Internationalisation and Corporate Governance:

Australian Evidence
J.C.Y. How1, I.C. Khoo2, H.G. Ng3, P. Verhoeven1*
1

School of Economics and Finance, Curtin University of Technology, Bentley, WA 6102, Australia
The Singapore Exchange Limited, 20 Cecil Street, #26-01/08, The Exchange, Singapore 049705
3
Department of Accounting and Finance, University of Western Australia, Crawley, WA 6009, Australia
2

Abstract

This study investigates the interdependencies between a firms degree of

internationalisation and the corporate governance structure adopted. It builds
on the concept of bi-directional causality between corporate governance and
the degree of internationalisation. That is, we propose that while a firms
degree of internationalisation may affect the governance mechanisms in place,
robust

governance

structures

may

aid

the

firms

move

toward

internationalisation. This proposition is, however, not supported based on a

sample of 61 Australian firms. Tests of unidirectional causality show that the
degree of internationalisation has a significant effect on the proportion of
independent non-executive directors with international experience.

Keywords: Corporate governance; Internationalisation; Bi-directional causality

Notes on authors: Janice How and Peter Verhoeven are respectively Senior Lecturer and Lecturer at Curtin University of
Technology; I-Ching Khoo is an Associate, Participant Supervision Department at The Singapore Exchange Limited; and
Hock Guan Ng is Senior Lecturer at University of Western Australia.

_________________________________________________________________________
* Corresponding author. Email: VerhoevP@cbs.curtin.edu.au

INTRODUCTION
The signs are becoming clear that companies cannot afford to keep corporate governance on the
back burner for long. Global investors are demanding higher standards of corporate governance
which will put pressure on companies to adopt best practices in order to compete viably for capital.
(The Business Times 1999)

The definition of corporate governance has evolved and broadened over the years to
encompass the whole process of running a company and serving the best interests of the
shareholders in conformity with the laws and ethic of the land (Lear 1997).

While

corporations faced criticisms concerning their governance practices in the 1970s, it is

recognised that some robust governance systems were established by the 1990s (Lear 1997).
The recent Asian currency crisis, however, has thrust corporate governance into the limelight
regarding its adequacy in ensuring the proper functioning of firms (Das 2001).

The issue of corporate governance is further compounded by the recent pervasive trend
towards internationalisation of business operations. Developments such as the integration of
the European Community, rapid business and commercial growth in the Pacific Rim, and
watershed changes in the political economies in Eastern Europe, communist China, and the
former Soviet Union have opened up tremendous business opportunities for companies
world-wide. This is an era in which foreign ownership of domestic commercial assets is
ubiquitous (Schermerhorn, Hunt & Osborn 1994).1

Given such a global phenomenon, it is foreseeable that the way of conducting business would
have become unequivocally more complex.

Internationalisation, for one, imposes

considerably greater information processing demands on companies.

Furthermore, the

impact of internationalisation is concentrated in the upper echelons of corporations (Sanders

& Carpenter 1998). This is expected to augment the agency problem, as the top management

team would have greater specialised knowledge regarding foreign operations as well as
higher levels of discretion. As such, corporate governance arrangements are necessitated to
ensure alignment with both the level of information processing requirements and the expected
increase in monitoring difficulty.

This study addresses the dearth of research on the relation between internationalisation and
corporate governance, which has been largely ignored despite its theoretical and practical
monuments.

Thus far, only one study (Sanders & Carpenter 1998) has examined the

relationship between corporate governance and internationalisation. This study therefore

aims to contribute to the literature by examining the relationship between corporate
governance and internationalisation using a sample of Australian firms. Considering the
small domestic market in Australia, we would expect Australian firms to have a higher
degree of internationalisation than their US counterparts.

We test the conjecture that decisions over corporate governance structure and
internationalisation are made jointly using a simultaneous-equation model. The results from
applying a two-stage least squares regression to this model, however, indicate the absence of
a contemporaneous interaction between the corporate governance structure and the degree of
internationalisation. We revert to a unidirectional model to estimate the impact of the degree
of internationalisation on the various corporate governance mechanisms. The results indicate
that internationalisation has a minimal impact on corporate governance structures in
Australia, with only one governance mechanism found to be significantly associated with the
degree of internationalisation.

Specifically, we find that internationally experienced

independent non-executive directors are needed to enhance the monitoring ability of the
board in an international context.

This paper is organised as follows. Section 2 reviews the relevant literature, Section 3
develops our hypotheses, and Section 4 describes our data and research design. Section 5
discusses our results and we conclude in Section 6.

LITERATURE REVIEW

Internationalisation poses complex and risky managerial issues that companies have to
confront with whatever knowledge and experience they have. Kemp and Shimomura (1999)
allude that internationalisation comprises the following: (a) the enlargement of the set of
trading countries, (b) the enlargement of the set of traded commodities, and (c) the
international sharing of technology. Sullivan (1994) defines the degree of internationalisation
of a firm as the extent to which the firm depends on foreign markets for customers and
factors of production, and the geographical dispersion of this dependence.

Johanson and Vahlne (1977) develop the Uppsala model to explain the internationalisation
process. This model is based on the presumption that knowledge2 is the key to successful
international expansion. The lack of and difficulty in obtaining the necessary knowledge
hinder the progress of firms towards higher degrees of internationalisation. Johnson and
Vahle (1977) hypothesise that commitments to foreign markets will only strengthen after
firms have accumulated sufficient knowledge about those markets.

This assertion is

consistent with the findings of Daniels and Radebaugh (1998) where Swedish firms often
commence their international operations in small steps rather than large foreign investments
at any single point in time.

Exporting appears to be the most utilised form of initial

internationalisation process, consistent with the risk minimisation behaviour of firms in the
pattern of internationalisation. The export strategy merely entails firms to send goods to their
trading counterparts in the foreign country, where resource commitment and risk exposure
are relatively lower. As companies gain more confidence in their international operations
4

through the learning curve or foreign exposure, there is a greater propensity to extend their
commitment and resources by means of establishing production facilities and subsidiaries in
the foreign countries.

Such involvement would require considerably greater resource

commitment and risk taking.

It is also important that firms have a sound corporate governance structure in place to cope
with the ever-increasing levels of complexity in going international. Corporate governance
encompasses the mechanism by which stakeholders of a corporation exercise control over
corporate insiders and management such that their interests are protected (John & Senbet
1998). The fundamental catalyst for these mechanisms is the separation of ownership and
control, and the precipitation of the principal-agency problem.

