Why Organizational Capabilities Matter ?
Corporate governance means the relationships among stakeholders, including shareholders, the board, employees, customers, suppliers, and the managers. The objective of the corporate governance is to maximize firm value and to pursue the interests of the firm and its stakeholders. Corporate governance plays an important role in dealing with the ways in which suppliers of finance to corporate can assure themselves of getting returns on their investments. This also means that corporate governance mechanism induces the self-interested controllers of a company to make decisions that maximize the firm value for its owner. Thus, the agency problem can be mitigated to maximize the firm value if a firm has well-defined mechanisms on corporate governance.
Previous studies have offered insights into corporate governance that influences the firm’s ability to generate the better performance. Some studies directly examine the relationship between corporate performance and various board attributes such as board size, insider-outsider ratio [6,9,34], and director equity ownership. Ownership concentration is also the issue that has been frequently discussed. However, many conflicting results can be found in the previous studies. Some argue that firms with larger proportion of outside director can have positive effects on firm performance while others find that the deployment of outside director may do harm to corporate performance or have no relationship with the firm performance. On the other hand, some studies point out that concentrated ownership may mitigate the agency problem and enhance the corporate performance while some argue that concentrated ownership may sacrifice the interest of the minority investors and the agency problem still exists or few systematic relationship between ownership and corporate governance exist. Moreover, because each firm has its unique organizational context which might influence and constrain firm behaviors, the internal environment on which internal governance performs should be highlighted to ensure the efficacy of any governance arrangement. Therefore, this study also argues that the firm performance-determining effects of outside director depend on R&D capability and marketing capability detail below some hypotheses that outline conditions that outside governance power and family governance power would influence the firm performance.
The objective of this study is to explore the effects of corporate governance on firm performance under the contingent contexts of R&D and marketing capabilities. A panel data of 1202 cases is collected to test the hypotheses. The empirical findings and implications are discussed as follows:
First, the results demonstrate that there is an inverse U-shaped relationship between the proportion of outside directors and firm performance, which suggests the existence for an optimal level of outside directors for the firm performance. An optimal level of outside directors would exist to achieve better firm performance due to the conciliation between the positive and negative forces governing the relationship. Before the optimal level, the increase of outside directors would enhance firm performance. Higher level of outside directors may benefit sufficiently from wide-range advantages, such as monitoring any self-interested actions by managers and pursuing the growth of R&D capability. On the other hand, firm performance would be down as outside director’s increase after optimal level. Higher level of outside directors may not be as knowledgeable as the management team about operational process inside the firm and the industrial outlook outside the firm. And outside directors may lack the time and resources to monitor the management effectively. The present evidences imply that firms should realize that to be lower or higher in outside director situation can neither achieve higher firm performance. Thus, firms should carefully define the insider-outsider ratio of the board to achieve better firm performance.
Secondly, the results indicate that the proportion of family directors is negatively associated with firm performance, while the family ownership is positively associated with firm performance. A possible explanation for this result is that a higher level of family directors may have some obstacles such as wealth distribution, fund raising and talents leaving. In addition, the empirical results support that family ownership poses a positive effect on the firm performance. This outcome may come from that for most family electronic company in Taiwan, the family members who control a large proportion of the firm’s equity may be willing to spend their efforts on supervising the decisions made by the management team and overseeing the operation of the firm because the interests of equity owners are closely bounded with the firm performance.
Finally, the researcher also examines how the interaction between outside governance power and R&D capability affects firm performance. This study demonstrates that R&D capability significantly moderates the relationship between the proportion of outside directors in the board and firm performance. R&D capability is more helpful to firm performance when firms have a larger proportion of outside directors. On the other hand, the empirical outcomes show that the marketing capability plays a moderating role in affecting the relationship between the proportion of outside directors and firm performance. The result suggests that when firm has lower marketing capability, the firm should increase outside directors who often own valuable experience or expertise and connections in various areas. They can offer valuable advice and counsel to enhance the firm performance.
This study provides electronic firms in Taiwan with the results implying that the deployment of outside directors, family directors and family ownership may affect the outcome of the corporate performance, while the R&D and marketing capabilities can play moderating roles in the relationship between corporate governance and firm performance. The major contribution of this study may lie in the combination of the variables representing outside and family governance power respectively in the research model, which previous studies would separate these two constructs into two topics to discuss. On the other hand, when putting other financial variables, such as EPS or ROA, as the indicator of firm performance, the same relationship as the results of this study can be found between the three independent variables in this research and firm performance. Thus, the results of this study are stable and worth for being taken as the reference.
This study sheds some light on the impact of outside governance power on firm performance under different levels of R&D and marketing capabilities and probes the relationship of the family directors and family ownership with the firm performance, but also leaves some limitations for consideration of further research. First, I derived the empirical results from the electronic industry in Taiwan, which indicates that the findings in this study may not generalize to other industries. Secondly, this study only introduces the R&D and marketing capabilities as moderators on the relationship between the board composition and the firm performance. Other factors such as the backgrounds of board directors and organizational culture may also have impacts on the relationship. Thirdly, the measurement of firm performance in this study includes only the operating gross profit rate. Other indicators of firm performance such as patents output may be used in the future research.
To conclude, the impacts of family members and outside directors on firm performance deserve to be further discussed in the future. And the R&D and marketing capabilities are valuable resources for firms to utilize for superior performance and sustainable advantages. The viewpoints in this study highlight the optimal deployment of outside governance power and crucial importance of moderating roles of R&D and marketing capabilities when examining the relationship between the proportion of outside director and firm performance.
Journal of Accounting & Marketing