Does Board Independence Influence the Top Management Team? Evidence from Strategic Decisions toward Internationalization

• Published date: 01 July 2011
• Date: 01 July 2011
• DOI: http://doi.org/10.1111/j.1467-8683.2011.00850.x
• Author: Hsiang‐Lan Chen

Does Board Independence Inf‌luence the Top

Management Team? Evidence from Strategic

Decisions toward Internationalization

Hsiang-Lan Chen*

ABSTRACT

Manuscript Type: Empirical

Research Question/Issue: Using insights from the upper echelon perspective and agency theory, this paper examines the

effects of TMT characteristics on internationalization and the moderating effect of independent directors on the TMT

characteristics – internationalization relationship.

Research Findings/Insights: Based on a panel of listed f‌irms in Taiwan, this study f‌inds positive associations of TMT tenure

and internationalexperience and a negative association of TMT age with internationalization, supporting the upper echelon

perspective. There is also some support for agency theory. Thef‌indings suggest that the positive relationships of TMT tenure

and international experience with internationalization are stronger as more independent directors are included on the

board, supporting the view that independent directors as monitors and resource providers may offer better advice and

counsel to executives and enhance their strategic action capabilities in moving toward internationalization. However, the

support for agency theory is limited, as this study f‌inds no evidence of a moderating effect of independent directors on the

relationship between TMT age and internationalization.

Theoretical/Academic Implications: This study contributes to corporate governance knowledge by bridging the gap in the

relationship between TMT characteristics and internationalization via an empirical inquiry into the inf‌luence of indepen-

dent directors on the TMT. Specif‌ically,it reinforces the important role of the TMT in the strategic decision to internationalize

and highlights the signif‌icant inf‌luence of independent directors on the TMT characteristics – internationalization relation-

ship, expanding our understanding of the important strategic role of boards involved in TMTs’ strategic action in a

contextually appropriate manner.

Practitioner/Policy Implications: This study suggests that the board of a f‌irm realizing that internationalization is a

necessary strategy may consider choosing executives who are younger and have a longer tenure and more international

experience in order to develop and execute international operations effectively. To improve board effectiveness and the

quality of corporate governance, this study also demonstrates thata f‌irm should include more independent directors on the

board.

Keywords: Corporate Governance, Agency Theory, Upper-Echelons Perspective, Top Management Teams,

Internationalization

INTRODUCTION

Internationalization is fast becoming an increasingly nec-

essary and valuable strategy for f‌irms (Graves & Thomas,

2008), especially those operating in limited domestic

markets (Ruzzier & Antoncic, 2007). Correspondingly, inter-

nationalization is accompanied by considerable risk, com-

plexity, and uncertain outcomes, and is one of the most

important challenges f‌irms face (Musteen, Datta, & Her-

rmann, 2009). Executives need to possess certain personali-

ties and repertoires in order to function effectively in

international environments (Herrmann & Datta, 2005;

Tihanyi, Ellstrand, Daily, & Dalton, 2000). Hambrick and

Mason’s (1984) upper-echelons perspective suggests that

the demographic attributes of top executives can be valid

proxies for their cognitive styles and knowledge base,

which consequently inf‌luence their strategic actions. Much

research on the inf‌luence of the characteristics of top

*Address for correspondence: Department of Finance, NationalKaohsiung First Uni-

versity of Science and Technology, No. 2, Jhuoyue Rd., NanZih District, Kaohsiung

City 811, Taiwan. Tel: 886-7-601-1000; Fax: 886-7-601-1041; E-mail: angelachen@

ccms.nkfust.edu.tw

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Corporate Governance: An International Review, 2011, 19(4): 334–350

© 2011 Blackwell Publishing Ltd

doi:10.1111/j.1467-8683.2011.00850.x

management teams (TMTs) on internationalization has been

conducted in western countries, but little is known regard-

ing the extent to which the issues of developed economies

are applicable to developing countries. Therefore, this paper

investigates this research question in the context of Taiwan,

which allows us to gain additional insight into the manage-

rial characteristics that are proactive in leading their f‌irms

into international markets.

The considerable risk and signif‌icant managerial chal-

lenges that internationalization brings increase demands on

corporate mechanisms to govern top managers (Musteen et

al., 2009). Nadler, Behan, and Nadler (2006) argue that a

constructive board can not onlybe involved in strategic deci-

sions, but also provide input to the strategy implementation

process. Following this viewpoint, Kim, Burns, and Prescott

(2009) contend that in addition to providing control and

service, board directors can inject a strategicperspective into

the decision-making processes that enhances TMTs’ strate-

gic action capabilities. They also argue that today’s competi-

tive landscape should call for both internal (e.g., between

strategy and structure) and external (e.g., between structure

and environment) f‌it that provide a basis for competitive

advantage. Some researchers particularly have argued that a

board with a high percentage of independent directors pro-

vides greater independence and will become more involved

in strategic decision-making (Kaymak& Bektas, 2008; Osma,

2008). Since international environments are highly dynamic

and complex (Sanders & Carpenter, 1998), independent

directors who may possess timely information, diverse

resources and broad corporate and international experience

should be exploited to monitor TMTs and enhance their

capabilities (Castro, De La Concha, Gravel, & Perinan, 2009;

Finkelstein, Hambrick, & Cannella, 2008; Luo, 2007).

