RELATIONSHIP BETWEEN SOCIAL CAPITAL OF BOARD OF DIRECTORS AND FINANCIAL RESULTS OF RUSSIAN MULTINATIONAL COMPANIES
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INTRODUCTION 7
1.1. Re search background 7
1.2. Research question 8
1.3. Research goal and objectives 8
1.4. Expected findings 8
1.5. Organization of the research 9
2. THEORETICAL BACKGROUND OF BOARD OF DIRECTORS’ SOCIAL CAPITAL .. 10
2.1. Social capital definition and theory 10
2.1.1. Concept of social capital 10
2.1.2. Definition of social capital 12
2.1.3. Importance of social capital for MNEs development 15
2.2. Social capital of board of directors 16
2.2.1. Strategic role of board of directors in the company’s performance 16
2.2.2. Social capital of board of directors: definition and components 19
2.2.3. Measurement approaches to social capital of the board of directors 23
2.3. Research gap 29
2.4. Chapter 2 summary 30
3. EMPIRICAL RESEARCH 31
3.1. Hypotheses formulation 31
3.2. Methodology 35
3.3. Data collection and sample selection 35
3.3.1. Russian MNEs’ specifics for data collection 35
3.3.2. Sample selection 37
3.4. Measurement of variables 39
3.5. Descriptive statistics 43
3.6. Data analysis and results 50
3.7. Chapter 3 summary 52
4. DISCUSSION AND CONCLUSIONS 54
4.1. Discussion 54
4.2. Theoretical contribution 57
4.3. Managerial implication 57
4.4. Limitations and direction for further research 58
REFERENCES 61
APPENDIX
1.1. Re search background 7
1.2. Research question 8
1.3. Research goal and objectives 8
1.4. Expected findings 8
1.5. Organization of the research 9
2. THEORETICAL BACKGROUND OF BOARD OF DIRECTORS’ SOCIAL CAPITAL .. 10
2.1. Social capital definition and theory 10
2.1.1. Concept of social capital 10
2.1.2. Definition of social capital 12
2.1.3. Importance of social capital for MNEs development 15
2.2. Social capital of board of directors 16
2.2.1. Strategic role of board of directors in the company’s performance 16
2.2.2. Social capital of board of directors: definition and components 19
2.2.3. Measurement approaches to social capital of the board of directors 23
2.3. Research gap 29
2.4. Chapter 2 summary 30
3. EMPIRICAL RESEARCH 31
3.1. Hypotheses formulation 31
3.2. Methodology 35
3.3. Data collection and sample selection 35
3.3.1. Russian MNEs’ specifics for data collection 35
3.3.2. Sample selection 37
3.4. Measurement of variables 39
3.5. Descriptive statistics 43
3.6. Data analysis and results 50
3.7. Chapter 3 summary 52
4. DISCUSSION AND CONCLUSIONS 54
4.1. Discussion 54
4.2. Theoretical contribution 57
4.3. Managerial implication 57
4.4. Limitations and direction for further research 58
REFERENCES 61
APPENDIX
Creation of knowledge based management and investment into intellectual capital has recently become one of the main objectives of companies around the world; especially multinational corporations that require global management of its international affiliates profit from strong intellectual capital as it leads to a competitive advantage.
In the company it is board members, owners and executive directors who are responsible for making key decisions in the companies. Thus, board members are responsible for achievement of firm’s financial, strategic and other goals. Hence, intellectual capital of board of directors is crucial for the company, as it is largely interconnected with the decisions the board makes. The influence of the intellectual capital of the board of directors is a topic of research in terms of the financial performance of the firm.
The topic relevance is explained by the recently increased interest in the corporate governance in general, and board of directors in particular. Companies seek improvement in the board, as it defines the strategy of the company. Increased competition within the country leads Russian companies to expansion, hence, they decide to develop as multinational enterprises. The board makes a decision to do that, hence, some particular traits of the board members might influence the performance of a multinational company.
Finally, many studies currently focus on the social capital of the board of directors and some researchers claimed that the amount of studies with social capital in it has increased in the last decade (Martin-de-Castro et al., 2011). Although these studies focused on samples of companies from both developed countries (Hillman, A., 2005) and developing countries (Kim Y., 2005), as well as both external and internal social capital of the board of directors, there is no prior research on the social capital of board of directors conducted on the sample of Russian capitals. Moreover, several studies (Goerzen and Beamish, 2005) claimed that social capital is highly important for multinational companies, as it increases their chances of success.
