Hong Kong's Board Structure and Company Performance

The devotion of important financiers in the modern trading business has been captured by corporate governance. Some of the ways that corporations are portrayed in the current business world include the rising frequency of commercial topics in newspaper editorials, the rise in instances of commercial demeanor and governance, and the novel statutes intended to address corporate governance. In fiction, where academics have placed a lot of stress on the governance issue in many businesses, the dedication is recreated in a similar way. A primary apparatus of control that governs the proficiency and functioning of a business is its board of directors (BODs). An investigation by Agrawal and Knoeber (1996) divulges that the BODs is quite a noteworthy investigative subject since it elucidates the organization of governance in a specific company, and in the process assists in the expansion of bondholders’ fortune. Poor prescribed correlation amid stockholders and the BODs might delay the attainment of the objectives of the business. Besides, if conflicts arise within the corporate edifice, transferal rating under which business’ properties get sold to other corporations by limited persons for revenue intentions might be the ultimate result (Agrawal and Knoeber, 1996).

A compelling corporate governance always guarantees suitable utilization of the firm's resources, thus assuring shareholders of incredible value as far as capital access and financial balance are concerned. Denis and McConnell (2003) contend that a practical edifice of the BODs enhances the resolution creation process at the business, and blocks abuse of the company's assets, therefore, prompting better performance. In spite of the fact that there exist various researches carried out to scrutinize the influence of arrangement of the board on the firm recital, a majority of these have for the most part laid emphasis on the developed nations like the U.K. and the U.S. In any case, a few of them have tended to address the Asian countries, especially Hong Kong, a country characterized by differing facets of pecuniary and culture-related impact on the commercial sector. This investigation, therefore, tackles the association amid the panel edifice and its effect on the functionality of enterprises in Hong Kong. It will lay significant emphasis on the scope of the panel, if the chair has duality in serving as the Chief Executive Officer (CEO) and the proportion of Non-executive Director (NED) in the firm.

Objective and Hypothesis

The BOD is the quite significant apparatuses of governance of commercial firms. Liu and Fong (2010) advance that a competent BOD improves the independence of a firm, and guarantees culpability in all decisions arrived at in the organization. The directors also have the duty of solving conflicts amidst the management and stockholders of the firm. As such, corporate governance structures ought to guarantee that strategic leadership of the establishment is operative. With the kind of expansion witnessed in the Hong Kong market, and as a result of the increasing number of businesses in the locality, it has become a necessity to guarantee that the effectiveness of the boards managing these firms gets enhanced to improve functionality. Majority of the family-owned businesses in the state are presently operated by duality, in the sense that the chair of the board also serves as the CEO of the enterprise (Cheung et al., 2014).

Evidently, the influence of the BODs on firm productivity is a significant deliberation. Hence, the primary aim of this investigation is to explore the effect of the board arrangement on firm functionality in Hong Kong. Furthermore, it will tackle the issue of if duality plays any role in businesses, and if NEDs assist in advancing the functionality of a business. The hypotheses to guide the investigation are:

There is a direct correlation amidst board size and the enterprise functionality.

There is a deleterious association amidst duality and the enterprise functionality.

There is a direct association amidst the proportion of NED and the enterprise performance.

Literature Review

Return on assets (ROA) is a pointer of the profitability of an enterprise compared to its asset base. The ratio offers an indication as to how effective the enterprise’s administration is at utilizing its possessions to spawn incomes. Computed by apportioning a business's yearly revenues by its aggregate resources, ROA is exhibited as a proportion, and it shows the manager what revenues were produced from devoted investment (assets). ROA for corporations might differ significantly and will be significantly reliant on the type of industry (Baxter et al., 2016). This explains why in applying ROA as a proportional measure, it is paramount to associate it with an enterprise's preceding statistics or that of a related establishment.

