Business Ethics
Research Proposal – Board Structure and Company Performance


Research Background

In the recent years, the corporate scandals are becoming widespread negative events affecting investors and public in many of the countries around the world. Unfortunately, not only the frequency of occurrence of corporate scandals has not reduced, but the magnitude of the harms bring forward by these corporate scandals are becoming more serious in the recent years. Consistent with such trends, there are greater concerns by the public as well as the regulatory bodies on better and more effective corporate governance to be implemented in public listed companies in the recent years. One aspects of effective corporate governance is about having more independent non-executive directors in the board structure (Aggarwal et. al., 2010). In this research, the board structure, as will be investigated form the proportion of independent non-executive directors in the board structure, to the company performances will be analyzed and studies.

Rationales of the Research

It is actually not hard to find literature regarding the board structure and its impacts to company performance. In facts, there are also studies investigating the amount of independent non-executive directors to the company performances in several developed countries (Hamill et. al., 2006). However, there is relatively few research of such nature that studies the relationships of board structure (as proxy by independent non-executive directors) to company performances in emerging countries. Thus, in this study, Malaysia will be used as a case study to understand if such relationship hold true in emerging countries such as in Malaysia. By having better understanding on the board structure to company performance can have several implications to investors as well as management. Firstly, if statistically significant relationships are found, investors can then include the board structure as screening criteria in their stock selection process. It is then possible for them to bet on stock or companies are better corporate governance structure, with a high expected company performance in the future. Secondly, the managing directors can also rely on such information, and to hire more independent non-executive directors to serve in the company board.

Research Objectives

Following the arguments as presented above, several research objectives can be formulated:

  1. To investigate the relationships between the board structure to the company performance for financial companies in Malaysia.
  2. To suggests several strategies and implications from the research for applications in real corporate world.

Literature Review

In the past few years, corporate governance is a hot topic discussed by practitioners as well as academicians. A review of the literature found that a large amount of the discussions are concentrated on the agency costs or issues arise from the separation of management and ownerships in the many publicly listed companies around the world (Schiehll et. al., 2009). Accordingly, the issues arise when the manager (i.e., agent) is appointed to manage the assets of the business owners (i.e., the principal). The manager may not act in the best interests of the business owners, as they may have their personal agenda to push forward in the corporate scene. For example, it may be possible for the manager to engage in more risky venture to profit from the stock options granted to them, or to invest heavily on their personal pet projects (which might not be wealth maximizing projects for shareholders), or to the extent of heavily involving in fraud or misappropriation of company assets for selfish personal benefits (Brigham et. al., 2004). Thus, discussions have been centered on how to mitigate such risks due to agency costs or relationships between managers and business owners.

Then, in order to ensure best corporate governance in a company, it is often asserted by researchers that the appointments of independent non-executive directors are crucial for mitigating risks related to corporate fraud and scandals. This is because the independent non-executive directors are appointed by the investors, and in theory, should act in the interests of the shareholders. Thus, with the presence of independent non-executive directors, managers will be less daring to out rightly engage in serious corporate fraud, or be forced to behave ethically and responsibly as their actions are being supervised. Essentially, the independent non-executive directors will serve as the watchdog to safeguard company assets and performance from potentially harmful behaviors of management, as well as to contribute their experiences and insights in managing a company.

From another perspective, the importance of independent non-executive directors are not something ignored or denied by researchers or practitioners. Firstly, as we had discussed in sections above, the presence of independent non-executive directors is crucial to the company performance. For example, according to several studies by Ameer et. al. (2010), McKnight et. al. (2009), Mura et. al. (2007), as well as Shah et. al. (2008), it is found that the proportion of independent non-executive directors in the board structure is significantly and positively related to the company performance. The company performance may be measured by several criteria as follow: return on equity, return on assets, stock prices performance, growth or company profitability in the past few years. Apart from that, the higher proportions of independent non-executive directors in a board structure, the risk faced by the investors are also lower. For instances, according to a research performed by Abdullah (2006), he discover that stock ownership of non-executive directors on a company is likely to enhance their motivation to monitor the board in a more prudent and diligent manner. Not only is that, according to Lara et. al. (2007), if the independent board of directors are acting properly by exercising their rights and independence in the board meeting, the Chief Executive Officers as well as the other management staffs are more likely to adopt prudent financial reporting standard. Apart from that, it is also argued that the independent non-executive directors are beneficial and valuable in providing to the broad their extensive and comprehensive experiences and insights. Through their experience and knowledge, it is expected that they can add-value to the strategic management or execution of the firms they are serving.

