Accounting
Dissertation – Board Structure and Company Performance (Part 3 of 5)

CHAPTER 3: RESEARCH METHODOLOGY

3.1 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), growth in Earning per Share (EPS) and stock returns can be obtained from the stock broking website in brokerage house in Malaysia.

In order to perform the research design, all of the listed companies fall under FTSE Bursa Malaysia Top 100 KLCI (Kuala Lumpur Composite Index) on the Kuala Lumpur Stock Exchange in Malaysia will be selected. There are a total of 100 listed companies in FTSE Bursa Malaysia Top 100 KLCI Index (www.klse.com.my). The companies fall under this index can be used reasonably well for research purpose because these companies are chosen to be included in FTSE Bursa Malaysia Top 100 KLCI Index due to their investability, size, liquidity, and more stable performance. and In Table 3.1 below, all of the listed companies fall under this index will be presented.

 

Table 3.1: Companies Fall under FTSE Bursa Malaysia Top 100 KLCI

 table3-1

Source: www.klse.com.my

 

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 average Return on Equity (ROE) figures; average growth of Earning per Share (EPS); and average stock returns of companies listed under FTSE KLCI Top 100 Index in Malaysia) can be obtained from the following website: http://www.kenwealth.com/bin/home.asp. The website is actually the web portal of Kenanga Investment Bank Berhad, which is one of the leading stock brokerage firms in Malaysia. In the website, comprehensive data and historical development of all of the firms listed on Kuala Lumpur Stock exchange can be retrieved. As the services are provided to the clients of the brokerage house, the data and information provided is updated constantly and maintained properly for the usage of the clients. As the data is provided by a pretty reputable brokerage house in Malaysia, the data obtained from the web portal can be assumed to be accurate and suitable to be used as input in this dissertation.

3.2 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 higher 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:

 

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It is acknowledged that the effectiveness of board structure as well as the degree of independence of board of directors can be approach from other perspectives as well. For example, independence of board structure can be investigated from the proportion of family members in the board, the degree of family ownerships of a particular stock, the relative dominance of board chairman or chief executive officer in the board as well as if a same person hold both the position of chief executives directors and board chairman in a company. However, the proportions of independent non-executive directors are chosen in this study because such variable can be easily and objectively quantified. Besides, such information is also publicly available, even in the context of emerging countries such as in the case of Kuala Lumpur Stock Exchange in Malaysia. Considering the relatively limited resources available for the conduct of this dissertation, to choose the proportion of independent non-executive directors as the proxy of the degree of independence of a board structure is indeed reasonable, justifiable and viable.

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 purpose, three variables are selected to represent company performances. The details of these variables are listed as follow:

  1. The average Return on Equity (ROE) figures of companies listed under FTSE KLCI Top 100 Index in Malaysia, for research period from year 2006 to 2011.
  2. The average growth of Earning per Share (EPS) of companies listed under FTSE KLCI Top 100 Index in Malaysia, for research period from year 2006 to 2011.
  3. The average stock returns of companies listed under FTSE KLCI Top 100 Index in Malaysia, for research period from year 2006 to 2011.

 

The formulas used to calculate these variables are shown as follow:

 

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All of these three variables are selected primarily because they are indeed widely used financial metrics favored by scholars to proxy company performance. For example, return on equity is a good proxy of performance for listed company, because it is commonly accepted that the primary objective of the listed company is to maximize return for shareholders. Under such argument, the higher the figure of ROE a company able to achieved, it is often deemed that the company has a better performance. Indeed, there are investors that employ the ROE figure for their stock selection purposes. ROE figure is also employed as the proxy of firm’s financial performance by Shah et. al. (2008). Then, the growth of EPS is also a reasonably good measure to proxy the financial performance of a company. After, the existence of a company is to earn profit from the marketplace. As such, the net income, after adjusted for the total number of shares outstanding, as measured by EPS, is a relevant variable tightly linked to the company performance. The importance of EPS, particularly the growth of EPS over the years is widely known and watched by analysts and investors in financial market. As such, it is reasonable to employ the growth of EPS as the variables to proxy company performance in this study. EPS is also used by Mura (2007) as the proxy of firm’s financial performance in his study. Lastly, stock returns, as measured by the two components, namely (a) dividend distributed to shareholders, as well as (b) capital gains due to price appreciation of a particular stock, is yet another popular variables used by scholars to proxy stock performance in the financial market (Brigham et. al., 2004). This variable is included because it is of the researcher interest to understand if company with better corporate governance structure (as proxy by higher proportion of independent directors in board structure) is likely to reward shareholders or investors.

3.3 Quantitative Methods Used

In this study, after the proportion of independent non-executive directors, as well as the average Return on Equity (ROE); average growth of Earning per Share (EPS); and average stock returns of companies listed under FTSE KLCI Top 100 Index in Malaysia figures are obtained, the information will be tabulated into SPSS software for data analysis purposes. Firstly, the descriptive statistics of the variables will be investigated. Among the important descriptive statistics to be used include the mean value of each particular variables as well as the corresponding standard deviation of the variables. Then, the correlations coefficients between the variables (i.e., the proportion of independent non-executive directors, as well as the other proxy of firm’s financial performance) will be computed from the software. Statistically significant correlation will indicate that there are relationships between these variables. Scatter plot will also be generated to provide visual or graphical representation of these variables for further investigation.

3.4 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 included in the FTSE KLCI Top 100 Index will be used as the research objects in this dissertation. 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. Thus, this dissertation approaches the issues of board structure and corporate governance from a narrow perspective – i.e., the proportion of independent non-executive directors among board of directors. Definitely, there are many other viable approaches that can be used to study the relative effectiveness and appropriateness of board structure in good corporate governance practices. As such, this study may need to be supported by other research approaches to make the findings more conclusive and dependable. On the other hand, the company performances can also be measured from many different perspectives, such as the growth of revenue in the past few 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 dimension of company performance, as according to the structure of the research design presented in this dissertation, is limited to only the three dimensions as discussed above. Considering the relatively specific and narrow scope of research variables investigated in this dissertation, it is thus worth to mention that the study is not as comprehensive as it can be, and thus may limit its usefulness of the research findings in the practical world. In order to yield more reliable, dependable and comprehensive research findings to this topic, more studies should be conducted in the future to supplement or support the findings presented in this study. The suggestions for viable research topics in the future are presented in Chapter 5.

 

 

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