Multiple directorships in emerging countries: Fiduciary duties at stake?

• Date: 01 July 2020
• DOI: http://doi.org/10.1111/beer.12275
• Published date: 01 July 2020
• Author: Wim Voordeckers,Frank Lambrechts,Walter Hendriks,Bilal Latif

Business Ethics: A Eur Rev. 2020;29:629–645. wileyonlinelibrary.com/journal/beer  

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  629© 2020 John Wiley & Sons Ltd

1 | INTRODUCTION

Boards of directors are considered a key corporate governance mech-

anism and play a vital role in the avoidance of malpractice in corpo-

rate entities of all sizes (Brink, 2010; Samara, Jamali, Sierra, & Parada,

2018). Indeed, boards are seen as institutions that help to resolve

agency conflicts inherent in managing an organization (Giráldez &

Hurtado, 2014; Hermalin & Weisbach, 2003) and enhance an organi-

zation's ethical integrity by their active involvement in strategic deci-

sion making, not only benefiting firm performance but also serving the

interests of the broader community (Zhu, Wang, & Bart, 2016). Given

the pivotal role of boards in protecting the interests of the firm and its

stakeholders, it is not surprising that corporate governance reforms

worldwide (e.g., the US Sarbanes-Oxley Act of 2002), in the aftermath

of some striking corporate scandals at the beginning of this century,

recommended a stronger presence and contribution of independent

non-executive directors on the board (i.e., directors that do not main-

tain a business or social relationship with the firm nor with the main

shareholders, such as a family (Jones, Makri, & Gomez–Mejia, 2008;

Samara & Berbegal-Mirabent, 2018). These governance recommen-

dations increased the demand of outside directors but at the same

time reduced the supply of directors due to a higher workload and risk

(Linck, Netter, & Yang, 2008). Consequently, some profiles of directors

are in greater demand, leading to an increase in the phenomenon of

multiple directorships (Hassan, Miglietta, Platrinieri, & Floreani, 2018).

This observation raises the question of whether directorship appoint-

ments to multiple boards are beneficial or detrimental for board effec-

tiveness and firm performance.

On the one hand, multiple directorships may provide corporate

boards with val uable exper tise and access to c ritical reso urces in

Received: 22 Mar ch 2019 

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  Revised: 11 Februar y 2020 

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  Accepted: 13 Februa ry 2020

DOI: 10 .1111/bee r.12275

ORIGINAL ARTICLE

Multiple directorships in emerging countries: Fiduciary duties

at stake?

Bilal Latif1 | Wim Voordeckers2 | Frank Lambrechts2 | Walter Hendriks2

1Department of Leadership & Management

Studies, National Defence University,

Islamabad, Pakistan

2Research Center for Entrepreneurship and

Family Firms (RC EF), Hasselt Univer sity,

Agoralaan, Belgium

Correspondence

Wim Voordecker s, Research Center f or

Entrepreneurship and Family Firms (RCEF),

Hasselt Unive rsity, Agoralaan , 3590

Diepenbeek, Belgium.

Email: wim.voordeckers@uhasselt.be

Funding information

Higher Education Commission, Pakistan

Abstract

This study investig ates the effect of m ultiple director ships on firm per formance,

using a database of non-fina ncial firms listed o n the Pakistan s tock exchange. Prior

literature provides inconsistent evidence on the relationship between multiple di-

rectorships and f irm performance in an emergin g country context, which may be the

result of overlooking bot h the large differences in institut ional environments among

emerging countrie s and the dynamic en dogenous relationsh ips between boar d vari-

ables and firm pe rformance. We aim to contribute to this acad emic debate by focus-

ing on directorshi p appointments to m ultiple boards in a wea k institutional conte xt.

Corporate governance p ractices, suc h as boards with out side directors exer cising

their fiduciar y duties, are cru cial for effecti ve governance in weak instit utional en-

vironments. However, ser ving in multiple dire ctorships is exp ected to compromise

the execution of direc tor duties. Using a dy namic system Gene ralized Method of

Moments model , our findings show, inde ed, a negative effe ct of multiple direc tor-

ships on firm per formance in a weak institutiona l environment. Building on the pr em-

ise that corporate govern ance is conditional in nature, we also teste d the moderating

influence of firm size on this r elationship, but we did not find suppor ting evidence in

a dynamic model set ting. Our results have impor tant practical implicat ions for policy

makers as well as firms.

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     LATIF eT AL.

order to suppor t strategic decision maki ng (Kiel & Nicholson, 2006 ;

Pfeffer & Sal ancik, 200 3) and enhance boa rd effecti veness, result-

ing in higher fir m performan ce (Harris & Shimi zu, 2004; Za jac &

Westphal, 1996). On the othe r hand, researchers b uilding on agency

arguments consider multiple directorships as organizational slack

and a form of unethi cal behavior. Followi ng this perspe ctive, hold-

ing multiple bo ard appointments ca n be considered as oppor tunistic

and self-centered be havior since busy direc tors would not be able to

execute their fi duciary duties effect ively due to their over-commit-

ment (i.e., they se rve on too many boards) (Harris & S himizu, 2004),

although serving on many boards will provide them with numerous

personal benefits (e.g., director compensation and personal repu-

tation benef its). Thus, alth ough busy dire ctors can bri ng importa nt

skills and conta cts to the boa rdroom, it may com e at the price of

insufficient time commitment and dedication (Calderon, Piñero, &

Redín, 2018), leadin g to inadequate vig ilance (Lei & Deng , 2014).

