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Handa 2020 Does Presence of Foreign Directors Make A Difference A Case of Indian Ipos
Handa 2020 Does Presence of Foreign Directors Make A Difference A Case of Indian Ipos
Rekha Handa1
Abstract
In their pursuit to garner resources and support for their IPO, the issuing firms prepare well on all fronts.
Corporate governance, specifically board structures, is a critical issue that affects the decision quality
and also influences the investors’ psyche. Building on theories of agency, resource dependency and
signaling, this article attempts to study the effects of presence of foreign directors on firm-specific and
board-related characteristics of IPO issuing firms. Adding to the scant literature on national diversity,
this study concludes that foreign directors do signal a firm’s intent of internationalization and contribute
to strengthening corporate governance but national diversity does not translate into IPO returns.
Exploring a sample of Indian IPOs issued from April 2001 to March 2017, this study finds that presence
of foreign directors on the boards brings about differences in governance mechanisms wherein
internationalized boards were found to be stronger on governance front. Larger boards, more committees,
less number of related directors, better board interlocking were the benefits that manifested from presence
of foreign board members. Issue size and issue price of shares at the time of IPO are found to be
significantly higher for firms with foreign directors on their boards reflecting better acceptance among
the investors.
Keywords
Board of directors, corporate governance, foreign directors, signaling, underpricing
Introduction
As the backwash of corporate scandals that deflated numerous corporate bigwigs globally, corporate
governance hogged the attention of academicians and practitioners. Researchers have emphasized on the
indispensability of elements of corporate governance to corporate setups and to performance of these
corporates measured through different quantitative and qualitative variables. In these deliberations, the
monitoring and strategic role of board of directors has been underscored (Campbell & Mínguez-Vera,
2008) and board composition has gained tremendous interest becoming one of the burgeoning areas of
research.
1
University Business School, Guru Nanak Dev University, Amritsar, Punjab, India.
Corresponding author:
Rekha Handa, 15-Jyoti Nagar, Near Gate No. 3, Jalandhar, Punjab 144001, India.
E-mail: rekha.ubs@gndu.ac.in
112 Business Perspectives and Research 9(1)
Directors play a very critical role in the strategic direction and orientation of the company and in
monitoring and controlling to prevent mismanagement (Van den Berghe & Levrau, 2004). Composition
and structure of these boards remains an important consideration for the acknowledged benefits derived
from diversity (Dang et al., 2013). Diversity brings in distinct competencies, versatile opinions, unique
knowledge, and skills which equip better to handle the challenges of external environment and of diverse
groups of stakeholders. Board seats in companies are commonly occupied by people with differences on
account of task-related (viz. education, functional background, and tenure) or relation-oriented (such as
age, gender, nationality) attributes (Jackson, 1996; Pelled, 1996). Diversity would anyway exist rather
should exist. Also, denying board seat to certain people on account of differences emanating from
characteristics of gender, age, race, or nationality would amount to limiting board decisions to
homogeneous source of knowledge, expertise, or opinions and resulting biases in decisions and actions.
Social, ethical, and political groups did push for board diversity but with regulatory requirements
diversity on boards has assumed all the more significance.
Board diversity, for its inevitability and cost involved, is investigated to comprehend the benefits that
accrue and effect on board effectiveness and performance (Adams et al., 2010). Along with other board
characteristics, board diversity has been documented to contribute to debt financing and research and
development expenditure (Busru et al., 2019) which create the coveted competitive edge for a firm.
Board diversity has emerged as a prolific research area where researchers have been trying to investigate
the relationship of board diversity (and its various dimensions) to corporate performance and effectiveness
in different settings. The lack of consistency in results, distinctly different economic settings calling for
different approaches, various dimensions of board dynamics, and variety of performance measures make
board diversity a vibrant research area.
