Relationship between board structure and composition on firm performance, of UK listed companies from Morningstar Company Intelligence

Introduction

To conduct an empirical analysis on the link between board structure and composition on firm performance, of UK listed companies a total of 30 companies from Morningstar Company Intelligence was selected. For each of the companies, selected the data was coded into SPSS and according to the company size, performance and board data variables. The variables considered during the analysis comprised of Company size (Turnover, number of employees), company performance (ROCE, EPS and degree of internalization) and board data (size of the board, proportion of non-executive directors, CEO/chair duality, proportion of women directors, and the proportion of international directors.

The descriptive statistics (minimum and maximum values, mean and sd), as well as inferential statistics (correlation and regression), used to establish a relationship that exist between board structure and composition on firm performance, (Colley et al.2005). The empirical analysis on relationship that exist between board structure and composition on firm performance, were presented in the following sections.

Descriptive Analysis

The descriptive variables considered include the Turnover of 2013, number of employee, return on capital employee (ROCE), CEO duality, earnings per share, degree of internalisation, size of board, percentage of women, non execute and  International directors as summarized in Table 1(Appendix 1). From the results the mean of turnover was found to be 4507.35, with maximum employees of 38041. The, mean number of employees were 43337.47 and range from 9 to maximum of 629135 (Schmid and Zimmerman 2005).  The findings also indicated that the Return on Capital Employee (ROCE) ranged from a 0 to a maximum of 225.80 and had a mean of 7.9. The mean of CEO duality was 0.03 and the maximum was 1. The earnings per share ranged from a minimum of 0 to a maximum of 92.96, with a mean of 25.45. The degree of internalization was identified to range from 0 to 96.6and with a mean of 34.62. The board size was found to range from 4 to 14 and to have a mean of 8.93.   The percentage of female directors ranged from none to a maximum of 33.33 with a mean of 16.26. The percentage of non executive directors ranged from 40 to a maximum of 90, with a mean of 67.56. From the results, the percentage of international directors ranged from a minimum of none to a maximum of 100 with an average of 14.22 directors.

Standardized Descriptive Variables

In order to advance the inferential statistics, the descriptive variables were standardized as summarized in table 2(Appendix 1). The mean log of turnover was found to be 4507.4 and ranged between  1.98 and 38041. However, the mean log of board size had a mean of .923 and ranged from .6 and 1.15.  Furthermore, the mean log of number of employees was found to be 3.57 and ranged from 0.95 and 5.8. The mean log of ROCE was -.474 and ranged between -1.40 and 2.35. Finally, the mean log of the independent directors was 1.36 and ranged from 1 to 2.

Pearson Correlation on corporate governance characteristics and firm performance

Pearson Correlation analysis was used to describe the strength of the linear relationship between corporate governance characteristics and firm performance using a sample of UK listed companies as shown in (Table 3) (Appendix 1). There was a significant influence of size of board on earning of shares [r=.453, n=30, p<.01], at 5% level of significance. This indicates that an increase in of size of board will lead to a rise in earnings per share of the shareholders of a firm. Also from the findings there was a significant influence of non executive directors on the earning per shares [r=.471, n=30, p<.01], at 1% level of significance. This indicates that an increase in non executive directors caused more earnings per share among the shareholders.

Linear Regression analysis

Linear Regression used to in determining the influence of ROCE and Percentage of Non Execute Directors. From the regression results the R coefficients were .356 and the R-square is .127. Thus Percentage of Non Execute Directors predictor variable has explained 12.7% of the variance in the dependent variable ROCE as shown in Table 4 (Appendix 1).  This suggested that the Percentage of Non Execute Directors was important in determining 12.7% ROCE. Model caused R2 to change from zero to .127 and this change give rise to an F ratio of 3.78, which is not significant (p>.05).

