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

553