This study examines the association between foreign shareholdings and several characteristics of board of directors in the context of a developing capital market. Using data of 777 listed firms on Bursa Malaysia for the financial year 2008, the study predicts that foreign shareholdings are positively related to board independence, multiple directorships, and financial literacy of the board of directors. The study finds a strong positive relationship between multiple directorships and foreign shareholdings. Contrary to our expectation, the association between board financial literacy and foreign shareholdings is negative and significant. With regard to the link between board independence and foreign shareholdings, we find weak evidence to support our prediction that there is positive relationship between board independence and foreign shareholdings. The multivariate results also show strong positive relationships between foreign shareholdings and number of foreign directors on boards, and between foreign shareholdings and audit quality. The study also documents a significant negative association between foreign shareholdings and firm size, and between foreign shareholdings and book-to-market ratio. The findings of the study supports the view that multiple directorships is an important asset to firms in emerging markets partly due to limited pool of potential talents and experts which in turn could signal reputational capital and quality of directors. Since there is a mandated presence of finance and accounting qualified director on the audit committee, foreign shareholders can somewhat rely on the oversight of audit committee instead of depending entirely on the board of directors for the quality of financial statements and financial reporting oversight. Finally, the presence of foreign directors on a board of directors may signal a firm’s commitment to adopt good corporate governance practices. It is also possible that foreign investors can influence corporate governance through their participation on the board of directors.
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Malaysia approved manufacturing projects to foreign investors from major economies in 2010 such as the United States, Japan, Hong Kong, Singapore, and Germany for RM11.7b, RM4.0b, RM2.8b, RM2.2b, and RM1.9b respectively (MITI Weekly Bulletin 2011).
A director may hold not more than 10 and 15 directorships in listed and unlisted firms respectively.
In our previous versions of the paper, we used panel data analysis. However, after a number of comments and suggestions from reviewers with regard to the use of data (i.e., dataset is not large enough with some 300+ firms over only 3 years, hence difficulty in detecting cause and effect with time series analysis), we decide to use cross-sectional data instead of cross-sectional time series data.
The Main Board companies have a minimum paid-up capital of Ringgit Malaysia (RM) 60 millions while the Second Board companies are those that have a minimum paid-up capital of RM40 millions. In early August 2009, both boards were merged and now the unified listing board is known as Main Market.
Notwithstanding the data limitation which prevents us from examining the changes in ownership and changes in boards of directors, it is sufficient from literature to conclude that the typical ownership and control structure of the East Asian firms, including those in Malaysia, is highly concentrated (Claessens et al. 2000; Fan and Wong 2002). Since ownership is highly concentrated in the hands of families and states and tends to be comparatively stable over time (La Porta et al. 1999), one would expect that corporate ownership and board structures are related (Mak and Li 2001). Further, owners are likely to extend their resources through the board and management appointments. Although we do not test whether changes in ownership structure result in changes in board structure, based on literature cited above, we expect ownership structure remains unchanged for our sample firms during the study period, which in turn could result in board composition remains unchanged as well.
Foreign shareholdings can also be manually identified in the list of 30 largest shareholders which a listed firm is required to disclose. Foreign companies or individuals may wish to own shares or control of local companies by trust arrangements with nominee shareholders.
It is well-documented in the literature that in emerging economies, ownership concentration is more pronounced. There are costs and benefits associated with ownership concentration. Entrenchment hypothesis contends that controlling shareholders are more likely to expropriate minority shareholders (Bebchuk et al. 2000; Claessens et al. 2002). Yeh and Woidtke (2005) provide evidence suggesting that there is poor governance when the board is dominated by members who are affiliated with controlling families but good governance when the board is dominated by directors who are not affiliated with the controlling family. On the other hand, commitment or alignment hypothesis suggests that concentrated ownership is beneficial when investor protection is weaker and concentrated ownership helps solve the managerial agency problem because controlling shareholders have higher control rights and incentive to discipline managers (Grossman and Hart 1988; Shleifer and Vishny 1997). In the case of family firms, controlling owners and management boards are members of the same family, it is expected that their interest are more closely aligned leading to lower agency problems (Fan et al. 2011).
In addition to their role as shareholder activists, foreign owners are also likely to exert pressure on management by putting their representatives on the board of directors. We, however, cannot determine whether foreign owners’ participation on the board by putting at least one foreign director on a firm’s board since such data are unavailable to us.
We concur with the view that foreign owner identity may also determine nationality of board members and indirectly provide greater monitoring, hence better firm performance (Carter et al. 2003). For instance, if the foreign shareholders are American entities, the foreign board members are more likely to be also American citizens. Foreign owners often find that by investing in companies that are operating in different environments they increase the risk of return on their investments. Thus, these foreign owners may attempt to exert control over firms they invest in order to reduce uncertainty of their investments by putting their foreign directors who may also have similar nationalities as the owners. Such control ensures that managerial behaviors are compatible and support common goals of the foreign owners. Empirical evidence provided by Oxelheim and Randoy (2003) shows that firms in countries whose financial markets are partially integrated can create value by “importing” the Anglo-American governance practices through the appointment of one or more Anglo-American directors to their boards. Unfortunately for this study we are not able to explore the effect of nationality of owners on the nationality of board members due to unavailability of data. We, however, acknowledge this as one of the limitations of the study.