According to Baxter et al. (2016), a company’s assets are encompassed of equity and debt. All of these forms of funding can be applied to fund the firm’s activities. The ROA percentage provides stakeholders with a clue of the level of efficiency in the business in transforming the funds at its disposal into net revenue. An advanced ROA proportion indicates a healthier financial position since it will imply that the enterprise is getting extra income on little outlay (Baxter et al., 2016). A case in point is if a firm has a net revenue of one million US dollars and aggregate assets of five million US dollars, then its ROA will be twenty. Though, if another enterprise gets the same return but has total assets of ten million US dollars, it has an ROA of ten percent. Pegged on this illustration, the first business is efficient at transforming its outlay into yield. Keenly thinking about it, the most imperative job of the management is to arrive at astute decisions when apportioning the company’s resources.

There are major roles of BODs at the firm including checking the administrative part of the organization and enhancing bondholder-administrators relationship. In this sense, the chiefs of the board go about as checking specialists; if the interests of both the managers and stockholders are adjusted, at that point office usefulness is achieved. Hence, the BOD has the expertise to reject, utilize, or repay the top-level administrators to watch noteworthy choices at the business. As indicated by Bhagat and Black (2002), the top managerial staff is viewed as an instrument of administering the company's decisions. They are relied upon to offer operational guidance concerning corporate administration, along these lines, enhancing the execution of the business. Aguilera and Cuervo-Cazurra (2009) additionally contend that the chiefs, through the Resource Dependency Theory, go about as contrivance for attuning the firm with outside components. Thus, the board plays momentous duties in guaranteeing that the company performs at its best. In most corporations in Hong Kong, board governance and individuality can be said to be accountable for the enhanced performance. However, it has gotten reported that most firms owned by families have no independence in terms of board management resulting to poor performance, especially due to family interference on the management of the companies (Leung, et al., 2014; Cheung et al., 2014).

A Board of Directors is a renowned group of individuals who jointly supervise the activities of a firm, which can be either a for-profit ventures, nonprofit organizations, or a government agency. A board of directors' mandates, obligations and errands are governed by government procedures (including the authority's corporation’s law) and the establishment's own constitution and statutes. These authorities may stipulate the number of associates to form the board, the criterion of selecting them, and the frequency of meetings (Brennan and Solomon, 2008).

In a company where members have voting rights, the board is answerable to and may be subservient to the company’s full membership, which typically chooses for the members of the board. In a stock corporation, NEDs are chosen by the stockholders through a vote, and the board is the utmost authority in the running of the organization. The BOD can then appoint the corporation’s chief executive officer (CEO) and lays down a clear general strategic direction. However, in corporations with detached tenure, the identification and selection of directors (that shareholders vote for or against) usually gets done by the board itself, resulting in a high degree of self-perpetuation. In a non-stock corporation with no overall voting association, the board is the ultimate governing body of the organization; its members are sometimes chosen by the board itself (Cheung et al., 2014).

The notion of the scope of the board is pertinent in tackling an enterprise’s functioning. It might get presumed that a bigger size is desirable since it can bring diversity regarding expertise. However, the bigger the size, the more the difficulties of efficacy in observing, synchronization, and communiqué (Combs et al., 2007; Brennan and Solomon, 2008). Bigger boards are also confronted with the difficulty of disapproving the top managing authority and seriously scrutinizing the business’ position. Guest (2009) discovered that a grander board size has a notable deleterious impact on the company functionality after reviewing over 2,500 models in a period of twenty years of the UK itemized corporations. He similarly found out that the UK firms’ BODs ordinarily play a relatively weak overseeing role but do more in consultative roles. There might arise variances in the Hong Kong case occasioned by diversities in organizational culture. Moreover, the requisite and anticipation concerning the panel might vary in the epochs preceding his study. It is, therefore, important to advance the scrutiny of the connection amidst board size and enterprise functionality of Hong Kong enterprises.

Another vital determinant of the efficacy of board usefulness is the duality of the Chief Executive Officer. This focuses back to the administration edifice of the board in which the administrator and CEO are viewed as the same individual or not. The agency proposition posits that a need exists of isolating the chair post from that of CEO so as to guarantee that panel autonomy is safeguarded and that organizational interference is eliminated. This could enrich regulating and observing roles of the panel (Leung et al., 2014). In a different investigation, Tuggle, Sirmon, Reutzel, and Bierman (2010) inspected the association amidst the enterprise functionality and CEO dichotomy as well as the notion of panel’s management role. They said that a proficient enterprise execution and the division of CEO might diminish the panel individuals' thoughts with respect to the oversight duty. Bhagat and Black (2001) state that there is no association between the rate of self-sufficient chiefs and the authoritative execution. In perspective of the US associations, their examination unearthed that growing the freedom of the panel helps not low-advantage setups to progress their functionality.

