Independent directors, ownership concentration and firm performance in listed companies

Abstract

Purpose The purpose of this paper is to investigate the impact of independent directors on firm performance in Vietnam and identify how different types of ownership structure and the presence of controlling shareholders influence the relationship. Design/methodology/approach For a sample of 217 non-financial Vietnam-listed companies during the period from 2010 to 2014, this study uses the ordinary least squares regressions to estimate the relationship between independent directors and firm performance. Two econometric techniques – the fixed effects estimation and the difference in difference estimation – are used to control for endogeneity. The results are also robust to the lag variable of independent directors. Findings The results reveal that independent directors have an overall negative effect on firm operating performance. This finding may be because of information asymmetry, expertise disadvantage and the dominance of ownership concentration that prevent independent directors from fulfilling their monitoring function in governance. The negative relationship between independent directors and firm performance is stronger in firms where the State is a controlling shareholder. Research limitations/implications Findings suggest that changes relating to independent directors, as a response to the new corporate governance code in 2012, do not have a positive effect on the relationship between corporate governance and firm performance. Further reform is required to improve internal control mechanisms and corporate governance systems in Vietnam. Originality/value This is the first study to provide a robust evidence on the relationship between independent directors and firm performance in Vietnam as well as to explore the impact of the type of controlling shareholders on the relationship.

A review of accounting research in Australasia

“…For instance, Nguyen et al . () investigated the influence independent directors have on firm performance and the mitigating effect of ownership structure and controlling shareholders on this relationship. Studies have examined the relation between governance mechanisms and managerial practice; for instance, Rao and Tilt () focused on the influence of board diversity on corporate social responsibility reporting.…”

Perceptions of independent directors about their roles of and challenges on corporate boards

“…Research in transition economies on the impact of controlling shareholders on independent directors is also mixed. In China, Liu et al (2015) find a positive influence of controlling shareholders on the relationship between independent directors and firm performance while Nguyen et al (2017) report an opposite impact of controlling shareholders on independent directors in Vietnam. The next question that will be of interest to academia and practitioners is how controlling shareholders influence independent directors on boards.…”

“…The ownership concentration along with the dominance of the state in firm ownership structure and the low level of government efficiency is a unique feature of Vietnam as compared to other transition economies such as Russia and China. For example, Nguyen et al (2017) find that most of listed companies have highly concentrated ownership. They also find that the highly concentrated ownership in listed companies in Vietnam negatively influences the relationship between independent directors and firm performance and the participation of the state as a controlling 1 In this study, we define private shareholders as individuals and institutions that are not related to the state.…”

Does Corporate Social Responsibility Shape the Relationship between Corporate Governance and Financial Performance?

“…In a more recent paper, Liu et al (2015); Black et al (2015) reported a positive correlation between board independence and improved business performance. While Nguyen et al (2017) found that the percentage of independent directors on the board was significantly and negatively related to firm performance measured by ROA. Empirical research by Widhianningrum & Amah (2012) also shows that partially independent commissioners variables have a negative effect on the company's financial performance.…”