The focus of much of the existing corporate governance literature has been on the crosssectional relationships between firm performance and the control mechanisms in place to
ensure that managers act in the best interests of their shareholders. Notwithstanding the
importance of such relationships in addressing the agency problem, it is also of interest how a
companys governance structure comes into being. However, to date, only a few studies have
considered the evolution of corporate governance structures over time and the causes of the
evolution.

To our knowledge, only Sanders and Carpenter (1998) have considered how complexities
arising from a firm going international are accommodated by its governance structure.
Adopting Sullivans definition of internationalisation, they argue that the linkage between
corporate governance structure and the degree of internationalisation is important for two
reasons.

First, internationalisation places considerably higher information-processing

demands on the top management team due to the globally competitive environment in which
the firm operates. As such, corporate governance arrangements come into play to ensure
5

alignment

with

the

level

of

information-processing

requirements.

Second,

internationalisation increases the specialised knowledge required of the top management team
regarding operations in the foreign market. The level of managerial discretion is also higher,
given the environmental and strategic complexities associated with firms that operate
internationally.

Such information asymmetries give rise to the typical agency problem

(Gomez-Mejia & Balkin 1992; Rajagopalan & Finkelstein 1992).

It is expected that

corporate governance arrangements pertaining to compensation design would be prescribed

to resolve the agency problem.

Sanders and Carpenter (1998) find that, as expected, the degree of internationalisation does
impact on the governance structure adopted. Their results show that higher and longer-term
CEO pay, larger top management teams, and the separation of chairperson and CEO
positions, essentially aid firms in coping with the increasing levels of complexities.

HYPOTHESES

While applying Sanders and Carpenters approach to the Australian context, we consider the
theoretical possibility that having the right corporate governance structure in place could aid
the process of internationalisation. It is conceivable that firms make decisions on the degree
of internationalisation and their corporate governance structures contemporaneously, taking
into account the interactive effects the two have on each other. The hypotheses we test are
developed as follows.

The CEO, being the top person charged with the strategic leadership of the company, is
responsible for leading the strategic planning and co-ordination of the firms international
activities.

Finkelstein and Hambrick (1989) argue that CEOs have more complex and

demanding tasks than others and corporate diversity, which is similar in concept to

internationalisation, is especially relevant.

Undoubtedly, such responsibility demands

extensive knowledge and high information processing capability, which invariably increases
as the degree of internationalisation intensifies. As Henderson and Fredrickson (1996) note,
the ability to process large amounts of disparate and conflicting information resulting from
internationalisation, is both rare and crucial.

As the company expands its operations

internationally, it faces multiple competition in the respective foreign markets. In addition,

the company has to satisfy the diverse commercial, social, and political factors such as
varying consumer tastes, cultures, and government policies and regulation in order to be
successful or even survive in its international endeavours. Hence, we propose that the level
of CEO compensation will be proportional to the degree of internationalisation to reward and
motivate him for the ability and effort. This relationship finds support in Finkelstein and
Hambrick (1989). Our first hypothesis is thus:

H1:

The higher the degree of internationalisation of a firm, the higher the level of its
CEOs cash compensation.

For the same reason, we also argue that long-term forms of compensation such as
shareholdings are expected to increase with the degree of internationalisation. Such forms of
compensation are deemed to be more effective in aligning the interests of management with
those of the shareholders (Jensen & Murphy 1990) as they reward the CEO for maximising
shareholder wealth. It is virtually axiomatic that international business is more intricate and
complex compared to domestic business operations given that companies under the former
condition have to confront simultaneous and conflicting business environments. As such the
CEO will require greater discretion and autonomy in dealing with contingencies in such a
dynamic task environment. Under the agency theory, the costs of monitoring such complex
activities and CEO actions will increase significantly. By allocating shares as part of the

remuneration package of the CEO, shareholders link the fortune of the company to that of the
CEO and thus bridge the potential gap in interest between themselves and the CEO.
Therefore it is advocated that the greater complexity and risks of increased
internationalisation will enhance the probability of shareholders utilising shares as a
motivating and interest-aligning device. Hence, it is hypothesised that:

H2:

The higher the degree of internationalisation of a firm, the higher the level of its
CEOs shareholding.

As the degree of internationalisation increases, so does the need to ensure the adequacy of
information processing capacity. An individuals information capacity is constrained by the
limitations of the human mind itself and it is impossible for a single individual to process and
explore all the information and alternatives. As such, the CEO has to be supported by the top
management team to cope with the influx of information arising from internationalisation.

Muth and Donaldson (1998) find that an increase in the number of executive directors
enhances the firms performance.

Executives essentially contribute to the depth of

experience, expertise, and knowledge that the CEO could draw from to facilitate better
informed decision making and board functioning.

This is supported by Haleblian and

Finkelstein (1993), who find that firms with large teams functioning in complex
environments achieve better performance compared to firms with small teams.

However, small teams may arguably function more effectively due to their compact size.
Team members typically spend time familiarising themselves, setting priorities and
boundaries, and building a common working vocabulary. With larger teams, more time and
effort will have to be expended working on such issues and therefore the potential likelihood
of conflicts is often enhanced.

Nonetheless, it can be counter-argued that the superior

information processing capacity of larger management teams may outweigh such costs.
Maintaining a large top management team facilitates the specialisation of team members in a
specific area of operation, which promotes better decision making and problem solving.
Sanders and Carpenter (1998) also argue that large top management teams are better
equipped to handle and solve large and complex problems. Therefore, we hypothesise:

H3:

The higher the degree of internationalisation of a firm, the larger its top management
team.

Research on corporate governance suggests that the size of a board may be associated with
the complexity of the firms environment (Sanders & Carpenter 1998). As a firm becomes
more internationalised, it is expected that more members will be required to acquire expertise
in special realms of internationalisation and/or to enhance the information processing
capability of the board. Hill (1999) postulates that the dominant role of board members,
particularly independent outside directors, has evolved from that of monitors of managerial
integrity to monitors of efficiency and maximisers of shareholder wealth. Therefore, it can be
deduced that as internationalisation deepens, a larger board with a diverse range of expertise
and experience is needed to ensure efficient functioning of the firm.