Research into how board directors and top executives are

interrelated in shaping f‌irm strategies remains sparse (Wu,

2008), and this paper aims to f‌ill this research gap by high-

lighting the inf‌luence of board independence (i.e., indepen-

dent director ratio) on TMTs’ strategic decisions toward

internationalization.

The Taiwanese context is well-suited to this study for

two major reasons. First, Taiwan is a small open economy

with limited domestic markets and scarce natural

resources. Therefore, Taiwanese f‌irms are pressured to

internationalize in order to expand (Chiang & Chen, 2008).

To establish themselves in foreign markets and to secure

low-cost labor and raw materials, Taiwanese f‌irms have

diversif‌ied their production bases to China, Vietnam, India,

Mexico, and the Czech Republic, to name a few countries.

Second, the role of independent boards is particularly

important in Taiwan due to the lack of external markets

for corporate control (Solomon, Lin, Norton, & Solomon,

2003; Tsai, Hung, Kuo, & Kuo, 2006). To improve corporate

governance and thereby attract foreign capital, regulatory

changes in Taiwan have emphasized the roles and qualif‌i-

cations of independent directors. Furthermore, the Taiwan

Company Act stipulates that a company’s business

operations shall be executed pursuant to the resolutions

to be adopted by the board of directors. Therefore,

independent directors are very likely to interact with

top executives when making strategic decisions such as

internationalization.

Based on insights from upper-echelons perspective and

agency theory, this study of 254 manufacturing f‌irms listed

on the Taiwan Stock Exchange Corporation (TSEC) and the

GreTai Securities Market (GTSM) examines the inf‌luences

of TMTs and independent directors on internationalization

decisions. Specif‌ically, the study provides support for

upper-echelons perspective, which stresses the effects of

TMT characteristics on organizational outcomes, such as

the level of internationalization. Accordingly, this study

f‌inds positive associations of TMT tenure and international

experience and a negative association of TMT age with

internationalization. Additionally, the study indicates that

the positive relationships of TMT tenure and international

experience with internationalization become stronger with

an increasing independent director ratio, supporting the

emphasis of agency theory concerning the role of indepen-

dent directors in guiding executives’ internationalization

actions (Jackling & Johl, 2009; Musteen et al., 2009). Inde-

pendent directors may serve to monitor executives and

provide them with resources, advice, and counsel that

enhance their strategic action capabilities in moving

toward internationalization. However, this study does

not provide support for agency theory in terms of the

moderating effect of independent directors on the TMT age

– internationalization relationship.

This paper contributes to corporate governance knowl-

edge by bridging the gap in the relationship between TMT

characteristics and internationalization via an empirical

inquiry into the inf‌luence of independent directors on the

TMT. A breakdown of this contribution is as follows: First,

studying Taiwanese data not only enables a better assess-

ment of the generalizability of prior conclusions regarding

the relationship between TMT characteristics and interna-

tionalization, but also sheds light on the governance –

internationalization relationship within the context of

emerging economies with weaker institutions (Chiang &

He, 2010), which has not been widely documented in

prior research (Wu, 2008). Second, following Kor (2006)

and Wu (2008), this paper recognizes that board directors

and top executives are interrelated in shaping f‌irm strate-

gies. By demonstrating that internationalization decisions

made by TMTs depend on the independent director

ratio, this study should expand our understanding of the

possible moderating role of corporate governance on

agency-based effects. Third, extending Kim et al. (2009)

arguments about the strategic role of board directors in

inf‌luencing TMTs’ strategic actions in a contextually

appropriate manner, the empirical results of this study

suggest that independent directors with knowledge, expe-

rience and resources may enhance TMTs’ capabilities in

coping with dynamic and complex international environ-

ments (Sanders & Carpenter, 1998), and therefore should

benef‌it governance research on the context-dependent

nature of governance arrangements. Fourth, in contrast

with the cross-sectional nature of some prior research

(Herrmann & Datta, 2005; Jaw & Lin, 2009), the longitudi-

nal study described in this paper not only renders the

TMT effects on internationalization more reliable and

robust, but also expands our understanding of certain

managerial attributes that lead f‌irms to higher levels of

internationalization.

BOARD INDEPENDENCE, TMT AND INTERNATIONALIZATION 335

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