All listed companies in Hong Kong are obligated to have a board of directors which has the duty of overseeing the corporate exercises and securing the interests of the organization's stockholders. The board is driven by a director, who has a say over the route forward for the board. In a few organizations, the (CEO), who holds the top administration post in the foundation, additionally copies as administrator of the board. This is regularly the case with foundations that have grown quickly and still keep up the first originator in those parts (Bryane and Goo, 2015).

Executive Compensation

One of the activities that get the critical consideration from the owner of a business is an upsurge in the pay of the executive. Generally, such rises might arise to the disadvantage of stockholder proceeds, though many appreciate that an attractive remuneration aids in holding of competent staff in the firm. Nonetheless, it is the governing body that polls to raise their wages. In the circumstance where the CEO is likewise the director, an irresoluble condition occurs, as the CEO would poll on his own reparation. In spite of the sense that a panel is mandated by law to include scarce affiliates who are self-directed to the organization, the chair could influence the intentions of the panel, which can permit the ill use of the chairman post (Fan and Wong, 2004; De Andres and Eleuterio, 2008).

Corporate Governance

One of the panel’s key duties is to observe the establishment's undertakings and to warrant that it gets led in concurrence with the request of the association and the needs of the stockholders. As the CEO is the organization post liable for powering those maneuvers, having a merged role achieves self-monitoring, by the day's end opening the path for abuse of the post (Aguilera, 2005). A board driven by a self-sufficient administrator will most likely recognize and personality zones of the association that is skimming from its request and setting up remedial measures to get it back on track. In Hong Kong, commercial governance plays a critical duty in ensuring efficient running of firms as well as overseeing all activities in the firm. The companies are obligated to have a head who is the CEO and chief of the management team. However, it is critical that the CEO gets separated from the chairman of the BODs of the firm to avoid conflict of interest (Bryane & Goo, 2015). Nevertheless, most businesses in Hong Kong are family owned and this means that in most cases, the CEO doubles as the chairman of the board.

Audit Committee Independence

In 2002, the Sarbanes-Oxley Act, enacted as a reaction to various prominent business setbacks, brought on board stricter guidelines for business oversight, comprising a prerequisite that the review panel includes solely exterior board memberships. This infers that no individual from company's top executives can sit on the audit committee. In any case, because the review panel is a sub-gathering of the governing body and gives feedback to the head, having the CEO as the chair restricts the efficacy of the panel (Investopedia, 2003). This is particularly valid for the whistleblower section. Sarbanes-Oxley necessitates that the review panel sets up a system where representatives, as well as associated people, can give their feedback concerning extortion and any misuse of funds specifically to the board of trustees without backlash. At the point when the panel is driven by the administration, workers might be less inclined to report such exercises, and the review panel might be less inclined to follow up on similar cases.

The Bottom Line

The connection amidst an enterprise’s administration and BOD remains a significant subject for both stockholders and supervisors. The forthcoming fiascos in the commercial sector related to this absence of seclusion of roles might intensify the discussion and might result in very sterner statutes.

A non-executive director (NED or NXD) or exterior principal is an associate of the panel of directors of an organization or business who is not among the managerial crew and acts independently of the executive. NEDs are not staffs of the firm or allied with the enterprise in whatever manner and are distinguished from inside executives, who are associates of the board who also serve or hitherto served as executive bosses of the firm (most often as corporate officers). Nevertheless, they do possess similar permissible tasks and prospective obligations as their supervisory equals (Bryane & Goo, 2015). A non-executive director normally does not get involved in the everyday control of the firm, but is engaged in strategy drafting and forecasting roles. Also, the responsibilities of NEDs comprise the monitoring of the executive directors and acting in the interest of the shareholders of the firm (Investopedia, n.d; De Andres and Eleuterio, 2008).