Further insight into the necessity of large boards can be shed through the perspective of the
agency theory. Larger boards are preferred to smaller ones as the latter are deemed to be
easier targets for CEO domination (Muth & Donaldson 1998). As authority is delegated to a
larger board, the specialised competence of the board members increases and the CEOs
ability to manipulate each member is reduced (Scott 1992).

Board members are thus

individually less powerful, but collectively more powerful, relative to the CEO.

Furthermore, Zald (1969) finds in his study that the relationship between board size and firm
size is positive and significant. In addition, research has found that the probability of a
company being an exporter increases with the size of the firm (Bonaccorsi 1992). Given that
the export strategy is the most commonly used form of internationalisation, the results from
Bonaccorsis (1992) study about firm size can be inferred to be a good predictor of
internationalisation.

The link between internationalisation and board size can thus be

manifested. We propose:

H4:

The higher the degree of internationalisation of a firm, the larger the size of its board.

Fama and Jensen (1983) posit that assurance about satisfying shareholders interests can be
met through the appointment of independent outside board members, as these members have
the propensity to be independent of the management executives of the company. Empirical
evidence shows that the probability of removing CEOs when they perform poorly is higher
when the board is dominated by outside directors (Weisbach 1988; Hoe et al. 2001). As the
internationalisation process develops, the heightened complexity compounded by the
substantial increase in risks associated with such progression would mean that shareholders
should be more inclined to install such independent board members to ensure that
management is undertaking rational and financially viable courses of internationalisation
behaviour.

Furthermore, Bhagat and Black (1997) note the current trend of board

composition is to have fewer inside directors on the board. Hence, this line of argument
forms the basis of the next hypothesis:

H5:

The higher the degree of internationalisation of a firm, the higher the proportion of
independent outsiders on its board.

10

Although it is imperative to have independent outsiders to sit on the board to ensure the
objective monitoring of efficiency and the CEO, it is by itself not sufficient. Independent
outsiders may lack the requisite plethora of knowledge and information on diverse
international operations that will impede their monitoring responsibilities. As Reuber and
Fischer (1997) point out, successes of small and medium size enterprises (SMEs) in their
international endeavours are attributed to the foreign exposure of their personnel. It is also
observed that the international experience of independent outside directors has been included
in the 1998 selection criteria for such director appointments (Cullen Egan Dell 1998). This
was not the case from 1995 to 1997.

This is thus salient evidence that international

experience has ascended in importance in the board member selection process. A major
contribution of this study is the recognition of this factual observation. We propose that as
the degree of internationalisation of a firm increases, the proportion of independent outsiders
with foreign exposure constituting the board will increase to enhance the efficacy of their
responsibility as monitors of efficiency and maximisers of shareholder wealth. Therefore:

H6:

The higher the degree of internationalisation of a firm, the higher the proportion of
independent outsiders with foreign executive exposure on its board.

Thus far, hypotheses H1 to H6 predict the effect of a firms degree of internationalisation on

the respective corporate governance mechanisms. It is possible, however, that the robustness
of the governance structures adopted could assist the firm in attaining a higher degree of
internationalisation. Large top management teams may pave the way for overseas expansion
given that they encompass a wide diversity of skills and experiences. Therefore, firms with
large top management teams would be better equipped to cope with the resulting
complexities than the rest. Similarly, large boards may also encourage the move towards
internationalization since large boards are more likely to comprise members with

11

international competencies than small boards. Finally, to the extent that the internationally
experienced independent non-executive directors contribute as monitors of efficiency and
maximisers of shareholder wealth, it is plausible that the inclusion of a greater proportion of
these members on the board would lead the firm to a greater degree of internationalisation.
Assuming the governance structure to embody the top management team, board size, and
internationally experienced independent members, it is hypothesised that:

H7:

The more robust the governance structure adopted, the higher the degree of
internationalisation of the firm.

RESEARCH METHODS AND DATA

RESEARCH METHODS

Although Sanders and Carpenter (1998) emphasise that a firms corporate governance
structure is dependent on its degree of internationalisation, they recognise that the converse
causal chain could occur as well. That is, robust governance structures adopted by firms
could actually assist firms in becoming more international. For this reason, this study builds
on the concept of a bi-directional causality, and models the interaction between governance
structure and the degree of internationalisation of a firm in a simultaneous-equation
framework. Table 1 summarises the system of equations. Equations (1) to (6) test the effect
of a firms degree of internationalisation on each of the corporate governance mechanisms,
and equation (7) addresses the impact of the governance structure adopted on the degree of
internationalisation of the firm. Table 2 summarises the measurement of the variables used in
our tests.

< Insert Table 1 here >

12

< Insert Table 2 here >

In addition to simultaneously determining the relationship between the corporate governance

mechanisms and the degree of internationalisation, the model captures the interplay between
the governance mechanisms as well. Mangel and Singh (1993) acknowledge the possibility
of a negative relationship between short term (cash) and long term (shares) compensation,
while Sanders and Carpenter (1998) argue that inside share ownership and the proportion of
(internationally experienced) independent outside directors on the board are alternative
mechanisms used to reduce the agency problem.

The dependent variable in Equation (1) is CEO cash compensation (CEOCOMP), measured
as the natural logarithm of the mid-point of the highest executive remuneration band.3 The
independent variable of interest is the firms degree of internationalisation (DOI), which we
proxy by: (i) the ratio of foreign sales to total sales, (ii) the ratio of foreign controlled entities
to total controlled entities, (iii) the ratio of regions outside Australia to the total number of
geographic regions (five), and (iv) the ratio of foreign assets to total assets.4

Equation (1) shows that there are other factors (apart from DOI) that may also influence CEO
cash compensation. CEO stock ownership (CEOSHARES) is one such factor. High levels of
CEO shareholdings are believed to be indicative of the power of the CEO, and consequently
of his ability to command his own compensation. As suggested by Finkelstein and Hambrick
(1988), it is even possible for powerful CEOs to dictate their pay mix. We measure CEO
share ownership as: (i) natural logarithm of the dollar value of shares held by the CEO as at
the companies year-end; and (ii) the proportion of outstanding ordinary shares held by the
CEO.

13

The size of the top management team (TMT) is another factor that may affect CEO
compensation. Large teams reflect more hierarchical levels below the top man, and bring
heavier responsibilities for the CEO who would have to be compensated accordingly. The
top management team size is proxied by the number of executives with income of at least
$100,000.

