Does board capital increase firm performance in the Chinese tourism industry?

• DOI: https://doi.org/10.1108/CG-04-2021-0165
• Published date: 18 October 2021
• Date: 18 October 2021
• Pages: 653-679
• Subject Matter: Strategy,Corporate governance
• Author: Umair Bin Yousaf,Irfan Ullah,Man Wang,Li Junyan,Ajid Ur Rehman

Does board capital increase f‌irm

performance in the Chinese

tourism industry?

Umair Bin Yousaf, Irfan Ullah, Man Wang, Li Junyan and Ajid Ur Rehman

Abstract

Purpose –This study aims to examine therelationship between board capital and firm performance in

the Chinesetourism industry.

Design/methodology/approach –The study’s sample includes firms from the Chinese hotel, air

transportation/traveland catering industries. This study explores the governanceenvironment in tourism

industries. This study estimates three dimensions of the board, including education, expertise and

directors interlock. These dimensions are further grouped as human capital (i.e. education and

expertise), socialcapital (interlocks) and board capital (sumof social and human capital). Ordinary least

square regressions with multiple robustness tests are used to investigate the effect of board capital on

firm value in Chineselisted tourism firms during 2005–2018.

Findings –This study finds that board capitalpositively impacts firm performance in its dimensions of

human and social capital. This study also highlights the two important ownership contexts, namely,

institutional investorsand state-ownership, that shape the board capital-firmperformance association in

the Chinesetourism industry.

Practical implications –The findings suggest that board capital plays a significant role in corporate

decisions. The results illustrate that higher board capital improves both governance mechanisms and

resource provision roles of the board, resulting in higher firm value. The results further offer

implications for managers and shareholders of tourism firms when electing directors as shareholders’

representatives.

Originality/value –The study has two importantcontributions. First, it extends the prior literature of firm

value by consideringthe board’s human and social dimensions in the tourism sector.Second, contrary to

prior research on board, this study takes three facets of board capital, education, expertise and

interlocks that improve governance mechanisms and bring new resources in the shape of skills,

knowledgeand expertise.

Keywords China, Tourism industry, Corporate governance, Firm performance, Board capital

Paper type Research paper

1. Introduction

Corporate boards play a pertinent role in the organization’s strategic decision-making and

key activities (Luciano et al., 2020).However, boards’ effectiveness varies across industries

(Guillet and Mattila, 2010). Although studies have examined different board’s

characteristics associated with the firm decisions in the tourism industry (Guilding et al.,

2005;Song et al., 2020), board capital –an attribute representing the board’s ability to

perform (Fernandez et al.,2019;Hillman and Dalziel, 2003), has been generally overlooked.

This study seeks to plug this gap by investigating how board capital and its facets, i.e.

human and social capital, impactfirm performance considering China’s tourism industry.

In this study, we focus on how board capital influences firm performance. Board capital

entails human and social capital, where human capital indicates education and

Umair Bin Yousaf is based

at the School of

Accounting, Dongbei

University of Finance and

Economics, Dalian, China.

Irfan Ullah is based at the

School of Finance, Dongbei

University of Finance and

Economics, Dalian, China.

Man Wang is based at the

School of Accounting,

Internal Control Research

Centre in China, Dongbei

University of Finance and

Economics, Dalian, China.

Li Junyan is based at Xi’an

University of Architecture

and Technology, Xi’an,

China. Ajid Ur Rehman is

based at the Department of

Management Science,

Riphah International

University, Faisalabad,

Pakistan.

Received 30 April 2021

Revised 19 June 2021

28 August 2021

Accepted 29 September 2021

DOI 10.1108/CG-04-2021-0165 VOL. 22 NO. 4 2022, pp. 653-679, ©Emerald Publishing Limited, ISSN 1472-0701 jCORPORATE GOVERNANCE jPAGE 653

experience/expertise and social capital represents the network of ties with the external

environment, including firms and stakeholders (Chen, 2014;Hillman and Dalziel, 2003). The

extant research explains how firm performance is influenced by different board attributes,

e.g. board size, board independence, duality and board ownership (Garcı

´a-ramos and

Dı

´az, 2020). However, these attributes are primarily structural in nature and do not

profoundly capture the board’s performance ability. Considering that performance is a

function of ability (Hunter and Hunter, 1984), it is difficult for a board to achieve

performance if it lacks ability. As a result, we explore how board capital, which reflects the

board’s ability characteristic,affects firm performance, especially in the tourism industry.

The twenty-first century has witnessed enormous growth in technological development,

cross-country trade and travel. Various studies have been conducted to determine the

internal and external corporate governance antecedents of firm performance in the tourism

industry (Guillet, et al., 2013;Zheng and Tsai, 2019); the role of board capital has been

largely under-examined. Although the results from extant literature can be generalized to

the tourism industry, it is unique in severalaspects. It demands a separate industry-specific

examination of the effect of board capital on firm performance. First, firms in the tourism

industry can enhance their performance by adopting effective governance tools (Guilding

et al.,2005

); thus, board capital is one tool that ameliorates the governance mechanism of

the board (Hillman and Dalziel, 2003). Second, the tourism industry has peculiar attributes,

commonly exist to a lesser degree in other sectors; i.e. rapidly changing customer

demands (Evans et al.,2003), the influence of climate change (Scott et al., 2019), highly

customized services (World Economic Forum, 2017) and heavy reliance on e-commerce

(Cao and Yang, 2016). Accordingly, a successful board in a tourism firm has a significant

role in shaping its strategies (Ozdemir, 2020), mitigating agency problems (Hodari et al.,

2018) and providing advice on key corporate decisions (Zheng and Tsai, 2019). Third,

despite intense competition, tourism companies have to interact to provide a complete

service package (Evans et al., 2003). Moreover, considering their complementary nature,

tourism firms require strong collaboration across different industries (Ozdemir, 2020). This

double edge sword inflicts extra responsibilities on tourism boards to have a proper

stakeholder management strategy. Finally, unlike other sectors, i.e. industrial, automotive

and agricultural, which do not need frequent strategic changes, tourism firms may require

regularly adjusting their plans to ever-evolving situations (Pechlaner and Sauerwein, 2002).

Accordingly, we argue that boards with high human and social capital play a crucial role in

monitoring management, providing knowledge and bringing new resources, critical for the

tourism industry’s performance.

Considering the importance of board capital, we investigate how it influences the

performance of firms in the tourism industry of China. We consider China for several

reasons. First, China is the world’s second-largest economy, with numerous internationally

renowned companies (Zhao, 2018) contributing to the country’s development. Second,

China is one of the world’s top 10 tourism earners (UNWTO,2019). Third, China has unique

corporate governance issues that require specific solutions (Jiang and Kim, 2015).

Therefore, separate studies examining board attributes cannot be overlooked if one wants

to understand global businesses,especially in the realm of tourism in China. China is also of

particular interest to researchers considering unique principal-principal agency problems

(Jiang and Kim,2015, 2020;Sabbaghi, 2016). There are many government-owned firms in

China, commonly known as state-owned enterprises (SOEs). SOEs currently account for

two-thirds in terms of market capitalization (Jiang and Kim, 2020). Shleifer and Vishny

(1997) posit that there is a probability that controlling shareholders (in the case of China, it is

the state) may pursue personal advantages at the cost of minority owners. Although the

state retains a stronghold and pursues various public goals, empirical evidence depicts,

SOEs exhibit poor performance in China (Huangnan et al.,2020;Sun and Tong, 2003).

Board independence, which is traditionally assumed to bring independent thought

(Syahrina et al., 2016), better monitoring (Fama, 1980;Fama and Jensen, 1983) and

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