Relevance of corporate boards in driving performance in the period that covers financial crisis

• DOI: https://doi.org/10.1108/CG-11-2016-0204
• Pages: 321-338
• Date: 06 November 2018
• Published date: 06 November 2018
• Author: Geeta Rani Duppati,Frank Scrimgeour,Albert Sune
• Subject Matter: Corporate governance,Strategy

Relevance of corporate boards

in driving performance in the period

that covers f‌inancial crisis

Geeta Rani Duppati, Frank Scrimgeour and Albert Sune

Abstract

Purpose –This paper aims to examinethe relevance of boards in driving firm level performance.For this

purpose, it considersfirms listed on Ireland and Spain stockexchanges for the period 2005 to 2014, over

a period that includesthe global financial crisis.

Design/methodology/approach –This study usespanel data regression analysis to analyse the effects

of board characteristics on performance and also uses alternate model specifications to test the

significanceof robustness of relationships.

Findings –The impact of board size on performance is negative and significant for Irish and Spanish fir ms for

the study period. In general, the board independence has a positive effect on the performance of Spanish

firms for the complete study period and suggests consistency with the resource dependency theory.

Research limitations/implications –The analysis suggeststhat in general, the non-executive and the

board size do not affect thecorporate performance of Irish and Spanish firmsduring the financial crisis.

The fixed effects model suggestspositive effects of gender diversity on performance for Spanishfirms,

while the random effects indicatesnegative relationship between gender diversity and performance for

Irish companies.

Practical implications –The evidence on the Spanishfirms suggests that female representation on the

boardsmay be critical during the financial crisis

Social implications –The quota legislationon female board representationin Spain is yielding superior

resultsover the soft law approach by Irish firmsduring the times of financial crisis period.

Originality/value –This study contributes to theliterature on the corporate governance practices and

performance of two countries that were strongly affected by the crisis in the European Union. As

governments increasinglycontemplate board gender diversitypolicies, this study offers useful empirical

insightson Spanish and Irish firms.

Keywords Corporate governance, Non-executive directors, Gender diversity,

Resource dependency theory, Driscoll-Kraay, Ireland and Spain

Paper type Research paper

1. Introduction

This study empirically examines the relationship between board characteristics and firm

level performance of companies listed on the Ireland and Spain stock exchanges for the

period 2005 to 2014. The study of these two countries provides a context to understand the

role of boards in affecting the performance in a period that also includes the great financial

crisis (GFC) of 2008. Therefore, this study is important for two reasons. First, the opening

decade of the twenty-first century was characterized by successive shocks, feedback

effects between the financial and productive sectors, a rapid deterioration in many

countries’ fiscal position, difficulties in creating jobs during the recovery and, finally, the

worsening euro area sovereign debt crisis (Estradeet al., 2009 and European Commission,

2012). The events of this period providea significant challenge to boards and directors.

Geeta Rani Duppati is

Senior Lecturer at the

Department of Finance in

Waikato Management

School, UoW, Hamilton,

New Zealand.

Frank Scrimgeour is

Professor and Head of

School of Accounting,

Finance and Economics,

WMS, UoW, Hamilton,

New Zealand. Albert Sune

is Professor at the

Department of

Management at UPC,

Universitat Politecnica de

Catalunya, Barcelona,

Spain.

Received 1 November 2016

Revised 3 June 2017

4 December 2017

9 June 2018

Accepted 28 September 2018

DOI 10.1108/CG-11-2016-0204 VOL. 19 NO. 2 2019, pp. 321-338, ©Emerald Publishing Limited, ISSN 1472-0701 jCORPORATE GOVERNANCE jPAGE 321

Three corporate governance indicators (board size, female representation and board

independence) were chosen in testing the hypothesized relationship between corporate

governance practices with firm performance, which was measured by Tobin’s Q.

Descriptive and correlationanalysis were used to examine the hypotheses in this study. The

result showed that board size had a significantly negative relationshipwith Tobin’s Q for the

firms of the two countries. The impact of board size on performance is negative and

significant for Irish firms and Spanish firms for the study period. Boardindependence had a

positive effect on Spanish firms for the complete study period and also during the financial

crisis period and suggests consistency with the resource dependency theory. Female

representation is negativeand a significant driver of performance for Irish firmsonly.

Corporate governance has strong links to both economic and social outcomes. Corporate

governance codes play an increasingly important role in addressing gender balance on

corporate boards. To illustrate, Spain adopted a law on effective equality between women

and men in 2007, which recommends to large companies that,within eight years, the board

composition of their board proportion should be between 40 and 60 per cent female

(Rodriguez-Fernandez et al., 2014). While for Ireland, no quota law or proposal is underway

on gender diversity. Their approach is considered as soft law, as it relies on the principle of

comply or explain. The impact of the two codes –quota law as in Spain or soft law as in

Ireland –is unclear from the literature.

The board of directors is one governance mechanism that a firm may use to mitigate

agency costs associated with the separation of ownership from control. Despite being the

subject of much attention from regulators and the combined code, boards display

considerable cross-sectional variation. Agency theory suggests that management will actin

their own interest if they have the latitude to do so. Any power conveyed by ownership will

be exploited by management to construct a board that does not monitor them. Zajac and

Westphal (1996) drawing on organization behaviour and organizational sociology as well as

financial agency theory explain why both passive boards and controlling boards exist. For

example, a passive CEO dominated board will recruit non-executive directors (NEDs) that

have served on other passive boards.

Governance practice occurs in specific economic, social and legal contexts. These vary

significantly between Ireland and Spain. The Irish Stock Exchange requires that companies

make a disclosure statement in their annual report with respect to their corporate

governance practices which explains how they apply the principles of the code and states

whether they comply with the code and if the latter is the case explain the reasons for non-

compliance. However, mere compliance with the letter of the Combined Code does not

ensure that a company is well-governed as the board is only one part of the overall

corporate governance architecture of a company. Other aspects of a company’s

governance structure include its ownership structure, its level of debt and the market for

corporate control. It has been suggested (Agrawal and Knoeber, 1996;Rediker and Seth,

1995) that all of these governance mechanisms are in fact substitutes for each other.

Further, companies’ adoption of corporate governance best practice alone will not

guarantee progress. Many other factors dictate the success of firms, among other things,

and key issue is effective and competent supervision to ensure proper compliance

(Claessens and Yurtoglu, 2012).

Considering the Spanish and Irish environment allows us to expand previous results typical

of the Anglo-Saxon corporate system to different settings. In Spain and Ireland, the legal

protection of shareholders is not as extensive as that found in Anglo-American markets and

Spanish and Irish stock markets are less developed and play a far lesser role than British or

American markets do (Ferna

´ndez-Me

´ndez and Arrondo-Garcı

´a, 2007;Donnelly and

Mulcahy, 2008). Furthermore, Spanish data are interesting because boards are dominated

by executive directors (Olivencia,1998;Heidrick and Struggles, 2003), and as a result, they

are able to pursue their own interests by limiting the effectiveness of monitoring resources

PAGE 322 jCORPORATE GOVERNANCE jVOL. 19 NO. 2 2019