Vol 13 (2016) - Issue 6

Article preview

Board Composition and Firm Performance: Empirical Evidence on Listed Companies in Hong Kong – Part Two

This is the second part of a two-part paper considering the relationship between board composition and firm performance in Hong Kong. The aim of this paper is to analyse the effect of board composition, in terms of proportion of non-executive directors, on corporate performance in Hong Kong, where many companies are Family-owned or State-owned Enterprises. My research finds that currently 86.5% of listed companies in Hong Kong have 31% to 50% of non-executive directors serving on their boards. This paper focuses to see whether the requirements related to non-executive directors in the Listing Rules of Hong Kong can benefit companies’ financial performance in addition to its transparency, and to provide basis to companies to enhance financial performance by changing their board composition.
Part one of this paper considered three areas pertinent to this debate. First, it studied the theoretical framework based on agency theory and resource dependence theory to see how non-executive directors contribute to their monitoring and advising role of corporate governance. The paper went on to discuss the regulatory background in relation to non-executive directors in both the UK and Hong Kong. Second, it examined the empirical researches conducted around the globe related to the effects of non-executive directors on company’s financial performance. The third and last section of Part One then set out the data collection process and the methodology of my own empirical study to examine the relationship between board composition and firm performance for listed companies in Hong Kong. This second and final part of the paper explores the following three issues. First, it will analyse the 266 constituent companies of the Hang Seng Composite LargeCap and MidCap Index in Hong Kong to verify the effects of non-executive directors on company’s financial performance. It will also analyse certain director affiliations to evaluate whether these factors, which prevent a director from being 'independent', affect firm performance individually. Second, this paper will try to give reasons explaining its particular results found in Hong Kong. The third and last section of Part Two will provide policy implications according to the results.

4.4 Descriptive statistics of data
Table 1 below shows the board composition of Hong Kong companies in the sample. The median company in the sample has a board size of 10 directors, including 4 Independent Directors, 2 Affiliated Directors and 4 Executive Directors. The average board size is 10.74, with around 40% being Independent Directors, 20% being Affiliated Directors and 40% being Executive Directors. However, differences among companies can be huge. In the sample, board size varies from a minimum of 4 to a maximum of 22 members (a difference of 5.5 times). Number of Independent Directors varies from 2 to 14.