Board Qualification And Firm Performance Of Family Ceo Listed Firm In Malaysia

Altruism and nepotism in family firms

Altruism is a powerful force within family life and by extension, within the family firm. This characteristic ensures parents to be protective of their children, give fully supports to their family members to be considerate towards each other and cultivate loyalty and commitments to the family and firm. Altruism held the family members within the family firm with inculcating the belief that they have a residual claim on the family’s estate ( Stark and Falk, 1998). According to agency theory, the agency cost can be reduced through fostering, monitoring and enforcing agreements when ownership goes through the process of aligning their interests among family agents towards risk and growth opportunities. Therefore, family agent performance is not monitor regularly. Nevertheless, information asymmetries among family agents can be reduced meanwhile increasing informal agreements usage through increased cooperation and communication among and within family members and the family firm with altruism ( Daily & Dollinger, 1992). Besides, altruism benefits the agency in a way that a heightened sense of interdependence among family agents is created. In fact, employment relates welfare directly to firm performance.

Furthermore, it is deduced that agency problems increase from altruism and self-control are complicated when the CEO has discretion in placing control the firm’s resources. Intrinsically, this broadens the CEO’s capacity to make altruistic transfers for example perquisites, privileges, and employment to family members that they would not be receiving this kind of treatment if they were worked elsewhere. Henceforth, a variety of agency cost is created when these privileges and the sense of entitlement are evoked ( Gersick et al., 1997). Meanwhile, according to Ford and McLaughlin ( 1986), nepotism is the act of compassion toward one another among family members or friends. From employment perspective, it can be granting jobs to relatives and friends, without referring to merit. Apparently, such practices impact businesses negatively. In other words, they can reduce the support of other employees, decrease the quality and creativity of management and belittle the importance of competence and high-level performance ( Zax & Ichniowski, 1988).

Nepotism often provide positive perspective in many smaller family firms. This is due to the practice of “succession” with alternative cheap source of labour. Nepotism is neither good nor bad, in and of itself ( Barnes & Hershon, 1976). In other words, nepotism is a neutral phrase. Sarcastically, nepotism reflects the positive or negative charge based on the way one has educated one’s children. The values of becoming competent employees include honesty, respect for others, integrity, dependability, being industrious and doing one’s best in every endeavour. These values are crucial to instil in every generation in ensuring the competent generation is born. On the contrary, the failure of teaching these principles will result in the feeling of entitlement in the children which is believing that they are the privileged and they think they can get everything. Ironically, the stated deficiency eventually turns into a ripe incubator for problems to emerge when the child works in the family business ( Ford & McLaughlin, 1986). By referring to the literature discussed, it is hypothesized that there is a significant difference in mean value of return on equity and return on assets between family CEO firms and non-family CEO firms.

Board qualification and performance

The Malaysian Code on Corporate Governance (Revised 2007) suggests that directors have certain qualities (experience, skills, knowledge, professionalism and integrity) in face of intense responsibility. Previous studies found that board chairman with university degree is positively in relation to seven measures of performance which include earning per share (EPS), EPS appreciation, ROA, ROA appreciation, market–to-book ratio, cumulative returns and cumulative abnormal returns. Companies need to hire board members, including Chief Executive Officer (CEO) with certain level of either observable or unobservable capability ( Darmadi, 2013). According to Sebora and Wakefield ( 1998), directors with higher education are well adapt to business acumens and operations compared to those less educated counterparts. Jalbert et al. ( 2002) study on a sample of Forbes 800 firms discovered that CEO graduated from prestige school has positive relationship with ROA of the firm. Darmadi ( 2013) finds that postgraduate held by boards of directors have a positively and significant correlated with ROA.

However, Bhagat et al. ( 2010) find that CEO with non-MBA degree holders perform better than those with such qualification. On the side note, empirical evidence was revealed from their study that hiring new CEOs with an MBA leads to short-term improvements of performance. From the result of the study, Bhagat et al. ( 2010) do not consider CEO education as a good proxy for CEO ability. But Darmadi ( 2013) finds that undergraduate and financial certificate is not significant with ROA. Gottesman and Morey ( 2006a) find there is no significant evidence that CEO from more prestigious schools perform better than CEO from less prestigious schools.

Interestingly, mixed results are found in studies that investigate the influence of graduate degree towards better firm performance. Undeniably, skills and educational background are among the determinants for family firms’ performance ( Castillo & Wakefield, 2006). However, lack of study has been done for the relationship between director’s education with return on equity (ROE). Based on the arguments, it is hypothesized that, the proportion of board degree and professional qualification are significant and negatively related to return on equity (ROE) and return on assets (ROA) in family CEO firms.

Board size and performance

Board size determines the number of board of directors who are serving on the board of the companies. The larger the boards the superior performance of companies as compared to small ones because larger groups have more skills, expertise, capabilities and resources, and wider networking. Haleblian and Finkelstein ( 1993) elaborated that large groups could enhance problem solving abilities by providing more strategic perspectives and constructive judgement. Despite the upside potentials, Lipton and Lorsch ( 1992) brought a conclusion that too many executive members on board would lead to more problems.