Firm size (FIRMSIZE) has also been known to have a significant influence on CEO
compensation (Finkelstein & Hambrick 1989). Large firms are more able to award greater
compensation and, as with top management team size, large firms have more hierarchical
levels as well. We measure firm size by the natural logarithm of market capitalisation (share
price multiplied by the number of shares outstanding) as at the financial year-end.5

CEOs whose firms achieve outstanding performances could also possibly be paid more than
CEOs of firms with mediocre results. This warrants the inclusion of firm performance
(PERFORM) in our test, which we proxy by the firms return on assets in 1998. This ratio is
measured as earnings before interest and tax divided by total assets.

Mangel and Singh (1993) find that CEO tenure (CEOTENURE) is significantly related to
cash compensation. They suggest that longer tenure allows the CEO to gain power through
the appointment of board members who are likely to be more aligned with his interests.
OReilly et al. (1990) derive the same conclusion. CEO tenure (CEOTENURE) is measured
as the length of time (in calendar days) that the CEO has held his current position.

Finkelstein and Hambrick (1989) argue that higher compensation should accrue to CEOs with
longer experience in the general management field because they would have developed
expertise of greater relevance to the top management team task than, say, executives with
primarily production or marketing experience (pp. 124). By the same token, we argue that

14

CEOs with experience in the international arena could draw them an attractive remuneration
package as well. In Equation (1), CEOEXP is a dummy that takes the value of 1 if the CEO
previously occupied executive or chairperson positions on international firms and 0
otherwise.

Equation (2) allows CEO shareholdings (CEOSHARES) to be affected by CEO cash

compensation (CEOCOMP) in the same way that the former affects the latter. It is possible
that some boards substitute long-term compensation for cash compensation, thus resulting in
an inverse relationship between shareholdings and cash compensation (Mangel & Singh
1994). Further, CEO share ownership may be viewed as a means to align the interest of the
CEO with that of the shareholders.

Vigilant board monitoring reduces the need to grant the CEO shares (Sanders & Carpenter,
1998) so board structure is included. Two measures are proposed for board structure. The
first is the proportion of board members denoted as non-executive directors (NEDs) in the
annual report. However, while directors are separated into executive and non-executive
directors, Clifford and Evans (1997) recognise that the latter may not all be independent.
Approximately a third of them are noted to have an association with the company, which
could potentially challenge their monitoring ability.6 The second measure is the proportion of
board members who are independent non-executive directors (INEDs).

Similarly, internationally experienced independent directors (INEDSFOREIGN), who are

expected to be better monitors in an internationalisation framework, are included as well in
the equation. INEDSFOREIGN denotes independent directors who have occupied executive
or chairperson positions on international firms. Thus, the measure for this variable is the
proportion of independent non-executive directors who occupy or previously occupied
executive or chairperson positions on international firms.

Firm size (FIRMSIZE), firm

15

performance (PERFORM), and CEO tenure (CEOTENURE) are added to the equation for
the same reasons as those for cash compensation.

In equation (3), the size of the top management team (TMT) is a function of the size of the
firm.

A large firm typically signifies greater complexity and diversity in operations,

regardless of any involvement in international activities. Thus, in order to test the association
between top management team size and the degree of internationalisation for a firm, firm size
(FIRMSIZE) has to be controlled for. The industry (INDUSTRY) in which the firm is in
could also have an influence on the top management team. Certain industries, such as
manufacturing industries, are held to be more complex than others and would thus require a
larger team to manage the business. INDUSTRY is a dummy variable that takes the value of
1 if the firm operated in the manufacturing industry and 0 otherwise.

In equation (4), board size (BOARDSIZE) is related to firm size (FIRMSIZE). Denis and
Sarin (1999) note that larger firms have larger boards. BOARDSIZE is the total number of
directors on the board as reported in the directors statutory report or the corporate
governance statement. We include the INDUSTRY dummy since industry complexity can
influence the number of board members needed to oversee the financial performance of the
company.

Board structure (INEDS) and inside share ownership may be viewed as substitutable
governance mechanisms (Sanders & Carpenter 1998). As such, in order to determine the
impact of a firms degree of internationalisation on its board structure, CEO shareholdings
(CEOSHARES) would have to be controlled for in equation (5). Board structure is also
dependent on firm size (FIRMSIZE) as it has been observed that larger companies tend to
have a larger proportion of non-executive directors (Rosenstein & Wyatt 1990; Clifford &
Evans 1997; Denis & Sarin 1999). We control for CEO tenure (CEOTENURE) as it reflects
16

the CEOs power in the company and thus his ability to override the board independence.
We expect longer tenured (and thus more powerful) CEOs to appoint board members who are
demographically similar and more sympathetic to them (Westphal & Zajac 1995). It is also
possible that blockholders (BLOCK) can dictate the proportion of non-executive directors on
the board. Such a perception is reasonable given their stake in the firm. A blockholder is
defined as a shareholder with at least 5 percent of the companys outstanding stock. BLOCK
is measured as the sum of the percentages of shares outstanding that are owned by all
blockholders.

Equations (5) and (6) are similar except that the latter includes the CEO experience dummy
(CEOEXP). As it is, the CEO has more knowledge about the domestic operations than nonexecutive directors on the board. With the firm going international for the first time or
increasing its degree of internationalisation, the information-asymmetry problem is expected
to worsen. Internationally experienced non-executive directors are thus needed to monitor
the CEO in this respect.

In equation (7), the various governance aspects that could facilitate a firms move towards
greater internationalisation are included. Factors such as firm size (FIRMSIZE), firm
performance (PERFORM), firm age (FIRMAGE), and CEO experience (CEOEXP) are
included as control variables. Larger firms are viewed as more able to internationalise given
their larger resource base than smaller firms. Superior financial results achieved could also
encourage the move towards a higher degree of internationalisation. We control for firm age
since older firms are more likely to go international than younger firms due to the
accumulated experiential knowledge of older firms over the years. FIRMAGE is calculated
as the number of calendar years from the year of incorporation to 1998. CEO experience is
another key exogenous variable in this equation. The ability of the firm to engage in

17

corporate complexity or foreign operations is highly dependent on the exposure of the CEO
in such matters.

DATA

Our data are drawn from Connect 4, a networked database containing the annual reports of
most publicly listed Australian companies. Of the potential company reports for the year
1998, only 61 companies have complete and usable data for the analysis. We exclude mining
and finance firms due to their different corporate governance structures. Companies that
reveal signs of foreign dealings in the Chairpersons or Managing Directors Report but only
disclose Australian sales in their accounts are excluded as well.7 Given that the research
question is concerned with how Australian governance structures evolve to cope with
increasing internationalisation, only firms incorporated in Australia are selected.