The effect of alliance networks on individual firm performance has become a critical question to both managers and scholars (Goerzen, 2005). Therefore, this research contributes to the broad research of social capital of board of directors, supporting it with the evidence from Russian multinational companies.
In the company it is board members, owners and executive directors who are responsible for making key decisions in the companies. Thus, board members are responsible for achievement of firm’s financial, strategic and other goals. Hence, intellectual capital of board of directors is crucial for the company, as it is largely interconnected with the decisions the board makes. The influence of the intellectual capital of the board of directors is a topic of research in terms of the financial performance of the firm.
The topic relevance is explained by the recently increased interest in the corporate governance in general, and board of directors in particular. Companies seek improvement in the board, as it defines the strategy of the company. Increased competition within the country leads Russian companies to expansion, hence, they decide to develop as multinational enterprises. The board makes a decision to do that, hence, some particular traits of the board members might influence the performance of a multinational company.
Finally, many studies currently focus on the social capital of the board of directors and some researchers claimed that the amount of studies with social capital in it has increased in the last decade (Martin-de-Castro et al., 2011). Although these studies focused on samples of companies from both developed countries (Hillman, A., 2005) and developing countries (Kim Y., 2005), as well as both external and internal social capital of the board of directors, there is no prior research on the social capital of board of directors conducted on the sample of Russian capitals. Moreover, several studies (Goerzen and Beamish, 2005) claimed that social capital is highly important for multinational companies, as it increases their chances of success.
The effect of alliance networks on individual firm performance has become a critical question to both managers and scholars (Goerzen, 2005). Therefore, this research contributes to the broad research of social capital of board of directors, supporting it with the evidence from Russian multinational companies.
Goal of this study was to investigate a possibility of an existing relationship between social capital of board of directors and financial performance of Russian multinational companies. The relationship was tested with both external and internal social capital of board of directors and both accounting-based and market-based performance measures were used in the analysis as indicators of firm financial performance. The following research question was raised in the research: is there a relationship between social capital of board of directors and financial performance of Russian MNEs?
Based on the previous researches in the field of social capital of the board of directors, that used similar methods to the ones chosen in this research, it was predicted that social capital of board of directors affects financial performance of the company positively. Nevertheless, the macroeconomic factors are currently affecting Russian MNEs, thus, the conclusions based on the international companies’ samples may not be confirmed on the sample of the Russian companies. It was expected that the quantitative research would define the key factors of the social capital that impact the firm’s financial performance.
Since there are two main types of social capital of board of directors - external and internal - the hypotheses were formulated as sub-questions to the main research question. A clear distinction between relationship between internal social capital and firm financial results and external social capital and firm financial results was made. Moreover, there was a distinction between market based and accounting based valuation of firm financial results.
Hypothesis 1a: there is a positive relationship between board co-working experience and firm ROA.
Hypothesis 1b: there is a positive relationship between board co-working experience and firm market capitalization.
These two hypotheses can be discussed together, since no significant relationship between board co-working experience and either ROA or market capitalization was found. Although Barroso- Castro et al. (2015) found a significant positive relationship between co-working experience of board members and firm’s ROS, another researcher who did an extended analysis of board structure and its relationship with firm performance did not manage to find a significant relationship between board meetings or co-working experience, as indicators of internal social capital, and firm financial performance. There could be two main reasons for such results: firstly, it is possible that a research on 103 Spanish companies (Barroso-Castro et al., 2015) was significant due to the selected dependent variable, ROS. ROS is a more short-term indicator, which is also highly dependent on the industry. It is possible that board co-working experience might influence the short-term monitoring better, however, it does not add to the long-term strategic decision-making. Secondly, a more likely explanation of no significant relationship is based on the scarcity of data on the board of directors. It was possible to measure the tenure overlap from the appointment on the board until the focal year, however, this analysis did not include co-working experience outside the tenure selected by the focal year or even outside particular board. Personal relationships are highly difficult to capture, therefore, primary data is required to measure the relationship between internal social capital of the board of directors and firm financial performance.
H2a: There is a positive relationship between working experience in the governmental organizations and company’s ROA.
