The impact of foreign directors and firm performance on strategic change

Abstract

Purpose This study aims to investigate the joint effect of foreign directors (FDs) and firm performance on the corporate strategic change. Design/methodology/approach A theoretical framework linking foreign directors, firm performance and strategic change is proposed and tested. This study uses a sample of longitudinal data from 958 US listed firms over the period 2010–2018. The basic model of study first tests whether there is a direct relationship between FDs and level of strategic change. It then incorporates firm performance as a moderating variable, testing its effect on the relationship between foreign director and strategic change. Findings Consistent with the study’s expectations, the empirical findings indicate that FDs rich in appropriate experience are associated with superior strategic change, measured both in terms of variation in firm strategy over time and deviation from industry norms. The findings confirm that FDs are a salient driver of strategic change. The strength of the effect, however, depends on the firm performance. Research limitations/implications This paper has implications for effective global leadership development based on international appointments. First, directors can benefit from being assigned to work in foreign countries so that they are exposed to a wide range of experiences and can learn to overcome culture shock. Second, posting directors to foreign countries can improve their international knowledge and enhance various competencies related to creativity, leadership and problem-solving. By demonstrating that the board’s characteristics can play a role in corporate strategy development, the current study thus has implications for both study and practice with regard to board composition. The number of seats on any given board is finite, and each individual director is thus expected to not only monitor top management but also to apply their knowledge and relevant experience in service to the company’s ambitions. Except in cases where high firm performance leads to strategic persistence, the results suggest that greater levels of FDs correlate positively with strategic change. Practical implications The practical implications of this paper pertain to director recruitment and selection. First, the findings echo support for the inclusion of members with greater levels of international experience on boards and top management teams. It seems that, despite the importance of this characteristic, directors at US companies often lack substantial experience abroad (Carpenter and Westphal, 2001). A possible reason for this could be that internationally experienced employees otherwise lack the social capital necessary for promotion to directorships because of time spent stationed away from the firm’s headquarters. It is thus essential for companies to create networking opportunities for directors assigned to foreign offices. Originality/value Although previous research has provided some insight into how chief executive officer international experience can manifest in strategic change, this understanding remains far from complete for the members of board of directors. Furthermore, the topic of firm performance as a potential moderating influence remains underexplored. The aim of this study, therefore, is to assess the impact of FDs among directors on corporate strategic change while taking into account the possible confounding role of firm performance in this relationship.

Effective tax rate, board diversity, and firm performance: Evidence from the electric and electronic industry

“…The finding of a negative relationship reported between foreign directors and firm performance is consistent with Khan and Abdul Subhan [28]. A possible explanation for this is that foreign directors' influence on strategic changes weakens as corporate performance improves and that the status quo and industry standards continue to prevail [52]. Finally, similar to Robb and Watson [35], Marinova, et al [36], and Gregory-Smith, et al [37], the effect of female directors on firm performance is found to be insignificant, possibly because on average there are only 10% of women represented on the boards of the E&E PLCs.…”

“…Oh, et al [51] reported a positive association between the presence of foreign independent directors on the board, foreign sales, and firm value. Samara and Yousef [52] documented that foreign directors with extensive experience represent a catalyst for a firm's strategic change, whose strength is reflected in the company's performance. Besides that, Mardini and Elleuch Lahyani [53] found that the carbon emission performance and disclosure of French non-financial listed companies improve in the presence of foreign directors on the board.…”

Foreign directors and firm performance: a study in Vietnam

“…Peck-Ling et al also state that only when foreign investors have dominant (above 50%) voting rights, ROE increased [21]. Recently, Samara & Yousef found that FDs rich in appropriate experience are associated with superior strategic change but the strength of the effect, however, depends on the firm performance [23].…”

“…Chinese firms' performance increases due to foreign directors' experience and knowledge transfer in management practices and corporate governance [22]. Recently, in US firms, foreign director's rich in appropriate experience has been found to be associated with superior strategic change but the strength of the effect, however, depends on the firm performance [23]. However, Masulis et al find that foreign independent directors, defined as independent directors domiciled in foreign countries, display poor board meeting attendance records, more commit intentional financial misreporting, overpay their CEOs lower CEO turnover sensitivity to performance, and poorer performance due to geographical distance in US [24].…”

Governance diversity: Its impact on strategic variation and results

“…This distinction is an important one in strategy research. Business-level strategy relates to competitiveness within a specific industry, while corporate strategy reflects various aspects of a firm's portfolio, including potential divestments, downsizings, restructurings, mergers and acquisitions, and the internal development of new business units (Samara & Yousef, 2022). This study explores variations in a firm's level of resource allocation, which comprises an aspect of corporate rather than business strategy.…”