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

CHAPTER 5: CONCLUSION

5.1 A Review of the Research Objectives

In this section, the research objectives outline in Chapter 1 will be reviewed. A review of the research objective is necessary to ensure that the research objectives are fulfilled or answered. Referring to Chapter 1, Research Objective 1 is stated as follow:

 

Research Objective 1 : To investigate if there exists positive correlation relationships between proportions of independent non-executives directors in board structure to the average Return on Equity (ROE) figures of companies listed in Malaysia, for research period from year 2006 to 2011.

 

In the research findings presented in Chapter 4, it is found that there are no statistically significant relationships between proportions of independent non-executives directors in board structure to the average Return on Equity (ROE) figures of companies listed in Malaysia, for research period from year 2006 to 2011.

 

Research Objective 2 : To investigate if there exists positive correlation relationships between proportions of independent non-executives directors in board structure to the average growth of Earning per Share (EPS) of companies listed in Malaysia, for research period from year 2006 to 2011.

 

In the research findings presented in Chapter 4, it is found that there are no statistically significant relationships between proportions of independent non-executives directors in board structure to the average growth of Earnings per Share (EPS) figures of companies listed in Malaysia, for research period from year 2006 to 2011.

 

Research Objective 3 : To investigate if there exists positive correlation relationships between proportions of independent non-executives directors in board structure to the average stock returns of companies listed in Malaysia, for research period from year 2006 to 2011.

 

In the research findings presented in Chapter 4, it is found that there are no statistically significant relationships between proportions of independent non-executives directors in board structure to the average stock returns of companies listed in Malaysia, for research period from year 2006 to 2011.

 

Research Objective 4 : To suggests several strategies and implications from the research for applications in real corporate world.

 

In relation to the findings, no relationships can be found between proportion of independent directors to ROE, growth in revenue, growth in EPS, payout ratio and stock returns of publicly listed firms being investigated in Malaysia, for research period from year 2006 to 2011. Thus, the obvious implications from the research findings are that the proportion of independent directors in board structure cannot be used to predict the performance of a company. In contrast to some findings that there exist positive relationships between proportions of independent non-executives directors in board structure to firm performance, there are not such relationships in Malaysia. There is then, no strong empirical evidence that higher proportion of independent directors in board structure can add value, particularly from the perspective of financial performance of the listed companies, in the context of Malaysia. This strongly suggests that there are other drivers corresponding to financial performance of companies listed in Malaysia.

Nonetheless, some side findings from the result simulation are as follow. Firstly, it is observed that the firms that have high ROE achievement are found to tend to have similar ROE achievement in the future, and vice versa. As articulated previously in Chapter 4, this suggests that the profitability of a firm, as measured by ROE tend to persist. The implication is that investors can identify those investment targets by referring to historical ROE of the respective firms, to predict how these firms may fare in the future. Such a findings also suggest that investors that have long term horizon and orientation in investing is correct when they employ historical ROE of a firm to predict future profitability of a company in the future. Then, there is also finding concerning dividend policy practiced by companies listed in Malaysia. As found from Chapter 4, there are some empirical evidences supporting that firms tend to retain a fix payout ratio in terms of their respective dividend policy in Malaysia (whereby the only exceptions is within the period of financial crisis in year 2009). This is consistent with corporate finance theory whereby companies can set their dividend policy according to a fix payout ratio. Thus, investors that value highly on dividend payment can rely on the payout ratio to make their investment decision. Secondly, it is understood that firms tend to cut dividend in crisis time. However, once the economy recover, dividend is likely to resume, considering that the company will likely stick to the previous payout ratio in the future.

5.2 Discussion

As shown from the research findings of this dissertation, coupled with the information articulated in the literature review section, it can be generally understood that the nature, roles and contribution of independent directors differ according to the different countries or culture being investigated. In Malaysia, the contribution of independent directors is not obvious. The non-existence of empirical evidences that independent directors may contribute to the company performances of a listed company in Malaysia may due to the fact that Malaysia is still an emerging country, and it is perhaps appointment of independent directors is done just to comply with the laws and regulations.

