Adoption of Western Board Practices in East Asian Companies: Impact on Performance and Value

1. Are East Asian companies benefiting from Western board practices?John Nowland Discussed by Joseph P.H. Fan Centre of Economics & Finance Chinese University of Hong Kong

2. What the paper does? • Examining whether East Asian companies adopt more western board of director practices after the financial crisis • What kinds of companies have made more significant changes to their board governance? • Testing whether the adoption of more western board practice lead to improvement of operating performance and firm value in Asian countries?

3. Main Findings • Companies from Hong Kong, Malaysia and Singapore, except Taiwan, have actively improved their board practices • Family-owned companies were less likely to improve their board quality • Growing, non-family-owned firms with smaller board and less concentrated ownership were more likely to improve their board governance • Limited evidence was found to support that adoption of western board practice are associated with improvement of performance and firm value.

4. Overall • A good topic • Excited to find out how Asian companies adapt their governance mechanism to new institutional environments after the crisis. • Whether the adoption of western board governance in the emerging economies lead to better operating performance and firm value • Time-serial data different from most prior cross-sectional studies • My comments focus on • Board functions in Asia • Endogeneity • Research design

5. What does a board of directors do in Asia? • Potential board functions • Monitoring • Consulting • Reputation bonding • Networking (political, social, business) • We know that Asian boards probability don’t do much textbook style monitoring, … • Therefore important to collect more data to proxy for the remaining three potential functions

6. Endogeneity of Boards • Not surprised by the lack of relation between board and firm value • The board regression model should include a set of “non-traditional” variables that fundamentally shape board function, such as network, bonding, etc. • Inspired by the reported strong relation between board and ownership • Family firms and firms with highly concentrated ownership are less likely adopting western board practices • Likely related to their modes of competition – relationship based • Worth to dig deeper into it

7. More on Endogeneity Issues • Reverse causality • Table 7 – better governance lead to higher Tobin’s Q or lower Tobin’s Q drive companies to have better governance? • Table 8 – better governance lead to higher ROA or lower ROA drive companies to have better governance? • Table 9 – better governance lead to higher sales growth or vice versa? • Spurious correlations • Table 6 – do board size affect change of other board practices? Are they jointly determined by controlling owners? • Multi-collinearlity • In your models, some highly correlated variables are present, such as, firm size and board size. You can provide some more basic statistics to show that you addressed the multi-collinearlity issues. • Quite a few results in the paper are difficult to interpret, possibly due to model mis-specification and endogeneity issues

8. Research Design • Asian Crisis is not a useful motivation of your paper • The selected economies were not among the hard hit • Institutional factors (such as the degree of market liberalization) were not considered in empirical analysis, because of lack of variations • Neither is Asian CG reform a useful motivation • No direct evidence that changes in governance codes change corporate governance practices • Can we explore firm level variations? • Are governance changes associated with changes in • Ownership (types and concentration)? • Competing strategies (e.g., from relationship to market based, domestic based versus export oriented)?

9. Others • Are the ownership variables ultimate ownership? • What does separate chairman and CEO tell us? We know chairman always call the shot, even with separate CEO • Should you also de-mean the dependent variable in board regressions? • Do you need country dummies given country averages are deducted for all variables? • Why include board size in the board regressions? • Should the independent variables in the governance change regressions be also change (instead of static) variables? • Why is it necessary to include lagged CG variables in the CG change regressions, and lagged performance measures in the performance change regressions?

10. Overall • Good effort: time-series approach is a good way to go • Rampant endogeneity problem • Focus on one key factor that shapes corporate governance