of female board members will be the outcome variable, which may or may not influence the predictor variable (Oscar 1-40). Plan to Acquire the Necessary Research Skills to Perform the Study The main skills that the researcher requires for conducting the study are writing skill, data collection skill and data analysis (statistical) skill. The researcher must exhibit proficiency while writing the report as the subject is complicated and require rich insight. Moreover, the researcher will require presenting a formidable argument in favour of selecting cost of capital over Tobin Q as performance measurement tool. Data collection skill involves the ability to select data that are absolutely relevant to the subject of research. Data analysis is the most critical part of research methodology as the research outcome depends extensively on the same. The researcher will require implementing sufficient statistical skill as hypothesis testing will be undertaken using the FE panel regression analysis. In the FE Panel regression analysis, the primary assumption of the researcher will be that the time invariant characteristics of various entities will not be correlated with each other. In this proposal, the researcher will employ concepts of econometrics for calculating the regression coefficient. In this respect, the cost of capital of sample companies will be the predictor variable while the number of female on board will be the outcome variable. The correlation coefficient will be calculated at a specific significance level and the degree of relativity between the variables will be determined based on the coefficient (Oscar 1-40). Expected outcome and significance The potential outcome of this research proposal is expected to support the stakeholder theory, as discussed in the literature review. The research proposal is important from the perspective that very limited researches have been conducted relevant to the subject in Hong Kong and the report may prove useful to the business and industry regulators of Hong Kong regarding promotion of greater board diversity as well as implementation of regulatory measures in this respect. This reason also heightens the likelihood of future research in this sector. The expected outcome of the proposal is assumed to be positive in a sense that with higher involvement of females in boards in companies, the return on capital of companies and their overall performance will increase. In this paper, cost of capital has been considered as the measure of performance instead of Tobin Q, because cost of capital provides rather simplified and effective understanding of the developments. Works Cited Adams, Renée B., and Daniel Ferreira. "Gender diversity in the boardroom." 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