The analysis of variance used to test whether the model could significantly fit in predicting the outcome of firm performance (Table 5) (Appendix 1).  The F- ratio was 3.775 which was likely to happen by chance and was not significant (P>.05). The model was found to not to significantly able to predict ROCE. Thus, the model was not significant, leading to acceptance of the null hypotheses. This indicating that the predictor variable percentage of non execute directors do not explain the variation in the dependent ROCE.

The coefficient shown in Table 6 (Appendix 1), presents the standardized Beta coefficients between the predictor variable percentage of non execute directors as well as the dependent variable Log of ROCE. The estimates of β values were used to provide contribution of the predictor to the model. The Beta coefficient (β) of the percentage of non execute directors (-.020) and not significant at the 5% level of significance. Thus, the percentage of non execute directors was found not to influence the ROCE in Morningstar Company Intelligence, (β=-0.020, t=-.1.943, p>0.05). The findings showed that a unit increase in percentage of non executive directors will lead to a -.020 decline in ROCE performance when the other variables are held constant.

Bowerman & O’Connell, (1990) identified that VIF values should be below 10 and tolerance above 0.2. Collinearity diagnostics for this model, VIF values were all below 10 and tolerance statistics are all well above 0.2 and therefore, have not violated the multi-Collinearity assumption and conclude that there is no Collinearity.

Pearson Correlation on corporate governance characteristics and firm performance

The influence of corporate governance characteristics on ROCE was carried out using pearson correlation as summarized in table 7(Appendix 1). A positive relation exist between size of board [r=.544, n=30, p<.05] and turnover of 2013. This showed that an increase in size of board causes a rise in turnover. A positive relation exists between board size [r=.453, n=30, p<.05], female directors [r=.560, n=30, p<.05] and non executive directors [r=.471, n=30, p<.01] on earnings per share. This indicates that the, bigger the board, the more female directors and non executive directors in the listed company the earning per share increased.

A positive relationship exists between female directors [r=.671, n=30, p<.05] on boards size. This indicates that the more the number of female directors the board size increases. There was a positive relationship between female directors [r=.504, n=30, p<.01] and percentage of non executive directors. This indicated that the more female directors the higher the percentage of non executive directors.  No relationship between the turnover of 2013, number of employee, CEO duality, earnings per share, degree of internalization, size of board, percentage of women, non execute and  international directors on the ROCE of Morningstar Company Intelligence.

Multiple Regression

Board structure and composition factors influencing ROCE

Multiple Regressions were used to determine relationships between independent variable (turnover of 2013, CEO duality, size of the board, percentage of women, non execute and international directors) and dependent variables ROCE. From the regression results, the R coefficients were .485, and the R-square is .235. Thus, the predictor variables have explained 23.5% of the variance in the dependent variable ROCE as shown in Table 8 (Appendix 1). This suggests that the predictor’s investigated determining 23.5% of the ROCE performance.

The analysis of variance used to test whether the model could significantly fit in predicting the outcome of firm performance (Table 9) (Appendix 1). The F- ratio was 1.178 which was likely to happen by chance and was not significant (P> .05). The model was found to not significantly able to predict ROCE, leading to acceptable of the null hypotheses.

The coefficient shown in Table 10 (Appendix 1), presents the standardized Beta coefficients between the predictor variables and the dependent variable Log of ROCE. The β value presents the relationship between the ROCE and predictors. The Beta coefficient (β) of the turnover (-.203), CEO duality (-.281), size of the board (.087), women directors (-.022), non executive directors (-.008) and international directors (-.001) and all was not significant at (p>0.05). This indicates the turnover, CEO duality; size of the board, women directors, non executive directors and international directors does not predict ROCE. Collinearity diagnostics for this model, VIF values were all below 10 and tolerance statistics are all well above 0.2 and conclude that there is no Collinearity.