Non-executive directors are executives whose role in the company only involves consultative capacity. Characteristically, they join in panel conventions every month to give the value of their counsel and help the panels anxious of subtle concerns like the remuneration of the managerial bosses and other high-ranking bosses. NEDs are ordinarily waged for their facilities but do not form part of the staff.

Non-executive directors, as an element of their administration duties, are committed to embodying unequivocal key components. If, for instance, a previous CEO of a solid, open innovation firm accept the part of the role of a non-executive director with a new technology firm, he will be anticipated to hold vital roles in the new company. To start with, he is relied upon to keep the official executives and the whole board liable. Non-official executives do this by supporting with and administering an organization's strategy, presentation and risk analysis. The NED, in this example, does as so by offering official executives with understanding into outer issues that may impact the organization. He likewise independently assesses the business' execution, ensuring that the company's stockholders are on top of their game. Furthermore, he engrains himself in the bookkeeping records of the business to confirm financial responsibility and to set up fundamental controls.


Furthermore, all non-official chiefs are required to commit a generous measure of their opportunity to the regulating part in their organizations. They are foreseen to uncover other considerable time commitments to the load up and to notify the leading group of any varieties to their calendars. In the case over, the previous CEO may fill in as a non-official chief for two innovation firms. If so, he should completely submit his time commitments to both loads up.

At last, non-official chiefs are committed to offering an incentive through outside contacts that can be helpful to the company's administration in basic leadership. In the case over, the all-around associated previous tech CEO would in all probability have warm associations with investment firms that can help the startup.

Data and Methodology

This review explores the effect of the structure of the top managerial staff on the enterprise functionality of Hong Kong organizations. With the inconvenience experienced in acquiring information through review strategies in various organizations, the review resorts to the utilization of deductive positivism way to tackle the subject. This includes depending on the previous data from which hypotheses are progressed. The discoveries looked to see if the detailed theories are valid or false. Keeping in mind the end goal to accomplish this, the review will consider relapse as an apparatus for examination in which positivist comprehension will be sought after through the methodological procedures chosen.

Forbes is an American business magazine printed twice a week. It features new articles on finance, investing, industry, and promotion subjects. It additionally gives an account of associated themes, for example, science, innovation, law, interchanges, and legislative issues. The company is headquartered in Jersey City, New Jersey. Its major challenges in the countrywide business periodical class are Bloomberg Business Weekly and Fortune. The magazine is notable for its listing, including its ranking categories like the richest Americans (the Forbes 400) and ranks of biosphere's top companies (the Forbes Global 2000). The Forbes Global 2000 is a yearly positioning of the main 2,000 open organizations on the planet. The enlisting is based on a combination of four metrics: profit, trades, possessions and market value.

Information from Forbes reports extracted by Schaefer and Murphy (2016) uncovers the top Global 2000 driving firms on the planet, from which an aggregate of 49 Hong Kong-based organizations will be chosen. These ventures will be taken as the sample for the study; their yearly reports will be audited and investigation conducted. Yearly reports of 2016 will be found on the web.


Regression analyses will be done to find out the correlations between ROA, board size, the proportion of NEDs and duality of chairman and CEO.

In statistics modelling, regression analysis is a geometric methodology for approximating the relationships amidst variables. It includes various strategies for demonstrating and assessing innumerable factors, when the accentuation is on the relationship in the midst of a dependent variable and at least one autonomous variable. All the more especially, regression analysis helps a person to comprehend how the real estimation of the dependent variable shifts when either of the autonomous factors is activated, and the others are kept constant. In a few cases, regression analysis surveys the contingent suspicion of the reliant variable given the independent factors – that is, the run of the valuation of the dependent variable when the self-sufficient variables are unchanged. For the most part, the emphasis is on a quintile, or other area stricture of the restrictive dispersal of the dependent factor provided the self-ruling variable. In these circumstances, the objective of appraisal is on the utility of the self-sufficient variable known as the regression function. In relapse investigation, it is of significance to epitomize the variety of the reliant variable round the regression function which can be portrayed by a probability dispersal. A connected however unmistakable strategy is Necessary Condition Analysis (NCA), which approximates the most extreme estimation of the reliant variable for an expected estimation of the autonomous variable to discover the estimation of the independent variable that is required though not adequate for a specific part of the dependent variable.

