The influence of board independence on dividend policy in controlling agency problems in family firms
DOI | https://doi.org/10.1108/IJAIM-03-2021-0056 |
Published date | 22 July 2021 |
Date | 22 July 2021 |
Pages | 552-582 |
Subject Matter | Accounting & finance,Accounting/accountancy,Accounting methods/systems |
Author | Erhan Kilincarslan |
The influence of board
independence on dividend policy
in controlling agency problems in
family firms
Erhan Kilincarslan
Department of Accounting, Finance and Economics, University of Huddersfield,
Huddersfield, UK
Abstract
Purpose –This study aims to investigatethe impact of board independence on the cash dividend payments
of family firms listedon the Borsa Istanbul (BIST) in balancing controlling families’powerto mitigate agency
problems betweenfamily and minority shareholders in the post-2012period. The authors focus on this period
because Turkishauthorities implemented mandatory regulationson the employment of independent directors
on boards from fiscalyear 2012.
Design/methodology/approach –The research model uses a panel dataset of 153 BIST-listed family
firms over the period 2012–2017, employs alternativedependent variables and regression techniques and is
applied tovarious sub-groups to improve robustness.
Findings –The empirical results show a strong positive effect of board independence on dividend decisio ns. The
authors further detect that family directorship exhibits a negative effect, whereas both board size and audit
committees have positive influences but chief executive officer (CEO)/duality has had no significant impact on the
dividend policies of Turkish family firms since the new compulsory legal requirements in the Turkish market.
Research limitations/implications –The findings suggest that independent directorship and
dividend policy are complementarygovernance mechanisms to reduce agency conflicts between familiesand
minority shareholders in Turkey,which is a civil law-based emerging country characterizedby high family
ownershipconcentration.
Practical implications –The authors present evidence that Turkish family firms’corporate boards have
evolved, to some extent, from being managerial rubber stamps to more independent boards that raise opposing voices
in family decision-making. However, independent directors’preference for dividend-induced ca pital market
monitoring implies that their direct monitoring is less effective than it is supposed to be. This suggests a need to revise
the Turkish Corporate Governance Principles to enhance independent directors’monitoring and supervisorypower.
Originality/value –This is thought to be the first study to provideinsights on how board independence
influences dividend policyin controlling agency problems in Turkish family firms since Turkish authorities
introducedcompulsory rules on the employment of independentdirectors on boards.
Keywords Turkey, Family firms, Dividend policy, Board independence, Agency problem
Paper type Research paper
1. Introduction
The traditional agency cost theory derives from problems associated with the separation of
management and ownership in firms where ownership is dispersed among small shareholders,
but corporate control is concentrated in the hands of managers (Berle and Means, 1932;Jensen and
This research did not receive any specific grant from funding agencies in the public, commercial, or
not-for-profit sectors.
IJAIM
29,4
552
Received6 March 2021
Revised27 May 2021
Accepted16 June 2021
InternationalJournal of
Accounting& Information
Management
Vol.29 No. 4, 2021
pp. 552-582
© Emerald Publishing Limited
1834-7649
DOI 10.1108/IJAIM-03-2021-0056
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1834-7649.htm
Meckling, 1976;Easterbrook, 1984;Jensen, 1986). Yet, conventional wisdom suggests that agency
problems function differently in family-controlled companies. This is because families’direct
involvement in managing their firms leads to closer supervision and fewer owner–manager
conflicts (Fama and Jensen, 1983;La Porta et al., 1999;Ang et al., 2000). Nevertheless, it is broadly
contended that family owners implement policies that benefit themselves at the expense of
minority (small) shareholders (Shleifer and Vishny, 1997;Morck and Yeung, 2003;Anderson and
Reeb, 2004;Villalonga and Amit, 2006).Thekeyagencyproblemisthusfamilies’ex propriation of
minority investors’wealth.
La Porta et al. (2000) suggest that in developed capitalmarkets, corporate law generally
provides potential investors and existing shareholders with legal powers to protect their
wealth against expropriation. However, in countries with poor institutional settings and
weak shareholders’rights,typically in emerging economies, they argue that cash dividends
are a substitute for legal protection. By paying dividends, controlling shareholders (i.e.
family owners) guarantee a pro rata cash distribution to all shareholders, which in turn
reduces the possibility of expropriating wealth from others, and hence reduces conflicts of
interest between controlling and minority owners. As boards of directors make dividend
policy decisions, their governancerole is particularly crucial in alleviating agency problems
between families and minorityowners.
However, family firms’top executive positions and board seats are almost always
provided to family members, and therefore,their boards of directors are rarely independent
of the controlling family (La Porta et al.,1999;Faccio et al.,2001;Yoshikawa and Rasheed,
2010). Hence, family directors/executives play an important role in either paying large
dividends as a trust-generating device or distributing no (or low) dividends to retain cash
that they can potentially expropriate. At this point, the agency theory argues that
independent directors may serve as an effective corporate governance mechanism in
monitoring family directors’decisions and controlling their opportunistic behavior. This is
due to their independence from corporatemanagement and strong incentives to signal their
directorial reputation and expertise to the market (Fama and Jensen, 1983;Westphal, 1998;
Anderson and Reeb, 2004). It is, therefore, suggested that independent directors are in a
better position to protect the interests of outside shareholders, especially in emerging
markets where legislation provides insufficient protection for existing and potential
minority investors.
Consequently, if independent directors have sufficient power to scrutinize and control
family executives’actions, there is less need to pay cash dividends as an internal
disciplinary device for corporate managers. This implies that board independence and
dividend payments are substitute means of mitigating agency problems in family firms.
Nevertheless, families generally tend not to appoint boards that might weaken their
authority, and thus often seek to minimize independent director representation and/or
effectiveness (Shleifer and Vishny, 1997;Anderson and Reeb, 2004;Setia-Atmaja et al.,
2009). Thus, if independent directors believe their direct monitoring and supervision of
management are ineffective,they may push for high dividend payouts todecrease internally
available cash that might be manipulated by family managers to the detriment of outside
shareholders. This suggests that independent directorship and dividend policy are
complementary toolsto curb such conflicts between family and minority owners.
The foregoing discussion clearly illustrates the important role of independent directors and
their crucial impact on dividend policy in balancing controlling families’power and mitigating
possible problems between family and minority shareholders in countries with poor legal
protection. However, this issue remains under-researched. Previous studies (Schellenger et al.,
1989;Bathala and Rao, 1995;Al-Najjar and Hussainey, 2009;Setia-Atmaja, 2010;Sharma, 2011)
Influence of
board
independence
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