FOREIGN-EDUCATED DIRECTORS: DOES BOARD FOREIGN EDUCATION HURT FIRM FINANCIAL PERFORMANCE?

Abstract

This paper seeks to investigate the business case for the inclusion of foreign educated directors on the board. Specifically, I investigate the relationship between the percentage of directors with a foreign education and board attendance on firm financial performance as measured by Tobin’s Q, return on equity (ROE), return on assets (ROA), net profit margins (NPM) and total asset turnover (TAT). I do not find a significant relationship between the percentage of directors with a foreign education and firm financial performance for a sample of 155 firms listed on the Singapore Exchange. However, my evidence suggests that there is a significant relationship between the percentage of attendance of the board of directors and firm performance when measured by ROE or ROA, but no significant relationship for Tobin’s Q, NPM and TAT. Rational theoretical arguments drawn from resource dependence theory, human capital theory, agency theory, and social psychology suggest that educational diversity may have either a positive, negative, or neutral impact on firm financial performance. My statistical analysis backs up the theoretical point of no effect, either positive or negative. My results are consistent with a contingency explanation because the effect of board foreign education diversity may be different under different conditions at different periods of time. Analysing results over several companies and time periods could offset results and produce no effect. The results of my analysis do not support the business case for the inclusion of foreign educated directors on corporate boards. However, I find no evidence of any negative effect either. My evidence implies that decisions regarding the appointment of foreign educated directors to corporate boards should be based on criteria not including the impact of such appointment on firm financial performance.