In this article, an attempt is made to study the international dimension of the board diversity which is
incorporated through foreign directors with respect to Indian IPOs. Contribution of this study is unique
and significant in the present internationalization era where the inclusion of foreign directors would
enhance the “attitudinal” dimension of internationalization (Ramaswamy & Li, 2001) as contemplated
in the works of Perlmutter (1969), Maisonrouge (1983), and Sullivan (1994). IPO presents a distinct
setting to explore the board dynamics wherein the company reaches out to the public for the first time
with the best where withal and positive signals to garner investor confidence and resources. With the
visible shift toward nonfinancial signals where relationship between financial information and equity
values is particularly tenuous in the IPO context (Kim & Ritter, 1999) signaling through diverse corporate
boards definitely makes research sense. Moreover, the Indians in general tend to look up to the presence
and personality of foreigners regarding them as superior which can possibly be attributed to the fact of
India being under the British rule for a long time. In the case of an emerging economy with acknowledged
global clout, investigation of foreign directors helps comprehend the globalizing tendencies and
communicating their internationalization efforts. With this perspective, an effort is made to examine the
differences being caused by presence of foreign directors in the issue-specific and governance variables
at the time a firm goes public.
The remainder of this article is organized as follows: in “Theoretical Perspectives and Related
Literature,” the theoretical bases for inclusion of foreign directors on the boards and in the IPO context
are discussed. Related literature on the topic is also presented in the same section. Sample and
methodology are presented in “Methodology.” Analysis and interpretations are presented in the next
section. The final section concludes the study with limitations of present research effort and future
directions for research in this area.
Handa 113
dominance in board diversity studies. With increasing diversity in workforces, marketplaces, and
internationalization practices, researchers are exploring the other dimensions of diversity such as race,
ethnicity, and nationality (Arfken et al., 2004; Burke, 1997; Carter et al., 2003; Daily et al., 1999; Erhardt
et al., 2003; Shrader et al., 1997). With changing times, newer dimensions to diversity have been
identified and documented calling for fresh perspectives of research.
International diversity, emerging from different nationalities, is one of the most talked about diversity
dimension in present times characterized by globalization and internationalization of business methods,
models, and practices.
On the basis of limited available studies on the topic, it is evident that study of nationality as a
dimension of diversity on corporate boards is relatively a recent phenomenon, with efforts steaming in
the mid and late 1990s. A common measure of national diversity adopted by the researchers has been the
proportion of foreign directors on the boards (Kilic, 2015; Peck-Ling et al., 2016; Ramaswamy & Li,
2001; Ramaswamy et al., 2004; Randøy et al., 2006; Ujunwa, 2012; Ujunwa et al., 2012) while some of
the studies have also captured this dimension through a dummy variable to indicate the presence and
absence of directors of foreign nationality (Estélyi & Nisar, 2016; Masulis et al., 2012; Oxelheim &
Randøy, 2003). Eulerich et al. (2014) and Jhunjhunwala and Mishra (2012) indicated the national
diversity through an ordinal measure representing the number of different nationalities of members on
the boards. Jindal and Jaiswall (2015) in their study of Indian markets adopted the Blau Index and
Shannon Index as the measures of national diversity in line with the methodology conventionally adopted
in studying diversity in financial literature.
Relationship of foreign directors has been studied with respect to different variables. Working on a
sample consisting of all A-share firms of China from 2004 to 2012, Du et al. (2017) documented that
foreign directors play a crucial role in deterring earnings management. Complementing the prior
literature the study established that foreign directors may be less effective monitors in firms from
developed countries, but they help enhance the monitoring in firms from developing countries such as
China. Kim (2018) reported that firms hiring foreign directors exhibit better performance which translated
into higher value though with diluted reporting quality. However, exploring a sample of listed nonfinancial
Nordic firms in four countries, Hooghiemstra et al. (2019) confirmed that the presence of non-Nordic
foreign directors on the board is associated with significantly higher levels of earnings management
attributing it to language-related factors, as well as the level of foreign board members’ accounting
knowledge. Maturo et al. (2019) tried to investigate into the reasons for inconsistency in results pertaining
to national board diversity (based on a brief review of important studies in this field) and concluded that
the cause of conflicting results is the use of different theories and the implementation of different
methodologies in measuring diversity. Swiss markets were studied for national and gender diversity by
Ruigrok et al. (2007), finding low number of foreign directors on Swiss boards and most of them to be
independent directors. Adding to the literature in their unique way, Miletkov et al. (2017) concluded
through their study based on foreign independent directors in US firms that degree of internationalization
and firm size continue to be important determinants of having foreign directors. Oxelheim et al. (2013)
identified theoretically motivated reasons for the internationalization of boards and concluded that
different types of firm internationalization—commercial versus financial—might call for different types
of board internationalization. Kang et al. (2019) explored foreign directors as a board attribute with
respect to corporate social responsibility in South Korean corporate contexts.