On the contrary, a small board is more effective than a larger one in term of decision making especially for executive replacement. Findings by Jensen ( 1993) reveals that small board size could increase firm performance. Notably, according to Yermack ( 1996), the firms with small number of board size is having a tendency to gain a higher stock market value. Family firms used to have a smaller board size ( Eisenberg et al., 1998; Ibrahim & Samad, 2011; Hermalin & Weisbach, 2003; Lipton & Lorsch, 1992). According to Bennedsen et al. ( 2008), the optimum number for family firm’s board size is less than six members. On the negative side, the source of information, experience and contact of small board are limited. Based on this argument, it is hypothesized that board size is significant and negatively related to return on equity (ROE) and return on assets (ROA) in family CEO firms.

Population and sample

After screening through the 90 listed companies from sectors of construction, consumer, property, trading and services in Bursa Malaysia, only 38 companies from the list are family firms with only 21 companies identified as family CEO firms and 17 companies as non-family CEO firms. The data of time series and the cross-sectional study has been collected from the 38 listed companies in Bursa Malaysia for the period of 5 years from 2012 until 2016.

Data source

Secondary data is the main and only source of data for this study. Most of the secondary data are obtained and manually collected from Companies Annual Report and retrieved from datastream. By referring to those reports, information such as board size, the number of degrees qualification holders and the number of professional qualification holders among directors can be identified and calculated for the proportion. Furthermore, board size also can be extracted from the annual report.

Variables and measurement

This study will employ two profitability ratios as the proxy for the performance which are return on equity (ROE) and return on assets (ROA). ROE and ROA are measured based on the net income divided by total shareholders’ equity and the net income over total assets of a firms respectively ( Ibrahim & Samad, 2011).

Return on Equity (ROE) = $\frac{\mathrm{N}\mathrm{e}\mathrm{t}\mathrm{}\mathrm{i}\mathrm{n}\mathrm{c}\mathrm{o}\mathrm{m}\mathrm{e}\mathrm{}\mathrm{}}{\mathrm{T}\mathrm{o}\mathrm{t}\mathrm{a}\mathrm{l}\mathrm{}\mathrm{s}\mathrm{h}\mathrm{a}\mathrm{r}\mathrm{e}\mathrm{h}\mathrm{o}\mathrm{l}\mathrm{d}\mathrm{e}\mathrm{r}\mathrm{\text{'}}\mathrm{s}\mathrm{}\mathrm{e}\mathrm{q}\mathrm{u}\mathrm{i}\mathrm{t}\mathrm{y}}$

Return on Assets (ROA) = $\frac{\mathrm{N}\mathrm{e}\mathrm{t}\mathrm{}\mathrm{i}\mathrm{n}\mathrm{c}\mathrm{o}\mathrm{m}\mathrm{e}\mathrm{}\mathrm{}}{\mathrm{T}\mathrm{o}\mathrm{t}\mathrm{a}\mathrm{l}\mathrm{}\mathrm{a}\mathrm{s}\mathrm{s}\mathrm{e}\mathrm{t}\mathrm{s}}$

The board size (BSIZE) is measured by total number of directors serve on the board of the company ( Abor & Biekpe, 2007; Bokpin & Arko, 2009; Ibrahim & Samad, 2011). According to Balwin ( 1963), a person holding a degree is considered elite in the region of less developed countries. The proportion of qualified degree director (BDEG) is proxied by any undergraduate degree obtained by the board members and CEOs of the listed family firms divided by the number of directors on board. Graham and Harvey ( 2002) state that any individuals who holds a postgraduate degree must have obtained an undergraduate degree. On the other hand, professional qualification (BPRO) are titles or awards granted by professional bodies. The proportion of directors holding an undergraduate degree qualification and a professional qualification are calculated using the following formulas:

Proportion of Qualified Degree Director (BDEG) = $\frac{Number\mathrm{}of\mathrm{}undergraduate\mathrm{}holder\mathrm{}among\mathrm{}Directors}{Total\mathrm{}number\mathrm{}of\mathrm{}Directors\mathrm{}on\mathrm{}Board}$

Proportion of Qualified Professional Director (BPRO) =

$$\frac{Number\mathrm{}of\mathrm{}professional\mathrm{}qualification\mathrm{}holder\mathrm{}among\mathrm{}Directors}{Total\mathrm{}number\mathrm{}of\mathrm{}Directors\mathrm{}on\mathrm{}Board}$$

Control variable is also defined as constant variable. In scientific experimentations, this variable is the experimental element which stays constant and unchanged throughout the investigation in order to test the relative relationship of the dependent and independent variables. Many prior studies used firm size (LNFSIZE) as control variables. In this study, the firm size is measured by the natural log of total assets of the company ( Ibrahim & Samad, 2011; Sheikh & Wang, 2012; Vakilifard et al., 2011).

Data analysis

Data panel of multiple regression analysis

This study used the analysis of panel data because the data consists of cross-section and time series. By using this panel data analysis, it will eradicate unobservable heterogeneity that different firms in the sample data could exist, reduce collinearity among the variables and lead to better measurement than pure cross section or pure time series data ( Baltagi, 2001; Gujarati, 2003).

Model selection

Model selection is presented as follows:

FR = α + β1BSIZEit + β2BDEGit + β3BPROit + β4LNSIZEit + εit

Where:

FR = Return on Assets (ROA), Return on Equity (ROE)

BSIZE = Board Size

BDEG = Proportion of Qualified Undergraduate Degree Director

BPRO = Proportion of Qualified Profession Director

LNSIZE = Firm size

εit = The Disturbance or Error Term