This hypothesis turned out to be the most unexpectedly confronted one. Based on the regression analysis there is a significant negative relationship between board members’ experience in governmental organizations and firm’s ROA. This can be explained by a different type of resource that ties with government provide for the company. In case of external networks to other firms we talk about the resource dependency - networks available for board members help attract resources for the firm. In case of networks with government, no direct resources can be attracted to the company. It is reputation of board members who have prior work experience in the government that can offer benefits for the company, and it was proven that reputation is highly important for directors (Ferris et al., 2003). However, Melkumov and Khoreva (2015) found a negative relationship between resource-provision tasks and ties with the government. Thus, it can be argued that governmental employees who start to work on the board do not possess enough market or industry specific knowledge, which has no direct effect on the market capitalization, but it does on the internal accounting based measures of financial performance.
All in all, it is not possible to accept this hypothesis.
H2b: There is a positive relationship between working experience in the governmental organizations and company’s market capitalization.
No significant relationship was found between prior working experience in government and company’s market capitalization. It was expected to see a positive relationship due to the fact that researchers found a positive relationship between ex-politicians on the board with market¬based performance, especially in heavily regulated industries (Hillman et al., 1999; Hillman, 2005).
The absence of a significant relationship can be explained by several factors. Firstly, Russian governmental structure is fairly hierarchical and complicated, which leads to many levels of power. Some of the titles of board members can indicate governmental experience, however, in fact the person had no real access to the powerful politicians. Therefore, for a certainty a more thorough research must be conducted, including the length of the governmental employment and possible strength of connections the person possessed after leaving governmental position.
It is interesting to notice, that some researchers found that firms are more willing to invite a director with past experience in government, especially if they had longer term of service (Lester et al., 2008). This, however, would not have any effect on the market perception of the company and might influence other financial performance indicators negatively.
H3a: There is a positive relationship between board members’ external directorship ties and company’s ROA.
H3b: There is a positive relationship between board members’ external directorship ties and company’s market capitalization.
Multiple directorship or board interlocks were proved to have a significant relationship with firm’s market capitalization and ROA. This confirms a theory proposed by Ferris et al. (2003) that directors with seats on multiple boards increase their reputation, which can influence firm’s market capitalization due to a better perception from investors. Board members who seat on large boards in large firms are more likely to be asked to take a tenure in more boards, they are more likely to develop more interlocks. Moreover, there is a reversed relationship: if the firm is performing well, the director is more likely to be asked to take more directorships, which is followed by the reputation of a director on a board of financially profitable company.
Another similar research was conducted by Bohren and Strom (2010) and resulted in findings that supported a positive relationship between directors’ strong links to multiple boards and firm’s Tobin’s Q and ROA.
There has been research conducted that proved that board interlocks are negatively related to the market capitalization (Devos et al., 2009), since shareholders do not trust such directors. It is indeed a controversial issue, which is supported by the agency theory. Moreover, other researchers found negative relationship between board interlocks and firm market value based on a sample of Indian firms (Jackling and Shireenjit, 2009). It might not have been the case in our sample for two reasons: either board members in Russia have fewer ties in general; or the data on board interlocks is not open for public, which can also include the fact that some directors might be present on boards of smaller companies, which were not included in this research.
Based on the previous researches in the field of social capital of the board of directors, that used similar methods to the ones chosen in this research, it was predicted that social capital of board of directors affects financial performance of the company positively. Nevertheless, the macroeconomic factors are currently affecting Russian MNEs, thus, the conclusions based on the international companies’ samples may not be confirmed on the sample of the Russian companies. It was expected that the quantitative research would define the key factors of the social capital that impact the firm’s financial performance.
Since there are two main types of social capital of board of directors - external and internal - the hypotheses were formulated as sub-questions to the main research question. A clear distinction between relationship between internal social capital and firm financial results and external social capital and firm financial results was made. Moreover, there was a distinction between market based and accounting based valuation of firm financial results.
Hypothesis 1a: there is a positive relationship between board co-working experience and firm ROA.
Hypothesis 1b: there is a positive relationship between board co-working experience and firm market capitalization.