Lack of a comprehensive research effort, however, with focus on enhancing board effectiveness
through foreign directors remains the primary motivation of the present study. This new emerging
perspective of international diversity through induction of foreign directors provides a lot of room for
exploration and hence this study intends to contribute as a preliminary effort in this direction in context
Handa 115
of India which stands on the threshold of strengthen its position on global map through new age
international strategies.
Methodology
This study aims at understanding the role of foreign nationals on the boards of Indian IPO firms in
signaling the quality of issue and difference which brings in the broad parameters of a firm, in terms of
board characteristics and firm/issue-specific features. National diversity, which is not studied as a
dimension, draws attention as an extension to the upper echelon studies where individual traits and
capabilities are forwarded as explanations for quality of decision-making and the resulting corporate
performance. Dynamic IPO market of the vibrant Indian economy in the backdrop of growing wave of
internationalization lends the unique setting for the conduct of the present study.
Sample
Indian firms that came out with a public issue of equity securities between the time period of April 2001
and March 2017 which listed their issue on the Bombay Stock Exchange (BSE) form the sample of this
study. The period April 2001 marked the specification of corporate governance principles through
introduction of a new Clause 49 by SEBI ushering in a new era for corporate governance in the country.
Table 1. Year-wise Details of IPO Firms with Respect to Details of Nationality of Directors
The withdrawn issues, issues other than equity, further public offerings, rights issues, and the firms
for which the issue document, data across governance, or issue variables were not available were
excluded in the final sample. The final sample after sifting away firms for the restrictive conditions and
ensuring data availability the sample consisted of 626 IPOs. The sample was trimmed further as per the
availability of information on the nationality of the directors to meet the objective of this study. The final
year-wise sample details are presented in Table 1.
The firms in the final analysis include 360 firms with no foreign directors on their board and 84 firms
which have reported presence of nationals of other countries on their boards as directors.
Handa 117
Sources of Data
The primary source of data for data on governance variables has been the issue document, prospectus, as
published under the mandate of market regulator SEBI. The prospectus has been procured from the SEBI
website (www.sebi.gov.in). For those which were not available on SEBI website, the website of the
concerned company was accessed. For calculation of returns, the market prices of securities and
respective market returns (SENSEX values) have been extracted from the reliable and accurate database
of Ace Equity and BSE website (www.bseindia.com). In addition to these, the information related to firm
attributes and issue variables has been collated from Prowess and Capitaline database, the reliable and
authenticated sources for data on Indian firms.
H0: There is no difference in IPO issuing firms with and without foreign directors with respect to governance and
issue characteristics.
H1: There is significant difference among firms with and without foreign directors on account of governance and
issue characteristics.
118 Business Perspectives and Research 9(1)
With regards to returns of IPOs, positive initial returns are recorded for Indian IPOs on an average
which juxtapose well against the heightened activity in Indian IPO markets. Also, initial and market
returns demonstrate average positive returns which are akin and highlight the inherent potential of the
IPO firms and not merely flying with the market upsurge. Variations in issue price, issue size, age of
company, and subscription ratio provide a lead to move ahead in the analysis and investigate the reasons
for these differences and if they can be attributed to the variable of interest, i.e., foreign directors.
Stringent regulations pertaining to capital markets and keen vigil of the market regulators have succeeded
in trimming the time lag in issue close and listing of the issue on stock exchange.
