Board of directors, performance and firm value in Brazilian listed state-owned enterprises.
| Autor | Coletta, Carolina |
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Introduction
Corporate governance mechanisms are responsible for reducing agency conflicts and shareholders' expropriation (Shleifer and Vishny; 1994). Several studies in emerging markets have demonstrated that firm value and performance are associated with firm-level corporate governance. However, there is a lack of studies on which specific aspects of corporate governance (such as board attributes) are associated with firm value (Black et al.; 2020). Board attributes, such as independence, can lead to higher firm value and performance by reducing agency conflicts (Bhat et al.; 2018). Therefore, it is important to understand the relation between corporate governance mechanisms and performance to develop proper corporate and public policies (Kao et al.; 2019).
In the context of state-owned enterprises (SOEs), boards must develop, monitor and communicate internal controls, ethics codes and other measures to prevent fraud and corruption. The State must allow boards to exercise their responsibilities and respect their independence (OECD; 2015). In addition to agency theory's principal-agent relation, the principal-principal relation must be considered for SOEs (Chen et al.; 2019). In principal-principal relations, conflicts emerge from the interaction between SOEs and governments. Governments can extract financial benefits from these firms, expropriating other investors' capital. Conflicts surrounding the principal-principal relation are more likely when the government is the majority shareholder because it can use its voting power and control to obtain political benefits (Lazzarini and Musacchio; 2018).
SOEs, undoubtedly, operate in a context prone to political interference. Thus, decisions can be made to benefit political interests, rather than the business of the firm (Shleifer and Vishny; 1994). Governments can appoint board members according to their interests, with little incentive to properly monitor managers in order to reduce agency conflicts (Musacchio et al.; 2015).
In addition to their key monitoring role, the board's leadership in SOEs is critical to develop the firm's goals and strategies to achieve high corporate performance (Simpson; 2014). Considering that board members' decisions can impact the firm's stability, the quality of the board's contributions and actions depends on how such a board is formed (Mathew et al.; 2016). Bhat et al. (2018) argue that agency conflicts are minimized when board members are independent, which leads to better corporate performance. It is not unusual for board members in SOEs to be nominated by members of government, which results in inexperienced, influenced directors who negatively impact firm performance by generating inefficiencies for such firms (Thompson et al.; 2019).
Corporate governance literature presents few empirical studies regarding board of director's composition in SOEs (Menozzi et al.; 2012) and how the relationship between business and political decisions within the board occurs in such firms (Apriliyanti and Randoy; 2019). The limited number of empirical studies on corporate governance of SOEs in emerging markets is also noteworthy (Thompson et al.; 2019). Moreover, due to the importance and central role played by SOEs in developing countries, it is imperative to understand the factors that drive the performance of these firms (Mbo and Adjasi; 2017).
Considering the concerns presented in this section, the following research question is proposed by this paper: Does the adoption of good corporate governance practices by the board of directors result in higher performance and firm value for Brazilian listed SOEs, despite the conflicts arising from the principal-principal relation? Thus, this paper investigates the relationship between the structure of the board of directors and firm value and performance of Brazilian listed SOEs. In addition, the evolution of corporate governance practices adopted by boards of such firms, from 2002 to 2017, is presented.
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Literature review
Boards of directors are considered the most important firm-level corporate governance factor (Khongmalai and Distanont; 2017). In the agency theory perspective, boards play an important role in preventing decisions that are not aligned with the residual claimants' interests (Fama and Jensen; 1983). Boards with improved structure and a higher proportion of independent members can exercise better monitoring, and thereby reduce agency conflicts (Bhat et al.; 2018). Black et al. (2020) explain that an improvement in board structure, aligned with improved disclosure, can have an impact on a firm's market value since expected cash flows to minority shareholders are increased.
In the context of SOEs, an important interaction arises in addition to agency theory's traditional principal-agent relation: the principal-principal conflict perspective (Chen et al.; 2019). In hybrid SOEs, conflicts in the relationship between governments and public firms can negatively impact these firms' management and consequently, their performance. This occurs because the government attempts to extract political benefits from such firms, expropriating private investors' return on capital (Lazzarini and Musacchio; 2018). Governments can dominate the boards' behavior by directly appointing directors that suit their interests. In this way, boards can be used as political tools, since they are unlikely to defy poor decisions made by political entities (Thompson et al.; 2019). Another conflict from the principal-principal perspective is that board members can be manipulated to support political interests that do not reflect the firms' business interests, therefore, impacting their performance (Apriliyanti and Randoy; 2019).
Board leadership in SOEs is critical to ensure that the firms' objectives and strategies are developed to achieve a high firm performance (Simpson; 2014). Improving board effectiveness is extremely important for performance, regardless of business size or location (Shawtari et al.; 2017). Several empirical studies in emerging markets have demonstrated that firm value is associated with firm-level corporate governance, usually measured by country-specific indices. Different aspects of board structure have been used to explain the relation with firm value and firm performance, based on agency theory. However, little is known about which specific aspect of corporate governance drives this association (Black et al.; 2020).
Shawtari et al. (2017) find evidence that board size is negatively related to firm performance, measured by earnings before interest and tax (EBIT), for a sample of Malaysian SOEs. For these authors, larger boards can harm firm performance, as communication and coordination are impaired. Their results also evidence a negative relation between the duality of positions--CEO and chairman of the board being the same person--and firm performance, due to agency conflicts.
Considering board independence and firm performance, Liu et al. (2015) investigate this relation on the performance of Chinese listed firms, measured by return on equity (ROE) and return on assets (ROA). They find a positive relation, especially for firms controlled by the government. Similarly, Kao et al. (2019) conclude that board independence has a positive effect on performance indicators such as ROA and ROE, for a sample of Taiwanese listed firms.
Khongmalai and Distanont (2017) analyze the relation between corporate governance practices and performance of SOEs in Thailand and argue that the board, on its own, is not capable of leading SOEs to positive performance. In order to be effective, boards must force firms to develop effective management systems and controls, such as internal audits, internal controls, risk management, strategic management of human resources and information technology management. Therefore, corporate governance must also be incorporated at the operational level to be effectively implemented in SOEs, according to the authors.
In the agency theory perspective, a large body of research has investigated the relation of different measures of corporate governance and firm value, mostly using Tobin's q as a proxy (Ararat et al.; 2017). In this vein, Kao et al. (2019) conclude that board independence has a positive effect on firm value of Taiwanese firms, proxied by Tobin's q. According to a study by Fauver et al. (2017), considering data on board reforms in 41 countries, reforms regarding board independence lead to an increase in firm value, also measured by Tobin's q.
In addition to members' independence, Bhat et al. (2018) investigate board attributes such as size and frequency of meetings and their impact on Tobin's q for a sample of Pakistani firms. Regarding SOEs, the authors find evidence that all the attributes considered are positively related to Tobin's q, although only board independence presents statistical significance. On the other hand, for private firms, board independence is the only attribute positively related to Tobin's q. These findings are explained considering that independent board members reduce agency conflicts and protect shareholders' interests, which leads to higher performance.
Following such evidence, given the political manipulation context of SOEs, Apriliyanti and Randoy (2019) point out the importance of independent directors, since their decision making is more appropriate to SOEs' business goals, considering national interests as well as shareholders' interests. These findings are consistent with the argument proposed by Musacchio et al. (2015) regarding the low incentive that board members appointed by the government have to monitor managers and to take business-oriented decisions.
Monitoring is less effective when board members declared as independents have hidden underlying political connections, leading to destruction of firm value (Shi et al.; 2018). Thompson et al. (2019) find that the recruitment and selection of board members in SOEs...
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