Board structure and composition factors influencing earning per share

Multiple Regressions were used to determine relationships between independent variable (turnover of 2013, CEO duality, size of the board, percentage of women, non execute and international directors) and dependent variables earning per share. From the regression results, the R coefficients were 632, and the R-square is .399. Thus, the predictor variables have explained 39.9% of the variance in the dependent variable ROCE as shown in Table 11(Appendix 1). This suggests that the predictor’s investigated predict 39.9% of the earning per share.

The coefficient shown in Table 12 (Appendix 1), presents the standardized Beta coefficients between the predictor variables and the dependent variable earning per share. The Beta coefficient (β) of the turnover (.811), CEO duality (1.177), size of the board (1.588), women directors (.726), non executive directors (.446) and international directors (-.188) and all the board structure and composition factors was not significant at (p>0.05). This indicates the turnover, CEO duality, size of the board, women directors, non executive directors and international directors does not significantly predict earning per share. Collinearity diagnostics for this model, VIF values were all below 10 and tolerance statistics are all well above 0.2 and conclude that there is no Collinearity.

Board structure and composition factors influencing Degree of Internalization

Multiple Regressions were used to determine relationships between independent variable (turnover of 2013, CEO duality, size of the board, percentage of women, non execute and international directors) and dependent variable degree of Internalization. From the regression results, the R coefficients were .489, and the R-square is .240. Thus, the predictor variables have explained 24% of the variance in the dependent variable degree of internalization as shown in Table 13(Appendix 1). This suggests that the predictor’s investigated predict 24% of the degree of internalization.

The analysis of variance used to test whether the model could significantly fit in predicting the outcome of firm performance (Table 14) (Appendix 1). The F- ratio was 1.208 which was likely to happen by chance and was not significant (P> .05). The model was found to not significantly able to predict internalization, leading to acceptable of the null hypotheses.

The coefficient shown in Table 15 (Appendix 1), presents the standardized Beta coefficients between the predictor variables and the dependent variable internalization. The Beta coefficient (β) of the turnover (-4.322), CEO duality (73.776), size of the board (3.56), women directors (-.850), non executive directors (.833) and international directors (.118) and all was not significant (p>0.05). This indicates the turnover, CEO duality, size of the board, women directors, non executive directors and international directors does not significantly predict internalization. Collinearity diagnostics on the variables for this model, VIF values were all below 10 and tolerance statistics are all well above 0.2 and conclude that there is no Collinearity.

 

Discussion

From the findings there was a significant influence of size of board on earning of shares. Board size has been identified from studies to vary from one country to another. For Example, boards in Europe, tend to be small compared to other countries such as Germany and France that have larger board sizes (Heidrick and Struggles, 2007).  The board size influence on firm performance is a continuing debate. Some studies identify positive, while others find negative influence of board size and firm performance.

A positive relationship exists between size of board and turnover of  2013. The size of the board, percentage of female directors and percentage of non executive directors influence earnings per share. Awan (2012) established that board size positively affect the firm ROCE. Contrary, empirical evidence indicates negative effect of board size on firm performance. Beiner et al. (2004) established board size negatively affect corporate governance. Dey and Chauhan (2009) established board size increases with organization dynamics. The board size may be affected by other governance factors, such as organization structure and leadership (Colley et al., 2005).

Significant influence exists among non executive directors on the earning per shares among the shareholders. From the agency theory non-executive directors help in the creation of effective governance and prevail upon control management through decision making. In Korea, Choi et al. (2007) established a positive effect of non executive directors on firm performance.

Smallman (2004) argues the shareholders wealth is taken care as the steward’s tend to be maximized them too, because managerial success will serve most necessities and the stewards having a clear mission. Stewardship theory considers a more comfortable towards separating the role of chairman and from that of CEO, and a specialist executive directors rather than non-executive directors (Clarke 2004). Awan (2012) established a positive relationship among the executives and the firm performance.

A positive relationship exists between female directors and boards size. The female board members represent a different characteristic of the board (Dutta and Bose 2006). Smith et al. (2006) considered the significance of females on board. Women have been identified to have clear understanding compared to male and may assist in decision making by the board. Female enhance the perception of the community towards the firm positively improving firm’s performance. The role played by female members is to create a conducive business environment.