Regression analysis is commonly applied for expectation and appraising, where its usage has a momentous concealment with the area of machine erudition. Relapse analysis is, also, used to appreciate which amidst the self-governing factors are related to the reliant factor, and to explore the sorts of association existing among them. In bound conditions, relapse investigation can be used to deduce causal associations between the self-ruling and independent variables. In any case, this can provoke figments or false associations, so alert must be taken to guarantee the relationship does not derive causation.

Various strategies for performing regression analysis examination have been brought up. Recognizable procedures, for example, linear regression and ordinary least squares are parametric, in that the relapse capacity is portrayed similarly as a set number of darkening constraints that are assessed from the statistics. Nonparametric relapse implies strategies that permit the relapse capacity to lie in a predefined set of limits, which might be an unending framework.

The undertaking of regression analysis techniques practically speaking is pegged on the kind of the datum making technique, and the manner of recognition with the regression tactic under application. Given that the candid form of the data-generating process is in the meantime indefinite, regression analysis frequently relies to an extent on formulating guesses about this practice. These suppositions are among the probable tests of a satisfactory aggregate of data is reachable. Relapse representations for forecasting are often treasured unlike when the presumptions are ill-treated, in spite of the fact that they might fail to accomplish expected duties. Notwithstanding, in several applications, mostly with minimal effects or studies of connection in light of observational data, regression skills can lead to deluding outcomes.

In simple terms, regression might suggest predominantly to the approximation of persistent retort variables, rather than the distinct retort variables applied as a portion of depiction. The illustration of a steady yield capricious may prove effective more principally suggested as metric regression to separate it from the associated issues.

Results

After conducting the data collection process, using the firm ROA as the y-intercept, a regression analysis has been done.

Summary Output



























Regression Statistics











Multiple R

0.241222











R Square

0.058188











Adjusted @ Square

-0.00603











Standard Error

0.152789











Observations

48















ANOVA













　

df

SS

MS

F

Significance F



Regression

3

0.063461

0.021154

0.906155

0.445806424



Residual

44

1.027152

0.023344







Total

47

1.090613

　

　

　

















　

Coefficients

Standard Error

t Stat

P-values

Lower 95%

Upper 95%

Intercept

-0.08697

0.116503

-0.74653

0.459316

-0.32176981

0.147823

Board Size

-0.00158

0.00621

-0.25497

0.799933

-0.014097707

0.010931

NED %

0.204204

0.138846

1.47072

0.148483

-0.075622099

0.484029

Duality

0.038329

0.046942

0.816516

0.418604

-0.056277044

0.132936



Referring to the coefficients, it displays that there exists an undesirable relation,-0.00158, amid the panel size and the ROA. While the relation is relatively low. However, the p-value, 0.800 is much bigger than the collective alpha level of 0.05, which designates that it is not statistically important. Meaning that the predicted ROA may be mostly unlikely to follow the pattern.

For the relation between ROA and the percentage of non-executive director, there is a positive relation of 0.204; the p-value is 0.148 which is higher than 0.05.


The coefficients between ROA and duality of chairman and CEO is only positively 0.038 and having a p-value of 0.419 which is suggesting that there are no significant relations between them.


Graphs showing the correlation between ROA, duality and board size and ROA, duality, and percentage of the non-executive director were generated. A sample has been considered not to show in the graph as they appear of that sample changes the ratio of the graphs by having a -97% ROA while the other samples have ROA between -2% to 16%. Including that sample may hinder observing the trend of other samples, also, it is believed that the sample is a unique case.

The overlooked example organization works as a venture holding organization, which participates in the assembling of hardware and end-to-end fabricating lines for the large scale manufacturing of thin film silicon sun-powered modules. It works through assembling and "build and sell" framework. The Manufacturing portion takes part in the assembling hardware's and turnkey creation lines for the fabrication of nebulous silicon-based thin film sun-oriented photovoltaic modules. The “Build and Sell” fragment takes part in the Building sun-based ranches or housetop control stations and offering of the power stations once associated with the power matrix. The company currently has reorganization, and this might seriously affect its performance.



