The Link Between Board Composition and Corporate Diversification in Australian Corporations

Abstract

Manuscript Type: EmpiricalResearch Question/Issue: This study investigates the association between the composition of the board of directors and corporate diversification, to explore the role of the board in corporate strategic choice. Research Findings/Results: Based on a sample of 101 Australian publicly listed firms in 2005, this study finds that there is no link between corporate decisions on product and/or geographic diversification and two aspects of board compositionboard independence and institutional representation. However, there is a positive link between total diversification and a third aspect of board composition -the proportion of directors who have ties to boards of corporations in other industries. Theoretical Implications: The results provide support for the managerial hegemony and the resource dependency theories. Corporate strategic decisions regarding diversification are more likely to be made by management than boards of directors, and to be encouraged by interlocking directors with extra-industry ties. Practical Implications: Contrary to the requirement or recommendation in many jurisdictions that boards be more independent, these results indicate that shareholders' interests, represented by lower levels of diversification, are not promoted under such circumstances. Interlocking directors appear to effectively link the corporation to the external business environment and to encourage diversification. Existing recommendations and regulations to align management with shareholders' interests through independent boards should be revised. Board composition should also consider directors' knowledge, relevant expertise, availability, and length of tenure.

Board Competency Explanations for Differentiation in a Harmonisation Environment

“…The more diversified in terms of professional background, the larger the propensity to provide high level of corporate governance disclosure (odds ratio of 2.38). The importance of diversity in board composition as a dominant influence in making strategic decisions is consistent with the findings of Chen et al (2009) on corporate diversification decisions. We also notice that this model is explained by board size, while the only diversity measure which is significantly correlated by board size is the employee measure (untabulated).…”

“…We also notice that this model is explained by board size, while the only diversity measure which is significantly correlated by board size is the employee measure (untabulated). Our finding of a positive relationship between board size and information level is not consistent with findings in prior studies (e.g., Ahmed et al, 2006;Mak and Kusnadi, 2005), although it can be interpreted as consistent with predictions of resource dependency theory, i.e., the availability of necessary expertise for strategic decision making (Chen et al, 2009;Hessels and Terjesen, 2010).…”

“…Such differentiation behaviour is predicted by theory, i.e., we consider "resource-based explanations" for the companies' ability to sustain competitive advantage by differentiating behaviour and "agency theory/asymmetric information explanations" for the willingness to differentiate (Birkinshaw et al, 2001;Hessels and Terjesen, 2010;Lado et al, 1992;Lieberman and Montgomery, 1998). Related studies have focused on explanations for other corporate decisions such as whether and how to export (Hessels and Terjesen, 2010), product and/or geographic diversification (Chen et al, 2009) and choice of human resource management strategy (Buck et al, 2003). Two of the differentiation decisions in our study are related to reporting and two are related to governance structures.…”

“…We contribute to existing knowledge about optimal board compositions by considering possible explanations for the ability and willingness to make certain critical corporate decisions. Related studies have focused on explanations for other corporate decisions such as whether and how to export (Hessels and Terjesen, 2010), product and/or geographic diversification (Chen, Dyball and Wright, 2009) and choice of human resource management strategy (Buck, Filatotchev, Demina and Wright, 2003). We undertake an explorative study of the corporate governance codes' general recommendations for board member competencies in order to identify potential explanations for differentiation decisions.…”

The Effect of Supervisory Board Size on Corporate-Level Strategies-Evidence from Polish Public Companies

“…Yoshikawa and Phan [7] have examined the effect of ownership and capital structure on board composition and diversification strategies at the example of Japanese market, while David et al [8] continued with similar effort, although this time their focus was on ownership structures of Japanese corporations. Chen et al [9] have examined links between board composition and diversification strategies in Australia.…”