Most of the corporate governance and financial data were manually extracted from the firms
financial statement. We obtain data on CEO cash compensation and top management team
from the Remuneration of Executives note to the financial statement. Details of the board
such as its composition and size are extracted from the directors statutory report and the
corporate governance statement. The report on directors profiles provides details of the
board structure, CEO tenure, and international exposure of directors. Share price data are
taken from the Primark database.

We classify firms into manufacturing and non-

manufacturing based on the business classification index of Jobsons Year Book of Public
Companies.

Table 3 summarises the sample profiles.

CEOs of our sample firms have an average

(median) annual cash compensation of $853,024 ($504,500). They hold an average (median)
of $6.3 million ($262,770) of their companys shares, which amounts to 4.16% (0.1%) of the

18

total number of shares outstanding. The average (median) number of top executives and
board size of our sample firms is 37 (18) and seven (six) respectively. The average CEO
tenure for our firms is 2,099 days (approximately 5.8 years).

<Insert Table 3>

The average (median) sample firm has on its board a proportion equals to 73.17% of nonexecutive directors, 45.89% (50%) of independent non-executive directors, and 67.85%
(75%) of independent non-executive directors with international experience. Depending on
the measure adopted, Table 3 shows that the extent of sample firms involvement in
international investment ranges from 21.53% to 36.58%. Blockholders hold an average
(median) of 36.68% (35.47%) of the sample firms outstanding shares. The average (median)
market capitalization and age (in 1998) of firms in our sample is $1,139 million ($270
million) and 45 (38) years respectively. Firms performance (PERFORM) is proxied by the
return on assets, which averages 0.08 with a median of 0.09.

RESULTS

Table 4 reports the results from applying two-stage least squares to the system of equations
outlined in Table 1.8 The DOI construct used in this set of results is that of the companys
proportion of foreign controlled entities. It is arguably the most restrictive of the four DOI
constructs and thus would depict a stronger reflection of internationalisation since it involves
greater risks and commitment. Thus, this construct of DOI is expected to precipitate a
stronger relationship between corporate governance and internationalisation, as more robust
governance structures will be required to cope with the greater level of complexity.9 For
other variables with multiple constructs, the specific constructs used in this set of regressions
are: the dollar-value of shares held by the CEO for CEOSHARES; the proportion of board

19

members who are non-executive directors for INEDS; and the natural logarithm of the dollarvalue of total assets for FIRMSIZE.10

< Insert Table 4>

The major conclusion one can draw from Table 4 is that there are no contemporaneous
interactive influences between the degree of internationalisation and corporate governance
structures. For example, all the variables that capture the robustness of firm governance
mechanisms are insignificant at the usual 5% level. This leads to the rejection of Hypothesis
7. The degree of internationalisation (DOI) is also found to have an insignificant effect on
the various governance mechanisms, as indicated by the low values of the t-statistics for DOI
in each of equations (1) to (6).

One interpretation of these results is that Australian companies are able to pursue
international expansion without being constrained by governance issues or that, even with
sound governance structures in place, Australian companies may not necessarily shift towards
internationalisation. Note, however, that this lack of interaction between a firms degree of
internationalisation and the governance structure adopted refers to contemporaneous
interaction. It may well be that there are time lags in the effects of governance structures on
internationalisation, but such effects cannot be captured by the cross-sectional data used in
this study.

The simultaneous-equation model also allows for the possibility of feedback effects between
CEO cash compensation (CEOCOMP) and CEO shareholdings (CEOSHARES), between
CEOSHARES and INEDS, and between CEOSHARES and INEDSFOREIGN. The results
indicate that such contemporaneous interactions between firm governance mechanisms are
absent as well.

20

In light of the two-stage least squares results, we proceed to investigate the possibility of unidirectional influences of either DOI on corporate governance, or corporate governance on
DOI, by re-estimating equations (1) to (7) using Ordinary Least Squares (OLS). Given that
feedbacks between firm governance mechanisms are found to be absent, the equations are
modified to remove them. The equations estimated by OLS are given in Table 5.

< Insert Table 5>

The results from these regressions are reported in Table 6. The estimated coefficient on DOI
in equation (1a) is of the predicted sign but is significant only at the 10% level (t = 1.6359).
Hypothesis 1 posits that CEOs would receive cash compensation that is commensurate with
the firms degree of internationalisation. It is expected that with the additional commitments
and responsibilities of the CEO as internationalisation deepens, the level of CEO
compensation would increase accordingly to reward him for his efforts. The results suggest
that there is weak support for Hypothesis 1.

< Insert Table 6>

In line with the literature, firm size (FIRMSIZE) is a significant determinant of executive
cash compensation, as larger companies require and must pay for executives with the
necessary skills (Murphy 1997). The remaining explanatory variables like top management
team size (TMT), firm performance (PERFORM), CEO tenure (CEOTENURE),
blockholdings (BLOCK), and CEO experience (CEOEXP), are insignificant.

It is interesting to note that CEO compensation is not significantly affected by firm

performance. Although it can be argued that CEO compensation is typically set at the
beginning of the fiscal year where performance cannot yet be predicted, such compensation

21

are often guided by past performance in previous periods (Finkelstein and Hambrick 1988).
This seems to suggest that Australian CEOs compensation packages are not based on any
objective performance benchmarks or guidelines. In light of the criticisms of Australian
CEOs salaries (The Australian Financial Review 1999), this finding highlights the deficiency
of companies policies in the determination and justification of CEO compensation. The
finding also reinforces the public perception that there is little discernible linkage between
the price of chief executives and the performance of their companies (The Australian
Financial Review 1999).