Research Design

Overview of Research Design

In this research design, quantitative analysis will be performed. This is because quantitative analysis is more objective, and is less subject to the biased interpretations of researchers in the research process. Besides, the secondary data on the variables to be investigated, namely (a) proportion of independent non-executive directors in the board structure, and (b) the firm financial performance as measured by the Return on Equity (ROE) and Return on Assets (ROA) can be obtained from the stock broking website in brokerage house in Malaysia.

In order to perform the research design, all of the finance related stocks listed on the Kuala Lumpur Stock Exchange in Malaysia will be selected. The finance related stock, as per the classification by the stock exchange of Malaysia, namely Bursa Malaysia include the following types of companies: retail or commercial banking, financial services, insurances and investment banks. For this, a total of 36 companies will be selected in our analysis. For all of these companies, the data related to (a) proportion of independent non-executive directors in the board structure, and (b) the firm financial performance as measured by the Return on Equity (ROE) and Return on Assets (ROA) can be obtained from the following website: The website is password protected, but with the help of fried from Malaysia, he allows me to access the database of company information by the broker, as he is an online trading client of the brokerage house.


Selection of Research Variables

In this study, the objective is to understand if the board structure has effects against the company performance. Generally speaking, the board structure can be divided into two groups of directors, namely those independent directors or those non-independent directors. The more independent directors in the board structure, it is often perceived as better corporate governance practices, as the independent directors can better safeguard the investors’ assets and interests from misappropriation of company resources by the management. Thus, the high proportions of independent directors in the board structure, the corporate risks are mitigated to a larger extent. Thus, in order to understand the proportion of the independent directors to the board structure, the following formula is used:




From another perspective, it is of this study interests to understand the company performances for all of the companies under investigation in this research design. There are many variables that can be used to proxy company performance. For this, two widely used financial metrics are chosen as the good proxy of company performance. The first is Return on Equity (ROE), while the other one is Return on Assets (ROA). For this, the recent five years of the Roe or ROA figures for the companies under researched will be obtained. The average value of the five years ROE and ROA will be calculated. The average ROE and ROA figures will be useful to become a good proxy of corporate performance.

Quantitative Methods Used

In this study, after the proportion of independent non-executive directors, as well as the ROE and ROA figure is obtained, the information will be tabulated into SPSS software for data analysis purposes. Firstly, the descriptive statistics of the variables will be investigated. Then, the correlations coefficients between the variables (i.e., the proportion of independent non-executive directors, as well as the ROE and ROA) will be computed from the software. Statistically significant correlation will indicate that there are relationships between these variables.

Limitations of the Research Designs

There are several potential limitations of this research design. Firstly, as there are insufficient time to perform the research, only companies from financial sectors will be chosen for analysis purposes. This means that the other listed companies from other sectors, such as the industrial, trading and services, consumers or technology sectors are ignored. Thus, the results obtained cannot be used to indicate the general situation of all listed companies in Malaysia. Secondly, the research is concentrated only in listed companies in Malaysia. Thus, the research results are not indicative that the board structure in other emerging countries is similar to that of the results obtained from this study. Thirdly, there are also other measured that can used to measure the board structure. For example, the CEO ownership, the family relationships between the board members as well as many other variables can also be used to investigate the board structure of a listed company. Besides, the company performances can also be measured from many different perspectives, such as the return of stock prices in the past 3 years, the P/E ratio on the stock, or even the growth rate of the net income for the companies under researched. All these are not included in this research design. Thus, the study is not as comprehensive as it can be, and thus may limit its usefulness of the research findings in the practical world.

