The Impact of Contextualizing Board Structure on Firm Financial Performance in an Emerging Market

Abstract

INTRODUCTIONBoard structure has a substantial influence on the practice of corporate governance in advanced markets as well as in emerging markets (Allen, 2005; Marquis & Raynard, 2015). Recent research indicates that the significance of board structure not only arises from managerial scandals and corporate collapse, but also from its impact on firm financial performance. Specifically, numerous empirical studies reveal that certain structural approaches in board structure enhance firm financial performance (Payne, Benson, & Finegold, 2009). While these studies made a significant contribution to theory and practice, they have predominantly been developed within the context of an advanced market. Given that the underpinning theories used by these studies have originated from a mature market with well-established institutions, the applicability of their findings in an emerging market context is questionable. Indeed, Fan, Wei and Xu (2011) and Xu and Meyer (2013) claim that relying merely on the Anglo-Saxon board classifications (independent, outside, and inside) seems counterintuitive when investigating the financial implications of board structure in emerging markets without considering their significant contextual implications, given that boardrooms in those markets are highly populated by influential families and government representatives, who in turn represent the actual players on the board.Despite recent attempts to recognize the pivotality of context when determining the effect of board structure on firm financial performance in emerging markets, Judge (2012) and Marquis and Raynard (2015) clarify that the majority of research has largely neglected bundling the contextual considerations of emerging markets with theory. Schiehll, Ahmadjian, and Filatotchev (2014) explain that theory-context bundling involves configurations of governance mechanisms in emerging markets that simultaneously operate at the national level to govern firms within an overall economy or collection of economies. According to Huse, Hoskisson, Zattoni, and Vigano (2011: 12), accurate understanding of the relationship between board structure and firm financial performance in emerging markets 'requires an explicit involvement of context'. This signifies that an analysis of the phenomenon of board structure in emerging markets without the integration of theory and context lacks precision.Furthermore, as the bundling approach is a relatively recent trend among researchers, empirical evidence still remains relatively scarce (Kearney, 2012; Schiehll et al., 2014; Xu & Meyer, 2013; Young et al., 2008), and in some contexts this approach is completely unrepresented, as is the case in Saudi Arabia. In this regard, this paper aims to address the aforementioned issue, utilizing an integration of agency theory and class hegemony theory (Daily, Dalton, & Cannella, 2003) in the context of the emerging Saudi Arabian market. Particularly, this paper will identify the key social, political, and administrative Saudi players who populate the boardrooms and empirically examine their effectiveness in influencing firm financial performance in Saudi Arabia. In doing so, this paper answers the following questions: who actually populates Saudi boardrooms, and how effective is their board deliberation in relation to corporate financial outcomes? Correspondingly, the contributions of this paper lie in the provision of a more comprehensive theoretical approach and within the statistical findings in the context of an important emerging market. The rest of this paper is arranged as follows: firstly, the paper provides background on the context of the emerging Saudi Arabian market. It then builds on this discussion to develop theoretical arguments. This is followed by a presentation of the research methods applied. Finally, the paper discusses the results and provides avenues for future research.The Context of the Emerging Saudi Arabian MarketSaudi Arabia is a vibrant country with an emerging stock market known as Tadawul. …