Boards’ Attributes and Company Performance: the Romanian Experience

Abstract

IntroductionResearch on boards of directors' influence on a company's performance has increased in the past years as more scholars have shown a great interest in this subject. Researchers have looked at this relationship from various angles and tried to find connections using different corporate governance theories, such as agency, stewardship, social network, institutional and resource dependence theory (Davis et al, 1997; Jensen and Meckling, 1976; Pfeffer and Salancik, 1978). However, there are few studies that assess the impact of boards' attributes on financial performance from a strategic perspective. Moreover, studies that address these issues all together within the context of Romania are even scarcer. This study attempts to fill this gap by examining how five attributes of Romanian listed companies on the Bucharest Stock Exchange (BSE) - size, age, female representation, non-executive directors, CEO-duality - relate to diversification strategy and to corporate performance.Studies on corporate governance issues have focused merely on developed economies and these findings cannot be extrapolated to emerging economies (Jackling and Johl, 2009). Furthermore, investigations that assess Romanian companies are necessary as the country has been experiencing more foreign direct investments in the last few years, which calls for more transparent approaches to corporate governance.Conducting research on boards related to their strategic involvement has never been an easy task. The main reason for this is the reluctance of directors to share knowledge that is seen as extremely important for the success of the companies (Kesner and Johnson, 1990). Management researchers have difficulty in establishing the strategic role that boards might play within companies. Directors' influence on the strategy-making process is highly controversial within the corporate governance literature. Pugliese et al. (2009) showed that the strategic involvement of boards can be done in various ways: (1) through engagement in developing elements of the general strategy, like mission statements, long-term targets; (2) through contribution to different strategic outcomes, like innovation, diversification and mergers and acquisitions; (3) through involvement in various stages of strategic decisions by interacting with top managers.The purpose of this study is to advance international corporate governance research by focusing on the corporate governance practices of an emerging economy. Using data collected from 56 major publicly traded companies in Romania we examine the board attributes, diversification strategy and company performance. We begin with an overview of research related to this field and then we develop hypotheses asserting that board attributes will have no influence on diversification strategy. Additionally, we hypothesize that board attributes will impact company performance, whereas diversification strategy will serve as a mediator between board attributes and performance. Finally, we discuss the implications of the findings for theory and practice.1.Literature review and hypotheses development1.1.Board attributes and company performanceTaking into account the main role of directors, which is to supervise and to prevent opportunistic behaviour of managers (Fama and Jensen, 1983), the composition of a board of directors becomes vital within corporate governance frameworks. The struggle to find what lies behind a boards' black-box (Leblanc, 2004) has increased significantly in the last years in an attempt by researchers all over the world to identify key features of the most efficient boards. In this sense, a plethora of studies has tried to explain the relation between board attributes and company performance. Romanian research on board of directors is less developed than that in western countries. Furthermore, the focal point of Romanian scholars has been rather descriptive with an emphasis on describing the composition of boards and the relation between various boards' attributes. …