Enormous size of the issue (maximum value being `15,475 crores and average value of 294.30 crores)
also bears testimony to the increasing faith in the IPO route which can be attributed to Herculean efforts
being made by regulators to reinforce faith of investors and ensure safety and returns of their investments.
The initial diagnostics of the data lead to addressing the research objective with respect to foreign
directors. On the basis of presence of foreign directors and for comparative analysis, the sample is
divided into two parts: those with foreign directors and firms with all domestic board members.
Comparisons are drawn on this basis across governance and issue variables to decipher the differences
and their significance. To compare groups, t-test has been used after the initial check of normality of
data. Kolmogorov–Smirnov test and additionally Shapiro–Wilk tests helped establish the normality of
two groups across different variables of study. The results of t-test and comparative numbers have been
presented in Table 4.
120 Business Perspectives and Research 9(1)
Comparison of IPO issuing firms with and without foreign directors highlights statistically significant
results across governance variables pertaining to board and ownership. All of the variables incorporated
to measure corporate governance in these firms which access the capital market for the first time signify
that presence of directors across the domestic borders does reflect a significant difference with respect to
board characteristics. Presence of international directors on the boards of IPO firms when going public
shows a bigger board, higher average board age, larger number of board committees, and larger number
of other directorships. With respect to ownership, promoter ownership tends to be diluted to almost 28
percent from an average of 43 percent when no foreign director occupies a board position. Number of
block owners, which reflects shareholders with holding of 10 percent or more, is significantly less when
foreign directors occupy a board position highlighting less ownership concentration purported to
strengthen governance norms.
Comparative analysis of firms with international directors with those which have domestic boards
highlights that across all governance parameters foreign directors make significant difference. Presence
of foreign directors brings about significant effect which is reflected in the board attributes which
contribute to better governance and stronger mechanisms to compete in the marketplace. IPO firms with
global board rooms have stronger governance preparedness. Larger and older boards with more board
committees, less related members, and directors with higher number of other directorships make room
for international directors. It also leads to a premise that presence of foreign directors on the boards of
IPO issuing firms makes way for better governance which adds to the financial and governance health of
these firms. Extending this comparison to issue characteristics and initial returns, t-test is applied on
these characteristics as shown in Table 5.
Firms with foreign directors show higher unadjusted raw returns as well as market-adjusted excess
returns. However, the statistical significance of these results is not established leaving room for further
analysis. Companies having their issue of larger size and higher subscription ratio make room for foreign
directors elucidating that larger and popular firms induct directors from foreign countries on their boards
which adds to their acceptability and performance. Higher issue price is fixed by bigger firms with
inherent ability to command premium from investors who ride on their strengths and abilities are ready
to pay more. Firms with presence of foreign directors have higher issue price in comparison with those
with no foreign directors. This significance of difference across the two groups being studied is lacking
across other issue variables such as IPO age, total assets, and listing delay.
Comparison of groups segregated with respect to presence and absence of foreign directors highlights
significant differences across governance and issue characteristics clarifying that inclusion of foreign
directors on the boards of IPO companies does affect the governance and firm characteristics which can
be built to positively influence the governance and financial performance of firms. The results present
evidence for alternate hypothesis wherein board, ownership, and some of issue characteristics are found
to be significantly different with presence and absence of foreign directors.
Two groups of firms built on the basis of presence of foreign directors are found to be unbalanced
with respect to numbers. For establishing the robustness of initial results, an attempt is made to balance
the samples and so the larger sample (firms with no foreign directors) is trimmed down using statistical
randomness. As a result, the larger sample is brought down to the size of smaller sample and thus making
122 Business Perspectives and Research 9(1)
the size of each subgroup as 84. To this balanced sample, the t-test is applied again and the results across
governance and issue characteristics are presented in Tables 6 and 7.
The results with trimmed sample of firms are very similar to results of full sample and hence they
establish the robustness of results. A parallel has been drawn between the results and tabulated in Table
8 for a bird’s eye view of all comparisons made and points of significant differences. Directors with
foreign nationality bring about a significant difference to the firms where they occupy the board seats
and this difference can bring about a substantial difference to their governance orientation together with
firm specifications. The results highlight that firms with foreign directors on their boards are larger
pertaining to their board size, board independence, more mature in terms of board age, and less
concentrated with respect to ownership of shares.