The concept of family firms has been defined in many different ways in the literature. Chrisman et al. (2002) show that it is possible to differentiate family firms from non-family firms on the basis of ownership, management, and intention for family succession without the use of arbitrary cut-off points. Studies using dataset from Asian countries consider a firm as a family-controlled when the controlling shareholder is a family member (Hanazaki and Liu 2007; Claessens et al. 2000) or shares are held by founding family (Saito 2008). Using data from Finish market, for instance, Maury and Pajuste (2005) measure family ownership by aggregating families according to their family surnames.
We inspect the data to see whether foreign firms put foreign directors on their boards. Out of 346 companies with foreign shareholdings, only eight companies are listed subsidiaries owned by foreign entities. These listed companies/subsidiaries are Ajinomoto (M) Bhd, Amway (M) Holdings Bhd, British American Tobacco (M) Bhd, Dutch Lady Milk Industries (M) Bhd, Guiness Anchor Bhd, Lafarge Malayan Cement Bhd, Nestle (M) Bhd, and Shangri-La Hotels (M) Bhd. All companies except Lafarge Malayan Cement have at least one foreign director on their boards (Guiness, Nestle and Shang-ri La = 4 foreign directors; Ajinomoto and BAT = 3 foreign directors; Amway and Dutch Lady = 2 foreign directors).
We thank the referee for pointing out that a breakdown of firms (i.e., firms with foreign shareholdings and firms without foreign shareholdings) could provide some meaningful insights into what types of industries that foreign investors are likely to invest in. The breakdown of two groups of firms based on industrial classifications is as follows: Firms with foreign shareholdings (N = 346 firms): Industrial Products (109 firms; 32 %); Technology (73 firms; 21 %); Trade and Services (67 firms; 19 %); Consumer Products (29 firms; 8 %); and others (68 firms; 20 %). Firms without foreign shareholdings (N = 431 firms): Industrial Products (162 firms; 38 %; Consumer Products (83 firms; 19 %); Construction (57 firms; 13 %); Properties and Trade and Services (43 and 42 firms respectively; 10 % respectively); and others (44 firms; 11 %). It appears that foreign shareholders tend to invest more in industrial products (IP) sector (about a third of total firms with foreign shareholdings) which predominantly consists of manufacturing industries such as petroleum-based, chemical, plastics and rubber, electric and electronics (E&E) products relative to other sectors in the economy.
The study performs a number of diagnostics on the results reported in Tables 2, 3, 4 and 5 including investigation of outliers for both hypothesized and control variables. Standard diagnostic tests indicate that multicollinearity is not a serious problem. Tests are also conducted to detect heteroscedasticity. White’s (1980) heteroscedasticity consistent covariance matrix is performed for all regressions run in this study to help correct the problem.
None of the correlations are greater than the threshold value of 0.8, indicating there is no multicollinearity problem (Gujarati 2003, p. 359).
As stipulated in the Listing Requirements of Bursa Malaysia (January 2012), at least one member of the audit committee must be a member of the Malaysian Institute of Accountants (MIA) or he/she must have at least 3 years’ working experience and must pass certain examinations as well as a member of one of the associations of accountants specified in the Accountants Act 1967.
In this study, we do not test whether audit committee attributes such as audit committee activity, independence, and financial expertise have any influence on foreign shareholdings.
In the current study, we empirically test links between board characteristics and foreign shareholdings. However, we cannot verify the causal relationships between them. We acknowledge that the endogeneity problem is one of the shortcomings of the study. Due to data limitations, we cannot address the issue of causality directly and leave this issue for future research.
In order to have a parsimonious regression model and also due to their non-significant associations with foreign shareholdings, the industry dummy variables are excluded and the model is re-run. The results remain quantitatively and qualitatively unchanged.
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This paper derives from a research project “Corporate Governance Practices and Foreign Investment”, funded under the Fundamental Research Grant Scheme (FRGS), Ministry of Higher Education (MOHE) of Malaysia. The financial supports of both MOHE and Universiti Kebangsaan Malaysia are greatly acknowledged. We also would like to thank participants of the 12th Asian Academic Accounting Association (AAAA) Annual Conference hosted by Udayana University and co-hosted by Universitas Indonesia and Universitas Gadjah Mada in Bali, Indonesia on October 8–12, 2011, and the Accounting Research and Education Conference (AREC) organized by the Malaysian Accounting Association (MyAA) and Universiti Teknologi Malaysia, Shah Alam, Malaysia on 21–23 February 2012 for their constructive comments. We would also like to thank anonymous referees for their many helpful comments and suggestions. All remaining errors are the responsibility of the authors.
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Yatim, P., Iskandar, T.M. & Nga, E. Board attributes and foreign shareholdings in Malaysian listed firms. J Manag Gov 20, 147–178 (2016). https://doi.org/10.1007/s10997-014-9301-1
- Board of directors
- Multiple directorships
- Financial literacy
- Board independence
- Foreign shareholdings
- Foreign directors
- Family ownership