Academic journal article Journal of Economic and Social Development

Board Diversity, Network and Firm Value

Academic journal article Journal of Economic and Social Development

Board Diversity, Network and Firm Value

Article excerpt

(ProQuest: ... denotes formulae omitted.)

1. Introduction

In a world of increasing globalization, where countries cooperate in order to create even larger economic communities, questions arise as to what are the most important characteristics in determining the success of a firm in a particular market? Given that many countries have different cultural backgrounds and legal frameworks, it is not necessarily going to be the case that the characteristics that guarantee success in one market lead to success in another. However, a common characteristic of many firms is the presence of a board of directors.

A board of directors is one effective governance mechanism, the efficacy of which is widely recognized in both U.S. and non-U.S. models (Globerman, Peng and Shapiro, 2011; Hermalin and Weisbach, 2003; Kaplan and Minton, 1994; Yermack, 2006). In theory, a board represents all shareholders. It is charged with hiring, monitoring, evaluating, replacing, and advising management to ensure that all managerial decisions maximize shareholder returns. Among these functions, the monitoring and advising functions appear to be the most important (Adams and Ferreira, 2007; Boone, Field, Karpoff and Raheja, 2007; Raheja, 2005). Given the influence that a board of directors has on a firm, and thereby its chances of success, an obvious question is, what characteristics do successful boards share in a particular market?

Because the individuals who constitute boards have a great deal of influence over the decision-making process, shareholders and potential investors need to be aware of, and understand, the various characteristics of the individuals who make up the board. When examining this issue, most existing literature has focused on board composition, in particular the monitoring role of boards in governing management teams based on a principle-agent framework. While board composition is considered an important corporate governance mechanism (Globerman et al., 2011; Hermalin and Weisbach, 2003; Kaplan and Minton, 1994; Yermack, 2006), previous work has suggested that other board characteristics such as qualifications and competency of directors, diverse background of directors and the social network of board members are also important during the decision-making process (Espenlaub, Khurshed and Sitthipongpanich, 2012; Johnson and Powell, 1994; Peng, Buck and Filatotchev, 2003).

Moreover, Jiang and Peng (2011) suggest that institutions matter in corporate governance. Network is one of the major institutional characteristics in economies with inefficient markets. At the micro-level, network-both political and alumni, for example-could increase firm value; on the other hand, policy makers should be aware of unfair treatments from close connections. At the macro-level, improving resource allocation could help institutional and economic development. We ask whether firms could overcome market inefficiency through informal and private networks of directors.

When assessing the significance of boards of directors on firm performance and value, the majority of existing empirical research focuses on board structure, which is based upon a principle-agent framework. Specifically, existing studies examine how the size of the board, degree of separation between the chairman and the CEO, and increasing representation by independent directors make boards more effective in the performance of their monitoring role. While the agency theory views a board of directors as monitors over management teams, the resource dependence theory suggests that directors play an important part in providing various advice to managers and extracting external resources for firms.

This study examines how the characteristics of a board influence decision making within a firm. In particular, this paper examines how diversity in the characteristics of a board such as gender, age, educational background, professional expertise and international perspectives affect firm value. …

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