These two hypotheses can be discussed together, since no significant relationship between board co-working experience and either ROA or market capitalization was found. Although Barroso- Castro et al. (2015) found a significant positive relationship between co-working experience of board members and firm’s ROS, another researcher who did an extended analysis of board structure and its relationship with firm performance did not manage to find a significant relationship between board meetings or co-working experience, as indicators of internal social capital, and firm financial performance. There could be two main reasons for such results: firstly, it is possible that a research on 103 Spanish companies (Barroso-Castro et al., 2015) was significant due to the selected dependent variable, ROS. ROS is a more short-term indicator, which is also highly dependent on the industry. It is possible that board co-working experience might influence the short-term monitoring better, however, it does not add to the long-term strategic decision-making. Secondly, a more likely explanation of no significant relationship is based on the scarcity of data on the board of directors. It was possible to measure the tenure overlap from the appointment on the board until the focal year, however, this analysis did not include co-working experience outside the tenure selected by the focal year or even outside particular board. Personal relationships are highly difficult to capture, therefore, primary data is required to measure the relationship between internal social capital of the board of directors and firm financial performance.
H2a: There is a positive relationship between working experience in the governmental organizations and company’s ROA.
This hypothesis turned out to be the most unexpectedly confronted one. Based on the regression analysis there is a significant negative relationship between board members’ experience in governmental organizations and firm’s ROA. This can be explained by a different type of resource that ties with government provide for the company. In case of external networks to other firms we talk about the resource dependency - networks available for board members help attract resources for the firm. In case of networks with government, no direct resources can be attracted to the company. It is reputation of board members who have prior work experience in the government that can offer benefits for the company, and it was proven that reputation is highly important for directors (Ferris et al., 2003). However, Melkumov and Khoreva (2015) found a negative relationship between resource-provision tasks and ties with the government. Thus, it can be argued that governmental employees who start to work on the board do not possess enough market or industry specific knowledge, which has no direct effect on the market capitalization, but it does on the internal accounting based measures of financial performance.
All in all, it is not possible to accept this hypothesis.
H2b: There is a positive relationship between working experience in the governmental organizations and company’s market capitalization.
No significant relationship was found between prior working experience in government and company’s market capitalization. It was expected to see a positive relationship due to the fact that researchers found a positive relationship between ex-politicians on the board with market¬based performance, especially in heavily regulated industries (Hillman et al., 1999; Hillman, 2005).
The absence of a significant relationship can be explained by several factors. Firstly, Russian governmental structure is fairly hierarchical and complicated, which leads to many levels of power. Some of the titles of board members can indicate governmental experience, however, in fact the person had no real access to the powerful politicians. Therefore, for a certainty a more thorough research must be conducted, including the length of the governmental employment and possible strength of connections the person possessed after leaving governmental position.
It is interesting to notice, that some researchers found that firms are more willing to invite a director with past experience in government, especially if they had longer term of service (Lester et al., 2008). This, however, would not have any effect on the market perception of the company and might influence other financial performance indicators negatively.
H3a: There is a positive relationship between board members’ external directorship ties and company’s ROA.
H3b: There is a positive relationship between board members’ external directorship ties and company’s market capitalization.
Multiple directorship or board interlocks were proved to have a significant relationship with firm’s market capitalization and ROA. This confirms a theory proposed by Ferris et al. (2003) that directors with seats on multiple boards increase their reputation, which can influence firm’s market capitalization due to a better perception from investors. Board members who seat on large boards in large firms are more likely to be asked to take a tenure in more boards, they are more likely to develop more interlocks. Moreover, there is a reversed relationship: if the firm is performing well, the director is more likely to be asked to take more directorships, which is followed by the reputation of a director on a board of financially profitable company.
Another similar research was conducted by Bohren and Strom (2010) and resulted in findings that supported a positive relationship between directors’ strong links to multiple boards and firm’s Tobin’s Q and ROA.
There has been research conducted that proved that board interlocks are negatively related to the market capitalization (Devos et al., 2009), since shareholders do not trust such directors. It is indeed a controversial issue, which is supported by the agency theory. Moreover, other researchers found negative relationship between board interlocks and firm market value based on a sample of Indian firms (Jackling and Shireenjit, 2009). It might not have been the case in our sample for two reasons: either board members in Russia have fewer ties in general; or the data on board interlocks is not open for public, which can also include the fact that some directors might be present on boards of smaller companies, which were not included in this research.