Analysis of the IPO firms with respect to board and firm characteristics sheds light on the fact that
globalization of board rooms picking up in present times does bring in benefits which can help strengthen the
performance of firms. IPO firms, which endeavor to establish their credibility among investors and win not
just their confidence but also their money and attention, can employ board national diversity as an important
signal in proving their mettle and potential to investors and other stakeholders. Across many dimensions, the
presence of international directors makes a significant difference but is not statistically established with respect
to returns of IPOs. This can be attributed to the multitude of factors which affect the levels of underpricing at
the time of initial public offering. Future research efforts in this direction can aim to analyze board diversity
in a broader sense for its more specific effect on underpricing of IPOs. Relationship of national diversity to
IPO performance can be attempted with better scientific tools. The analysis can be further extended for long-
term performance and more comprehensive analysis techniques but this study definitely works as an important
basis in present times of globalization of not just operations but also board rooms.
Conclusion
Corporate governance, specifically board of directors, is an imperative issue which can potentially affect
the strategic decisions of an organization and determine the growth prospects of a firm. These mechanisms
have grown to be an indispensable aspect of organizations which operate in vibrant competitive
environment to garner resources and investors’ attention. Strong and effective board structures have been
documented as essential to the sustainability of corporate boards characterized by separation of ownership
and management, challenges of information asymmetry, and dependency of external resources. Building
on these theoretical perspectives, the present study is an attempt to gauge the presence of foreign directors
on boards of Indian IPO issuing firms and their ability to influence financial and governance variables in
an organization. The present work is unique as it covers the international diversity of board of directors
and investigation in context of new issue firms which compete for investors’ money in dynamic
environment adopting signals to communicate their potential. Working on Indian IPOs issued between
2001 and 2017, the study checks for presence of foreign directors on their boards and compares firms
with and without foreign directors for differences along firm, board, and ownership characteristics.
Amidst the challenge of non-disclosure of information on nationality of directors for many firms,
working on the final sample of 444 IPOs, comparisons are made on the basis of board parameters,
ownership measures, and issue-specific variables among firms with foreign directors and firms which
have no foreign directors on their boards. The results highlight significant differences across all board
124 Business Perspectives and Research 9(1)
variables such as board size, board age, board committees, other directorships, promoter ownership, etc.
to highlight that presence of foreign directors affects these variables and thus influences the governance
mechanisms of a firm. The results confirm the difference in governance mechanisms of firms with
foreign directors which though does not manifest in the form of better returns of IPOs but definitely
emphasizes the importance of nationally diverse boards. These differences, however, do not extend to
initial returns of IPO regarded as underpricing and to issue-specific variables of IPO age, total assets, and
listing delay. The results confirm that board diversity regarded as important contributor to corporate
success plays a discerning role in the case of IPOs. IPO issuing firms try all tricks in the book for success
of their issue and inducting diverse members on the board can definitely contribute in garnering attention
of investors and their money. Foreign directors bring in their international experience and exposure
which is strategic in present times of internationalization. The present study contributes as a preliminary
research in the area of foreign directors and can be extended to study the influencing power of foreign
directors in context of all firms rather than only IPOs. The present effort is an important link in connecting
the performance of firms to board diversity and analyzing potential to affect governance and other
parameters. This study is an important contribution to the scant literature on board diversity generally
and national diversity specifically in the Asian region. Future research efforts could be built to study the
moderating and mediating effect of foreign directors in affecting not just financial performance but also
other market-driven measures. Moreover, a comprehensive effort with larger connotations of diversity
and performance across firms with distinct characteristics in terms of size, operations, and scope can
lend higher credibility to board diversity and its ability to influence performance. This study hold
relevance amidst the acknowledged dominance of Indian IPO markets and growing thrust on corporate
governance and pursuit for effective board practices.
Funding
The author received no financial support for the research, authorship, and/or publication of this article.
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