The Impact of Educational Level of Board of Directors on Firms’ Performance

Abstract

The importance of education has been emphasized by the Malaysian Code of Corporate Governance which recommends directors to have qualities in knowledge and professionalism. However, there is comparatively lack of studies on the effects of educational background on the board level and its impact on performance. Thus, this study attempts to fill the gap by investigating the association between board diversity and firm performance of 26 government-linked companies (GLCs) and 26 non-government-linked companies (non-GLCs) in Malaysia. The study used characteristic of education diversity and tested on firm performance as measured by return on equity (ROE) and return on asset (ROA). It is predicted that education diversity has a negative association with both ROA and ROE. In order to investigate the findings, a final sample of 196 GLCs and non-GLCs listed on the Bursa Malaysia from 2007 to 2010 were used. It was analyzed using a quantitative method employed by Statistical Package for Social Science (SPSS) which compared education diversity of boards with firm performance. Multiple regression analysis was also used to estimate the relationships proposed in the hypothesis. The finding reveals that only education diversity in GLCs supported the hypothesis but not for non-GLCs. As a conclusion, this study established that education diversity in board would diminish firm performance especially in GLCs because their culture in appointing successful directors emphasizes on network with governance characteristics rather than education characteristic.