Accordingly, multiple directorships may compromise the directors’

duty of care (i.e ., informed dec ision making in goo d faith and hon-

est belief) (Sto ut, 2003) re sulting in a weaker et hical reput ation

(Baselga-Pascual, Trujillo-Ponce, Vähämaa, & Vähämaa, 2018).

In line with this lat ter view, corpor ate governance code s and

guidelines wor ldwide started to impose li mits on the number of di-

rector appoi ntments for lis ted firms, whi ch are usually def ined as

a maximum of thre e to five director ships depend ing on the coun-

try. However, many Asian em erging market s have a different in sti-

tutional context than developed markets and they face important

supply constr aints of qualif ied indepen dent director s. During the

prior decad e, several of these countrie s, such as India, Pakist an, and

Malaysia, impos ed only loose or no limits o n the number of director-

ships to cope with the director supply problem, thereby increasing

the incidence of mu ltiple directorships (Lei & D eng, 2014; Sarkar &

Sarkar, 2009). This m ay be problematic as nume rous emerging coun-

tries are char acterized by weaker legal prote ction and concentrated

ownership leading to particular agency problems and unlawful

firm conduc t, such as resour ce expropriati on and tunnelin g (Min &

Chizema, 2018; Moham mad & Husted, 2019; Sarpal, 2018). In such

an institutional environment, independent directors exercising their

fiduciary d uties with judgment an d care are crucial for ef fective gov-

ernance (Claes sens & Yurtoglu, 2013). A s a consequence , busy di-

rectors are ex pected to have substanti al detrimental effec ts on firm

performan ce as they will spend less ti me and pay less attention t han

needed to execut e their fiduciary dut ies (Stout, 2003).

Only a few studies investigate the multiple directorship ques-

tions in emergin g markets and th ey find mixed evid ence, includin g

positive per formance effects fo r Hong Kong (Lei & Deng, 2014) and

India (Sarkar & S arkar, 2009), and neg ative perfor mance effec ts

for India (Hundal , 2017). This inconcl usive evidence may b e due to

the fact that p rior studies m ainly overlooked b oth the large dif fer-

ences in institutional environments among emerging countries (e.g.,

wide variation of s hareholder ri ghts and corr uption) (Claesse ns &

Yurtoglu, 2013) and the dynamic endogenous relationship between

corporate govern ance and firm pe rformance t hat can subst antially

bias empirically results (Sarpal, 2018; Wintoki, Linck, & Netter,

2012). In addition , these prior emergin g country studies di d not con-

sider firm-leve l context variab les that may be imp ortant to und er-

stand governan ce effectiveness (Huse, 2 005b). Our study attempt s

to fill these voids .

Therefore, this study revisits the relationship between multiple

directorsh ips and firm per formance. We exa mine a panel of fir ms

listed on the Pak istani stoc k exchange using a dyn amic system

Generalized Method of Moments (GMM) estimator, which incor-

porates the dy namic nature of the r elationship un der study, while

simultaneously addressing unobserved heterogeneity and simulta-

neity concer ns (Wintoki et al ., 2012). In so doing, we p rovide sev-

eral contribu tions to the fiel d. First, we pr ovide evidence on t he

performance consequences of multiple directorships in Pakistan,

an emerging coun try charac terized by a weak institutional envi-

ronment. Des pite the wide var iety of institu tional environ ments in

emerging count ries (Claessens & Yurtoglu , 2013), it is surprising that

past research on multiple directorships mainly investigated emerg-

ing countries (e.g ., Hong Kong) characterize d by an average to good

institution al environment t hat score higher on a r ange of gover-

nance indicato rs than developed count ries do as a group. In contras t

to these countri es, the Pakis tani governance co ntext in our stu dy

is character ized by a dominance of con centrated fam ily ownership

structur es; despite this , the Securiti es and Exchange C ommission

of Pakistan (SECP) h as determined t he fiduciar y duties of directors

based partl y on the Anglo-A merican comm on law system, wh ich is

more evident in ma rkets with dispersed owner ship (Ibrahim, 2006).

This potential governance mismatch1  is compo unded by a less devel-

oped stock mar ket and a significantly lowe r score on the Corruption

Perception Inde x (indicating greate r corruption) and on seve ral other

important governance indicators (e.g., legal rights strength, creditor

rights, lega l protection of mino rity sharehol ders) than India and H ong

Kong (Claessens & Yur toglu, 2013). As out side director s fulfilling

their fiducia ry duties with care and loyal ty is of utmost importan ce

in an environment plagued with potential self-serving problems the

Pakistani institutional context serves as an invaluable laboratory2 

to delve deeper in to the dark side ef fects of multiple directo rs in a

weak emerging in stitutional context, t hus addressing this impor tant

omission in the current literature.

Second, follow ing the argume nt of Chi and Lee (2010) that t he

value of corpor ate governance is cond itional in nature a nd that

there is no one be st way to design the b oard and governan ce sys-

tem (Huse, 2005 a, 2005b), we investigate whether t he relationship

between multiple directorships and firm performance is conditional

in nature and dep ends on the context of the fi rm. Therefore, we aim

to add to the literat ure by introducing firm size a s a moderator. Firm

size is an import ant overlooked pot ential modera tor and it reflec ts

a higher organizational complexity, which is an important determi-

nant of differen t kinds of corporate governance n eeds (Gong, Zhou,

& Chang, 2013; Gree n & Peloza, 2014; Li & Chen, 2018; Xie, 2014).

In the next sec tion, we will dis cuss theoreti cal argument s in

favor of or against multiple directorships and formulate hypotheses.

In the subseque nt section, the data an d methodology are dis cussed.

Finally, we present and discuss the results.