Expected Outcome

From a comprehensive of the review of literature, it can be found that there are many studies that show that the more proportion of independent non-executive directors in the board structure, the better the firm performance. In other words, the risks faced by the company with more independent non-executive directors in the board structure will become lower, as these independent directors are the effective ‘watch-dog’ against the management of the corporations. Thus, it is expected that there should exists some degree of statistical significant relationships, measured via the correlation coefficients between proportion of independent non-executive directors to the firm performance, as measured by the ROE figure as well as the ROA.

References & Bibliography

Abdullah, S. N. (2006). Board structure and ownership in Malaysia: the case of distressed listed companies. Corporate Governance, 6(5), 582-594.

Aggarwal, R. (2010). Independent directors: time to introspect, suspect, respect – an Indian perspective. Journal of Indian Business Research, 2(2), 123-132.

Ameer, R., Ramli, F., & Zakaria, H. (2010). A new perspective on board composition and firm performance in an emerging market. Corporate Governance, 10(5), 647-661.

Bezemer, P., Maassen, G., Van den Bosch, F., & Volberda, H. (2007). Investigating the Development of the Internal and External Service Tasks of Non-executive Directors: the case of the Netherlands (1997 – 2005). Corporate Governance: An International Review, 15(6), 1119.

Brigham, E. F., & Houston, J. F. (2004). Fundamentals of financial management, 10th edition. International Thomson Publishing.

Capezio, A., Shields, J., & O’Donnell, M. (2011). Too Good to be True: Board Structural Independence as a Moderator of CEO Pay-for-Firm-Performance. The Journal of Management Studies, 48(3), 487.

Chamberlain, T. (2010). Board Composition and Firm Performance: Some Canadian Evidence. International Advances in Economic Research, 16(4), 421-422.

Colaco, H., Myers, P., & Nitkin, M. (2011). Pathways to leadership: Board independence, diversity and the emerging pipeline in the United States for women directors. International Journal of Disclosure and Governance, 8(2), 122-147.

de Andres, P., & Vallelado, E. (2008). Corporate governance in banking: The role of the board of directors. Journal of Banking & Finance, 32(12), 2570.

Ferreira, D., Ferreira, M., & Raposo, C. (2011). Board structure and price informativeness. Journal of Financial Economics, 99(3), 523.

Hamill, P. A., McGregor, P., & Rasaratnam, S. (2006). A temporal analysis of non-executive director appointments to UK firms: 1990-2000. Managerial Finance, 32(6), 537.

Lara, J. M. G., Osma, B. G., & Penalva, F. (2007). Board of Directors’ Characteristics and Conditional Accounting Conservatism: Spanish Evidence. European Accounting Review, 16(4), 727-755.

McKnight, P., Milonas, N., Travlos, N., & Weir, C. (2009). The Cadbury Code Reforms and Corporate Performance. IUP Journal of Corporate Governance, 8(1), 22-42.

Mura, R. (2007). Firm Performance: Do Non-Executive Directors Have Minds of their Own? Evidence from UK Panel Data. Financial Management, 36(3), 81-112.

Nguyen, B., & Nielsen, K.. (2010). The value of independent directors: Evidence from sudden deaths. Journal of Financial Economics, 98(3), 550.

Pass, C. (2008). Non-executive directors and the UK’s new combined code on corporate governance. Business Strategy Series, 9(6), 291-296.

Przybylowski, M., Aluchna, M., & Zamojska, A.. (2011). Role of independent supervisory board members in Central and Eastern European countries. International Journal of Disclosure and Governance: Including Special Issue Section on The State and Future of, 8(1), 77-98.

Schiehll, E., & Bellavance, F. (2009). Boards of Directors, CEO Ownership, and the Use of Non-Financial Performance Measures in the CEO Bonus Plan. Corporate Governance : An International Review, 17(1), 90-106.

Shah, S., Shah, S., & Zafar, N. (2008). Non Executive Directors and Performance of Firms: Empirical Evidence from an Emerging Market. The Business Review, Cambridge, 10(2), 207-212.

Zattoni, A., & Cuomo, F. (2010). How Independent, Competent and Incentivized Should Non-executive Directors Be? An Empirical Investigation of Good Governance Codes. British Journal of Management, 21(1), 63.



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