The estimated coefficient for DOI in equation (2a), which models the effect of the degree of
internationalisation on CEO shareholdings (CEOSHARES), is significant at the 5% level (t =
-1.7150). This is the only explanatory variable in the equation that is significant. Board
structure (INEDS), internationally experienced independent non-executive directors
(INEDSFOREIGN), firm performance (PERFORM), CEO tenure (CEOTENURE), and
blockholdings (BLOCK) have positive but insignificant impacts. The negative relationship
between DOI and CEOSHARES, however, is inconsistent with Hypothesis 2, which predicts
a positive relationship between the degree of internationalisation and the level of CEO
shareholdings. The results indicate that a high degree of internationalisation leads to a lower
proportion of CEO shareholdings. A plausible reason for this negative relationship is that
CEOs prefer to reduce the risk of their personal portfolio (Ahmihud & Lev 1981). With the
probability

of

corporate

failure

increased

by

engaging

in

higher

degrees

of

internationalisation, CEOs may try to diversify their holdings away from their own
companies stocks. This is consistent with the argument that insiders are reluctant to hold too
much of their personal wealth in the firm particularly when the firms stock exhibits high
volatility (Holderness et al. 1999; Demsetz & Lehn 1985).

Since internationalisation

inevitably entails more risks, companies are less likely to use long term compensation

22

contracts such as share options for their CEOs and have a lower proportion of the CEOs
remuneration in non-cash forms (Beatty & Zajac 1994).

The results also show that DOI is insignificant in determining the top management team size
(TMT). Thus, the proposition of Hypothesis 3 that larger teams are needed to assist the CEO
to cope with the increased complexities of internationalisation is rejected. The result suggests
that there may be other considerations that would influence top management team size
instead. For example, it is proposed that companies subscribed more to the belief of compact
management team sizes for optimal effectiveness in functioning. INDUSTRY and
FIRMSIZE, however, are significant at the 5% level.

The coefficient for DOI in equation (4a), which models the effect of the degree of
internationalisation on board size (BOARDSIZE), has the predicted sign but is significant
only at the 10% level (t = 1.4047). This provides weak support for Hypothesis 4, which
predicts that larger boards are required to provide the needed skills and knowledge to ensure
the efficient functioning of the firm when it engages in greater levels of internationalisation.
The coefficient for firm size (FIRMSIZE) is significantly positive, as predicted.

The coefficient for DOI in Equation (5a) is statistically insignificant (t = -0.5109). This leads
to the rejection of Hypothesis 5 that a higher degree of internationalisation would lead to a
worsening of the agency problem, and hence require a higher proportion of independent nonexecutive directors to enforce the monitoring functioning of the board. It is interesting to
note that the relationship, while statistically insignificant, is in the opposite direction to that
predicted. This suggests that high degrees of internationalisation lead to smaller proportions
of independent non-executive directors. This is in agreement with Sanders and Carpenter
(1998), who base their conjecture on the information processing perspective. They, however,
find that the number of independent directors is positively correlated with the degree of
23

internationalisation.

A possible explanation for the difference between the findings of

Sanders and Carpenter (1998) and those of this study lies in the difference in management
operations. The majority of US companies that form the sample of Sanders and Carpenters
study have CEOs who chair the board, while such duality is absent in most of the Australian
companies that form the sample in this study.

Whidbee (1997) reports that duality is

positively related to the proportion of outsiders on the board because of the greater need for
independent directors to counter the magnified influence of top executives holding such
positions.

The impact of the firms degree of internationalisation (DOI) on the proportion of

independent non-executive directors with international experience (INEDSFOREIGN) is of
the predicted sign and statistically significant at the 5% level (t = 2.1525). This supports
Hypothesis 6, which is based on the view that internationally experienced independent nonexecutive directors are required as monitors to circumvent the information asymmetry
between independent outsiders and the executive directors when the firm increases its
international exposure. This result essentially supports the two viewpoints on which this
factor is founded.

First, it reflects the importance of having internationally experienced independent nonexecutive directors as monitors in an international context. By definition, independent
outsiders typically lack the detailed knowledge of the operations of the company, and more
often than not, their main source of information is the executive directors whom they are
monitoring. Given that this information asymmetry problem is expected to increase as the
degree of internationalisation of the firm increases, the requirement for the independent nonexecutive directors to be internationally experienced is evidently crucial to circumvent the
information asymmetry between independent outsiders and the executive directors. Second,

24

it confirms Hills (1999) proposition about the evolving role of independent non-executive
directors, from monitors of managerial integrity to monitors of efficiency and maximisers of
shareholder wealth.

The other explanatory variables, namely firm size, CEO tenure, blockholdings, CEO
experience, and industry effects, do not significantly influence the proportion of
internationally experienced outsiders.

The results for equation (7a) indicate that the firms degree of internationalisation is not
dependent on its governance structure. Only CEO experience and the industry in which the
firm operates have significant influences on DOI. The finding that manufacturing firms have
higher degrees of internationalisation is also consonant with empirical data. The survey
carried out by Fortune magazine (1995) unequivocally indicates that the top 50 U.S.
exporters such as Motorola and Hewlett Packard are manufacturers of products.

That firm size has an insignificant impact on the degree of internationalisation is consistent
with Bonaccorsi (1992), who contends that small firms are not necessarily disadvantaged in
their plans to expand overseas. It is suggested that small firms may be able to engage in high
levels of internationalisation if they have a qualified CEO leading them in this dynamic
operation. Reuber and Fischer (1997) attest to this assertion in their study of SMEs. The same
argument is believed to hold as well in the case of young firms.

CONCLUDING REMARKS

This

study

investigates

the

relationship

between

corporate

governance

and

internationalisation from an Australian perspective. Estimation of the simultaneous-equation

model developed to capture contemporaneous interactions between the degree of

25

internationalisation and the corporate governance structures reveals a lack of such

interactions. The results from estimating the model based on unidirectional causality show
that firm governance mechanisms do not affect the degree of internationalisation. The effect
that internationalisation has on the governance structures of Australian firms is also found to
be weak.

The only relationship found to be significant is the effect of the degree of

internationalisation on the proportion of independent non-executive directors with

international experience. This suggests the importance of international experience of the
CEO for companies engaged in international activities.

It must be emphasised that internationalisation is a dynamic process. Although this study has
attempted to model the possibility of bi-directional causality between corporate governance
and internationalisation, it is limited to contemporaneous feedbacks by the cross-sectional
data used.

Extension into the time series domain would be useful in the modeling of

feedback effects and is a consideration for future research.

