Corporate Governance and Accountability

Question one (1):

Evidence has shown that there is a strong relationship between corporate board composition

and company performance. Johnson et al. (2000) has shown that board governance goes a

long way to affect a company performance. Company boards monitor usually the

performance and also offer advice to the management in their quest to protect investors

(Harris and Raviv, 2008). In the first question, the company that seems to be mostly affected

by board composition seems to be the food and producers. In this industry, as the non

executive members increases the returns on shareholders’ funds seems to rise. Also as the

number of women in the board rises, the returns grow as well. From the data availed, it can

be seen that Associated British Foods company has return on shareholders funds is less than

that of Tate and Lyle company. The later has board composition that includes seventy seven

percent non executives while the former has seventy five. This shows that there are more non

executives in the board than executives. As the percentage increases, return on shareholders’

funds increases. Unilever which has a higher percentage of non executives beats the other

two on the grounds of return on shareholders’ funds as well as capital employed.

Question two (2):

Part a

The second question involves the influence of board independence and board diversity on the

company performance. In their research paper, Hardjo and Alireza (2012) found that average

industry data shows a trend where independent corporate directors are associated negatively

with measures of performance. They argue that the only instance where independent directors

make a positive contribution to a firm’s performance is when they are in minority. The reason

why they impact performance negatively is that the actions of the both executive and non

executive members are not entirely explained by agency theory. Agency theory argues that

managers act to maximise their personal in total disregard of the investors (shareholders). In

smaller markets, the directors usually have strong interconnections. In this kind of a market

or industry, the small size allows for board independence. The interconnections and

independence of markets allows stewardship to hold (Muth and Donaldson, 1998). According

to the stewardship theory, managers together with non independent board members are better

directors of a firm. They are also more loyal than dependent board members. The firms in

question show that greater influence from non executives. The greater the influence the better

the results posted.

There is evidence that board directors are less independent today than they were before.

Gilson and Kraakman (1991), postulates that the corporate boards require directors who show

managerial independence and accountability to shareholders. The company’s institutional

investors have to place personal representatives in the board. This is however hard to

undertake. Greater board independence may not work well in the modern world. There needs

to be more measures to ensure that the independence works. From the firms mentioned in

question one, as the number of women reduces, the returns tend to grow. This compounds the

fact that more women there are in the corporate board, the better the company’s returns.

Part b

There are various research projects that have been undertaken in the field of corporate board

governance diversity. Karen and Elizabeth (2001) add that groups with functional diversity

are able to solve problems with greater efficiency than those with like minded individuals.

There is also diversity of board members based on diversity. It brings people with a wide

range of perspectives. It also enhances networking innovativeness, creativity and access to

resources. All these have shown that diversity enhances the performance of a company. This

stems from the efficacy of decision making, conflict management and many others. There

seems to be one exception to this observation.

Gender diversity does not seem to fit the diversity performance relationship. According to

Karen and Elizabeth (2001) the greater the number of women in the top tiers of management,

the greater the company performance. The argument is that women tend to be keen with the

performance of a firm. They keen on monitoring the company’s performance. They are more

available for the firm than their male counterparts. Erhardt (1999) has shown that diversity

and performance are positively related. They arrived at this conclusion through a study of

several firms’ performance records and how their board is diversified.

Question three (3):

The final question pertains to how this analysis can be done different to produce better

results. In this case, much preference can be placed on the SWOT analysis. This involves

gauging the strengths, weaknesses, opportunities and threats of having greater board

independence and diversity or less. The questions to ask would be what are the strengths that

arise from having a more independent board as opposed to a dependent one? There would

also be need to identify the weaknesses of the same. The analyst can also ask themselves

whether there are opportunities arising from this arrangement. If there are any, what are the

threats involved. If the overall effect is positive, the company should alter their existing

policy if it is not in line with the findings. The analysis should also be done for the diversity

aspect (Harris and Raviv, 2008).

As a conclusion, the above analysis does not offer a conclusive opinion of what really

happens inside a firm. Information asymmetry holds a lot of valuable information from the

external investor. The firm should consider having an internal analyst to conduct the analysis

because they are most likely going to have all the relevant information (Muth and Donaldson,

1998). This can help the errors that may arise due to inadequate information to an external

analyst or investor wishing to understand the relationship.

References

Erhardt, P. (1999). Difference: A Field Study in Diversity, Conflict, and Performance in

Workgroups, Administrative Science Quarterly. Vol. 44.

Harris, M., and Raviv, A. (2008). A theory of board control and size. Review of Financial

Studies. Vol. 21, pp. 1797-1832

Johnson, S., Boone, P., Breach, A., and Friedman, E. (2000). Corporate governance in the

Asian financial crisis. Journal of Financial Economics. Vol. 58, pp. 141–186

Karen, A. and Elizabeth, A. (2001). The Dynamic Nature of Conflict: A Longitudinal Study

of Intragroup Conflict and Group Performance, Academy of Management Journals. Vol. 44.

Koerniadi, H. and Tourani-Rad, A. (2012). Does Board Independence Matter? Evidence from

New Zealand, Australasian Accounting Business and Finance Journal, Vol. 6. No. 2.

Muth, M and Donaldson, L. (1998). Stewardship theory and board structure: a contingency

approach, Corporate Governance. Vol. 6, pp. 5-28.