Having to say that, the lack of evidences supporting the notion that there is relationships between proportions of independent non-executives directors in board structure to firm performance should not be something surprising. There are many factors driving companies’ performances. For example, just to name a few, the industry structure, the competitive landscape, the corporate culture, the leadership factors, the changes in environmental forces as well as the impacts from external shocks. As such, the true drivers of firm performance in Malaysia could be contributed by other forces, which should be investigated from further studies. However, although the lack of positive findings in this study is depressing, there are real impacts and lessons from the research. Firstly, the roles of independent directors to corporate performance may not as important as investors might perceive, particularly in the context of Malaysia. Then secondly, it is found that among the many different financial metrics used to gauge company performance, only ROE of a firm can be used reasonably well for investors to estimate the future performance of a firm. The other financial metrics, such as growth in revenue, current stock returns or growth in company’s EPS cannot be used to predict the future financial performance of that firm.

5.3 Suggestions for Further Research

In this finding, the relationships between proportions of independent directors to several financial performance metrics, such as ROE, growth in revenue, growth in EPS, payout ratio and stock returns of publicly listed firms, in Malaysia is performed. Although it is found that there is no evidences supporting the high proportion of independent directors should contribute to the better financial performance of the listed companies, it is however, unclear if the higher proportion of independent directors can lower the risks faced by a particular company. Indeed, it is also unclear if the high proportion of independent directors can strengthened the corporate governance of a particular listed company. Thus, in the future, studied on the contribution of independent directors, to strengthening of corporate governance or mitigation of risks faced by listed companies in Malaysia should be investigated. It is highly possible that the addition of independent directors in board structure may not contribute to financial performances of a firm, buy they may enhance corporate governance structure of listed firms, as their roles is to oversee the development and expansion of the companies in a prudent manner.

Secondly, it is acknowledged that this study is concentrating on Malaysia. However, for more comprehensive understandings on the roles or contribution of independent directors to financial performance of listed companies, study should be enlarged to include research on other nations, such as in Indonesia, Thailand, Philippines, China or India. This is because it is not understood if absence of empirical evidences is a phenomenon in Malaysia, or such findings may persist in emerging countries.  Only through a comprehensive study on the proportions of independent directors to several financial performance metrics in other nations in Asia or emerging countries, scholars can form better view if the contribution or roles of independent directors do differ in the context of Asia or in the emerging countries. All of such information can be crucial for scholars to understand the real impacts of appointment of independent directors in listed companies. Indeed, the persistency of absence of differences in financial performance of risk mitigation from appointment of independent directors can indicate the failure of corporate governance structure in capital market in the emerging countries.

Apart from that, a similar study can be conducted to developed nations such as Singapore in Asia. It is highly probably that the roles, expectation, appointment and contributions of independent directors in the more developed nations differ than that of the emerging countries. As a more developed nations, the study on the relationships between proportions of independent directors to several financial performance metrics in the particular country is crucial. Comparisons between the research findings are crucial to investigate how the independent directors’ contributions or roles may different between the two neighboring countries.

Last but not least, there are many interesting possible research areas concerning predicting future companies’ performance, based on the research findings accidentally discovered in this dissertation. As discussed above, it is found that there are strong empirical evidences that ROE of a firm can be used reasonably well for investors to estimate the future performance of a firm. Specifically, it is observed that the firms that have high ROE achievement are found to tend to have similar ROE achievement in the future, and vice versa. Such accidentally findings strongly suggest that investors can identify those investment targets by referring to historical ROE of the respective firms, to predict how these firms may fare in the future. Nonetheless, many different criteria can be incorporated in future study to understand the correlations of these variables to firm’s performance. Although it is shown that proportion of independent director in board structure is not the variable that can be employed to predict corporate performance, other variables not being studied but may be able to affect corporate performance include corporate culture, the control of family business, the profit margins, the human resources practices, employees satisfaction, customer satisfaction, the brand name of the corporations as well as many other relevant non-financial metrics.

In a nutshell, this study open the awareness and force investors or management to think deeply and seriously on what are the drivers of firm performance. It suggests many possible research areas, which among these research areas, may enhance scholars understandings on the few areas as follow, namely, firm performance, corporate governance and contribution of independent directors.

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