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30

Table 1
System of Equations to be Estimated Using Two-Stage Least Squares
No.
(1)

Equation
CEOCOMP = 10 + 11 DOI + 12 CEOSHARES + 13 TMT + 14 FIRMSIZE
+ 15 PERFORM + 16 CEOTENURE + 17 CEOEXP + 1

(2)

CEOSHARES = 20 + 21 DOI + 22 CEOCOMP + 23 INEDS + 24 INEDSFOREIGN

+ 25 FIRMSIZE + 26 PERFORM + 27 CEOTENURE + 2

(3)

TMT = 30 + 31 DOI + 32 FIRMSIZE + 34 INDUSTRY + 3

(4)

BOARDSIZE = 40 + 41DOI + 42 FIRMSIZE + 44 INDUSTRY + 4

(5)

INEDS = 50 + 51 DOI + 52 CEOSHARES + 53 FIRMSIZE + 54 CEOTENURE

+ 55 BLOCK + 56 INDUSTRY + 5

(6)

INEDSFOREIGN = 60 + 61 DOI + 62 CEOSHARES + 63 FIRMSIZE + 64 CEOTENURE

+ 65 BLOCK + 66 CEOEXP + 67 INDUSTRY + 6

(7)

DOI = 70 + 71 TMT + 72 BOARDSIZE + 73 INEDSFOREIGN + 74 FIRMSIZE

+ 75 PERFORM + 76 FIRMAGE + 77 CEOEXP + 7

31

Table 2
Notations and Measurements of Variables

Endogenous
Variable

Denoted as

Measured as

CEO cash
compensation

CEOCOMP

The natural logarithm of the mid-point of the highest executive

remuneration band

CEO
shareholdings

CEOSHARES

Top
management
team size

TMT

The count of the total number of executives

Board size

BOARDSIZE

The count of the total number of directors on the board

Independent
non-executive
directors

INEDS

The proportion of board members who are independent non-executive

directors

INEDS with
foreign
experience

INEDSFOREIGN

The proportion of independent non-executive directors with

international experience who occupy executive or chairperson
experience positions on international firms

Degree of
internationalisation

DOI

(1) the ratio of foreign sales to total sales

(2) the ratio of foreign controlled entities to total controlled entities
(3) the ratio of regions outside Australia to the five geographic
regions (New Zealand and the Pacific Islands, Asia, Africa,
Europe, and America)
(4) the ratio of foreign assets to total assets

(1) the dollar value of shares held by the CEO, being the product of
the number of shares held and the share price at year-end
(2) the proportion of outstanding ordinary shares held by the CEO

Firm size

FIRMSIZE

(1) the natural logarithm of total assets

(2) the natural logarithm of market capitalisation

Firm
performance

PERFORM

The firms return on assets in 1998, defined as earnings before interest

and tax divided by total assets

CEO tenure

CEOTENURE

The number of calendar days that the CEO has held his current
position

Blockholdings

BLOCK

The sum of percentages of shares outstanding owned by all

blockholders, where a blockholder is defined as a shareholder with at
least 5 percent of the companys outstanding stock.

CEO experience

CEOEXP

A dummy variable, which takes the value of 1 if the CEO occupies

executive or chairperson positions on international firms and 0
otherwise

Industry

INDUSTRY

A dummy variable, which takes the value of 1 if the firm operates in

the manufacturing industry and 0 otherwise

Firm age

FIRMAGE

The time lapse from the year of incorporation to 1998

32

Table 3
Summary Statistics of the Data

Mean

Median

Standard
Deviation

Skewness

Kurtosis

Minimum

Maximum

853.02

504.50

847.94

2.03

3.94

155.00

3,845.00

6,309.19

262.77

22,587.64

5.31

30.43

150,373.77

4.16

0.10

11.52

3.22

9.81

57.05

37

18

54

3.75

18.00

345.00

0.80

0.26

13.00

CEOTENURE (days)

2,099

1,800

1,904

2.04

5.23

90.00

9,540.00

NEDS (%)

73.17

80.00

14.35

-1.45

2.46

0.20

90.00

INEDS (%)

45.89

50.00

21.43

-0.41

-0.07

83.30

INEDSFOREIGN (%)

67.85

75.00

35.79

-0.94

-0.41

100.00

DOI: Foreign Sales (%)

25.38

20.70

21.40

0.87

0.23

81.75

DOI: Entities Overseas (%)

36.58

40.54

25.74

0.01

-0.84

100.00

DOI: Continents (%)

35.74

40.00

24.80

0.26

-0.83

80.00

DOI: Foreign Assets (%)

21.53

16.69

19.41

0.66

-0.61

67.61

BLOCK

36.68

35.47

20.3811

0.22

-0.04

0.00

97.00

1,139.19

270.44

1,937.20

2.70

8.06

6.73

9,849.02

FIRMAGE

45.36

38.00

35.3412

0.96

0.44

6.00

160.00

PERFORM

0.09

0.09

0.10

-3.78

22.77

-0.51

0.26

Variable
CEOCOMP ($000)
CEOSHARES ($000)
CEOSHARES (%)
TMT
BOARDSIZE

Market Capitalisation
($million)

33

Table 4
Two-Stage Least Squares Results (n=61)

Equation (1)

Equation (2)

Equation (3)

Equation (4)

Equation (5)

Equation (6)

Equation (7)

Endogenous
Variable:

CEOCOMP

CEOSHARES

TMT

BOARDSIZE

INEDS

INEDSFOREIGN

DOI

Constant

11.2496
(11.3376)**

3934
(0.0486)

-69.8753
(-3.2646)**

1.7257
(1.9604)*

0.8669
(3.4688)**

3.9931
(0.0363)

-1.0213
(-0.9420)

-0.1956
(-0.1251)

-7776
(-1.1081)

4.7299
(0.0851)

-1.9461
(-0.8515)

-0.6837
(-1.2705)

-17.3519
(-0.0308)

-4.22E-09
(-0.7554)

4.27E-07
(0.0307)

DOI

-1026
(-0.1390)

CEOCOMP
CEOSHARES
TMT

-7.85E-09
(-0.1735)
0.0054
(0.5944)

-0.0053
(-0.7448)
-0.1038
(-0.4648)

BOARDSIZE
INEDS

5383
(0.2370)

INEDSFOREIGN

1.10E+08
(0.5896)

FIRMSIZE

0.2729
(1.5274)

2326
(0.0080)

PERFORM

1.1026
(0.5579)

1.00E+08
(0.7568)

CEOTENURE

5.83E-05
(0.4575)

3789
(0.8931)

1.9347
(1.2496)
19.9291
(5.5929)**

0.9525
(6.9179)**

-0.2506
(-0.0282)

-5.17E-06
(-0.1875)

-0.0017
(-0.0311)

-0.0027
(-1.1691)

-0.0791
(-0.0314)

0.2227
(0.8436)

5.3801
(0.0308)
-21.9963
(-1.2917)

INDUSTRY

0.3524
(0.5032)

0.0880
(0.6813)

-0.0493
(-0.1748)

8.2385
(0.0310)
0.0017
(0.5176)

FIRMAGE
Adjusted R2

0.1506
(0.5055)
0.5495
(0.4656)

BLOCK
CEOEXP

0.0339
(1.9972)*

0.5029

-2.5539

0.3857

0.3821

-1.1759

-3.8005

-7.1189

*Significant at the 5% level.