It is expected to have a positive relationship between them because a bigger board might comprise more shareholders from different aspects and offer the board a full view of the firm business. This may help to come up with decisions that benefit the firm. Also, a larger board may lower the risk of black box operation that may affect the firm benefits.

However, from the graph above, it is shown that there is a negative correlation between ROA and the board size. The regression analyses also support the negative relationship. A possible reason may be that the larger board size may decline its efficacy, which may turn as a deterrent the firm benefits. A larger board size may also lead to a higher expenditure on Director’s Remediation which may lower the firm’s profit.



It is expected that a higher percentage of the non-executive director should lead to a better firm performance as a better monitor should be done to improve it. And from the regression analyses above has proved that. However, form the graph above, it shows that the increasing percentage of NED is slightly lowering the ROA. The possible explanation may be that the high percentage of a non-executive director may represent the board is not familiar enough with the firm business and its daily operation as most of the members are not involved in it. This may lead the board making decisions that are not maximizing the firm benefits.

From the two graphs above, the correlation between ROA and duality of CEO and Board Chairman are not significant. Only the performance of the company with separate chairman and CEO may have a wider range of expectation. The reason for this phenomenon may due to the specific board formation structure of Hong Kong companies. Family owned business are quite common in Hong Kong, and most Asia countries, family members may act in different posts in the company. They may corporate to maximize their family goods, instead of firm benefits.

Conclusions

The research suggested a negative relation between ROA and Board Size, which means that a larger board may not lead to a better performance. However, as regarding the requirement of the HK Stock Exchange, listed company has a minimum requirement of board size of 5. The research focuses on the listed company in Honk Kong, therefore, does not include a company with board size below 5. The trend of board size below 5 has not been studied.


The negative relation between ROA and NED%, although the regression shows a positive relation. After ignoring the special case, the relation becomes negative. The function of NED should be reconsidered according to the result. However, in Hong Kong's case, the non-executive director may also help to protect the rights of public shareholder, which are usually the minority shareholder. They may help to balance the benefits between the majority and the minority shareholder.


From the research, it shows that there is no relation between ROA and duality. As family owned business are very regular in Hong Kong. A family owned company is a business association in which policymaking is swayed by numerous cohorts of a family linked by marriage or blood. They are firmly related to the enterprise by governance or proprietorship. Family-run firms are not thought to be privately-run companies since they do not have the multi-generational measurement and family impact that make one of kind elements and connections of privately-owned companies. Consequently, whether there is duality or not may fail to have that considerable effect on the firm performance.

Recommendations and Limitations

Because of the limited ways of collecting data, this study was not able to retrieve first-hand data and thus relied on secondary data.

A bigger sample size permits the investigator to intensify the significance level of the outcomes because the confidence of the outcomes will probably escalate with a bigger sample size. This is to be anticipated since the bigger the sample size, the more precisely it is projected to show the compartment of the whole group.

Referring to the limited human resources, this study is only able to focus on a single year and 48 samples. Which a small sample size may lead to less accurate results, and may have a higher probability to conduct an inaccurate result. For further study, a larger sample size may be considered regarding the duration of years and location of companies.


The particular business nature of Hong Kong having lots of family-owned business may also affect the result of research. Another city out of Asia may be chosen as a comparison, or if possible, a worldwide sample might be selected for consideration in order to conduct a more accurate result.





References

Agrawal, A. & Knoeber, C.R. (1996). Firm performance and mechanisms to control agency problems between managers and shareholders. Journal of Financial and Quantitative Analysis, 31(03), 377-397.

Ag Decision Maker (n.d.). The role of the board of directors. Available online: http://www.extension.iastate.edu/agdm/wholefarm/pdf/c5-71.pdf [Accessed 16/6/2017].

Aguilera, R.V. & Cuervo‐Cazurra, A. (2009). Codes of Good Governance. Corporate Governance: An International Review, 17(3), 376-387.

Aguilera, R.V. (2005). Corporate governance and director accountability: an institutional comparative perspective. British Journal of Management, 16(1), S39-S53.

Baxter, S., Sanderson, K., Venn, A.J., Blizzard, C.L & Palmer, A.J. (2016). The relationship between return on investment and quality of study methodology in workplace health promotion programs. American Journal of Health Promotion, 28(6), 347-363...