Multiple directorships in emerging countries: Fiduciary duties at stake?

Abstract

This study investigates the effect of multiple directorships on firm performance, using a database of non-financial firms listed on the Pakistan stock exchange. Prior literature provides inconsistent evidence on the relationship between multiple directorships and firm performance in an emerging country context, which may be the result of overlooking both the large differences in institutional environments among emerging countries and the dynamic endogenous relationships between board variables and firm performance. We aim to contribute to this academic debate by focusing on directorship appointments to multiple boards in a weak institutional context.Corporate governance practices, such as boards with outside directors exercising their fiduciary duties, are crucial for effective governance in weak institutional environments. However, serving in multiple directorships is expected to compromise the execution of director duties. Using a dynamic system Generalized Method of Moments model, our findings show, indeed, a negative effect of multiple directorships on firm performance in a weak institutional environment. Building on the premise that corporate governance is conditional in nature, we also tested the moderating influence of firm size on this relationship, but we did not find supporting evidence in a dynamic model setting. Our results have important practical implications for policy makers as well as firms.

The Moderating Role of Ownership Concentration on the Relationship between Board Composition and Saudi Bank Performance

“…The inclusion of the main effects (board composition & ownership concentration variables) in models 2 and 5 of Table 4 increases the explanatory power of variance in bank performance (∆R 2 = 0.05 *** , ∆R 2 = 0.06 *** ). The results reveal a significant positive association between board composition variables and bank performance, which is largely consistent with theoretical perspectives and empirical evidence (e.g., Al Farooque et al, 2019;Hamdan et al, 2019;Latif et al, 2020). On the other hand, ownership concentration has a negative impact on bank performance, which is in line with prior evidence ((e.g., Buallay et al, 2017;Hamdan, 2018).…”

“…Heteroskedasticity is also checked using Breusch-Pagan / Cook-Weisberg test, and the results are insignificant, which mean an absence of heteroskedasticity problem. Endogeneity is another concern in corporate governance and firm performance research (Giraldez-Puig & Berenguer, 2018;Latif et al, 2020;Wintoki et al, 2012). The potential sources of endogeneity include omitted variable bias, unobservable heterogeneity, and simultaneity or reverse causation.…”

“…Al Farooque et al (2020) indicate that independent and outside directors on the board positively affect firm performance. While Latif et al (2020) document a positive relationship between non-executive directors on the board and firm performance, Amin and Nor (2019) report a negative relationship between the two variables. Moreover, Akter et al (2020), Combs et al (2007), and Le et al (2006) document an insignificant impact of independent and outside board members on firm performance.…”

“…Third, to control for potential omitted variable bias (Gujarati, 2003;Wooldridge, 2010) and to rule out alternative explanations for the mean results (Singh et al, 1986), the current study includes a number of control variables for board characteristics (board activity), ownership structure (government ownership), and firm-specific characteristics (bank size, bank profitability) (refer Table 1). There are extensive theoretical and empirical research that suggest a significant impact of these variables on firm performance (e.g., Ali et al, 2019;Altuwaijri & Kalyanaraman, 2020;Bennouri et al, 2018;Hamdan, 2018;Harymawan et al, 2019;Latif et al, 2020;Uribe-Bohorquez et al, 2018).…”

Board busyness and firm productivity

“…In theoretical and empirical academic literature, there are different arguments that support opposite association of board busyness and firm productivity (e.g., Chen and Lai, 2015). To clarify, on the one hand, board busyness increases the probability that directors become over committed to perform their diverse directorial duties (Fernández Méndez et al , 2016) and may lead to time constraints and cognitive capacity restriction of boards (e.g., Kress, 2018; Latif et al , 2020), and therefore may lead to lower efficacy as supervisors and advisors of managers, resulting in lower firm productivity. On the other hand, board busyness can increase directors' experience and knowledge by observing best practices at other companies (e.g., Pennings et al , 1998; Chen and Guay, 2018) and therefore may lead to higher efficacy as supervisors and advisors of managers, resulting in higher firm productivity.…”