**Significant at the 1% level.
Whites (1980) heteroscedasticity-consistent t-statistics are stated in the parentheses.

34

Table 5
Equations to be estimated using Ordinary Least Squares
No.
(1a)

Equation
CEOCOMP = 10 + 11DOI + 12 TMT + 13 FIRMSIZE + 14 PERFORM
+ 15 CEOTENURE + 16 BLOCK + 17 CEOEXP + 1

(2a)

CEOSHARES = 20 + 21 DOI + 22 CEOCOMP + 23 INEDS + 24 INEDSFOREIGN

+ 25 FIRMSIZE + 26 PERFORM + 27 CEOTENURE + 28 BLOCK + 2

(3a)

TMT = 30 + 31 DOI + 32 FIRMSIZE + 34 INDUSTRY + 3

(4a)

BOARDSIZE = 40 + 41 DOI + 42 FIRMSIZE + 44 INDUSTRY + 4

(5a)

INEDS = 50 + 51 DOI + 52 FIRMSIZE + 53 CEOTENURE + 54 BLOCK

+ 55 INDUSTRY + 5

(6a)

INEDSFOREIGN = 60 + 61 DOI + 62 FIRMSIZE + 63 CEOTENURE + 64 BLOCK

+ 65 CEOEXP + 66 INDUSTRY + 6

(7a)

DOI = 70 + 71 FIRMSIZE + 72 PERFORM + 73 CEOTENURE + 74 BLOCK

+ 75 FIRMAGE + 77 CEOEXP + 78 INDUSTRY + 7

35

Table 6
Ordinary Least Squares Results (n=61)
Equation (1a)

Equation (2a)

Equation
(3a)

Equation (4a)

Equation
(5a)

Equation (6a)

Equation (7a)

Endogenous
Variable:

CEOCOMP

CEOSHARES

TMT

BOARDSIZE

INEDS

INEDSFOREIGN

DOI

Constant

10.8319
(28.0593)**

-3879
(-0.9371)

-68.2620
(-4.1222)**

1.3184
(1.8874)*

0.6174
(8.3681)**

0.4400
(2.0778)*

0.0453
(0.3080)

0.3865
(1.6359)

-2796
(-1.7150)*

-7.6514
(-0.4507)

1.1799
(1.4047)

-0.0513
(-0.5109)

0.4971
(2.1525)*

20.1418
(4.3381)**

0.8988
(6.7152)**

0.0288
(3.4376)**

0.0196
(0.8182)

DOI

2763
(0.7544)

CEOCOMP
TMT

0.0020
(0.9911)

INEDS

1185
(0.6081)

INEDSFOREIGN

1033
(0.9020)

FIRMSIZE

0.3370
(5.4775)**

-1469
(-1.0207)

PERFORM

0.6416
(1.2539)

4768
(0.8199)

CEOTENURE

3.82E-05
(1.1342)

2780
(1.3455)

-5.64E-06
(-0.7232)

-1.13E-05
(-0.3777)

-3.63E-06
(-0.2506)

BLOCK

0.0010
(0.2880)

4468
(0.5170)

-0.0009
(-1.1464)

6.50E-05
(0.0341)

0.0010
(0.7028)

CEOEXP

0.1489
(1.2369)

-0.0223
(-0.2208)

0.1501
(2.6355)**

-0.0395
(-0.3401)

0.1082
(2.0150)*

0.0894
(0.3142)

-19.0951
(-1.6888)*

INDUSTRY

-0.3801
(-0.9183)

0.0136
(0.2567)

-0.0009
(-1.0465)

FIRMAGE
Adjusted R2

0.0088
(0.5673)

0.6186

0.1256

0.3885

0.4898

0.0818

0.0437

0.0865

*Significant at the 5% level.

**Significant at the 1% level.
Whites (1980) heteroscedasticity-consistent t-statistics are stated in the parentheses.

36

ENDNOTE

The Japanese, for example, possess ownership stakes in more than 1500 factories in the US

employing over 350,000 people (Fortune Magazine, 1992).

2

Johanson and Vahlne (1977) classify knowledge as being objective and experiential, and

hold the latter to be the paramount factor for internationalisation. While objective knowledge
can be easily learned, experiential knowledge can only be obtained through actual personal
experience although surrogate experience may be obtained through collaboration with foreign
partners.
3

While certain companies disclose the exact compensation make-ups of their directors, the

majority of the companies disclose them in bands. In order to maintain consistency in our
data, CEO compensation for all companies is inferred from the bands disclosed under this
note and is taken to be the mid-point of the band.
4

Unlike Sanders and Carpenter (1998) who adopt a composite measure whereby the different

proxies for the degree of internationalisation are aggregated, the present paper employs
single-variable measures. Although it is conceivable that a composite measure would surpass
single-variable measures, Ramaswamy, Kroeck and Renforth (1996) argue that the complex
nature of internationalisation makes it counterproductive to aggregate the variables due to a
lack of understanding of the individual constituents of the internationalisation construct. By
using the variables separately, the robustness of the measures employed may also be checked.
5

Although not reported, using total assets to measure firm size yields qualitatively similar

results.

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Examples of so-professed non-executive directors include professional advisors (like

lawyers and accountants of the company), directors/employees of interrelated companies,

suppliers, lenders, blockholders and previous executive directors.
7

Knowledge of the company engaging in foreign dealings is cross-checked with the Jobsons

1997/98 Yearbook of Public Companies.

8

The correlation matrix (not reported) shows that multicollinearity is not a serious problem in

our data.
9

Although not reported, we also estimate the equations using the alternative DOI constructs

and find that the results are robust to the DOI construct employed.
10

As with the DOI variable, we test for robustness by using all possible combinations of the

constructs in separate sets of regressions. The results (not reported) do not differ
qualitatively.

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