The board structure and composition did not influence the ROCE of Morningstar Company Intelligence. The board structure and composition predicts 23.5% ROCE, 39.9% earnings per share and 24% of the degree of internalization. It has been argued by both theorists (Fama & Jensen 1983) and regulators (Cadbury 1992; Higgs Report 2003), that the separation of the roles of CEO and Chairman is an important determinant of board effectiveness. Empirical evidence indicates mixed results on the influence of non­executive directors on firm performance. Peng (2004) also found that institutional outside director’s impact positively on firm performance, which implies the effective resource role played by them. Lack of appropriate expertise from outside directors (Zahra & Pearce 1989) and their fear of challenging difficult decisions made by management (Lorsch & MacIver 1989) do not contribute to corporate performance.

From previous research on board structure relationship to director composition and leadership structure, it has been argued that board structure may influence various organizational outcomes (Daily & Dalton 1995). According to Weir and Lang (2001) UK companies that adopted governance structures, of Cadbury Committee did not establish any relationship between structures and performance based accounting (ROCE).

Schmid and Zimmermann (2005), established no evidence of significance difference in firm value between CEO duality. Elsayed (2007) identified that the duality had no influence on corporate performance in Egypty. In Malaysia, studies have showed duality does not have an impact on the firm’s performance. Managers become risk averse due to the performance evaluation by outside directors resulting in concentrating on short-term investments at the expense of strategic investments that benefits the companies (Gunasekerage & Reed 2008). Baysinger and Hoskisson (1990) also report that the ability to contribute to strategic decisions is limited for boards dominated by outside directors.

According to Abdullah (2004), outside directors could adversely affect board performance largely because they do not have access and adequate knowledge about the firm. Much of these studies have looked on board composition because of the importance of the monitoring and governance task of the board (Kiel & Nicholson 2003).  Having a higher proportion of non-executive directors on the board has a positive influence on firm performance (Shleifer & Vishny 1997).

Furthermore, Keil and Nicholson (2003) confirm that agency theory leads to recommend for a board should comprise of majority independent directors from outside and the position of chairman and CEO should be separated to increase shareholder value. MacAvoy et el. (1983) do not find any support for the hypothesis that a board’s composition affects firm performance. Fosberg (1989) and Molz (1988) did not find any link between outside independent directors and performance. The argument for the board composition is that the skills and the knowledge base they bring to the firm are of importance to firm performance (Bonn, Yoshikawa & Phan 2004).  Non-­executive directors may become less effective. The independence of non-executive directors may diminish as the tenure of the board increases (Bhagat & Black 1998; Dalton et al. 1998; Yarmack 1996).

 

Agency theory always stresses the need of distinction among the responsibilities of the CEO and Board chairman that creates a separate leadership structure (Coskan and Sayiar, 2012). This separation is aimed at leadership structure that monitors the CEO objectively and effectively.

Conclusion

There was a significant influence of size of board, non executive directors on the earning per shares among the shareholders. A positive relationship exists between size of board and turnover of 2013. The size of the board, percentage of female directors and non executive directors influence earnings per share. A positive relationship exists between female directors and boards size and non executive directors. The board structure and composition predicts 23.5% of the variance of ROCE 39.9% of the earning per share and 24% of the degree of internalization.

Recommendation

There is need to create diversification in order to enhance performance of firms.
From the findings there was no relationship between the turnover of 2013, number of employee, CEO duality, earnings per share, degree of internalization, size of board, percentage of women, non execute and  international directors on the ROCE of Morningstar Company Intelligence. Thus firms should ensure that they consider the importance of these factors in enhancing the firms performance.

There should also be few members on the board to enhance firm’s performance.

The Board should also appoint female directors contribute towards enhancing firm’s performance.

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