Determinants of board characteristics of acquiring firms in Malaysia / Nadiah Abd Hamid

Separation of ownership and control in large publicly owned firms has induced potential
conflicts between the interests of managers and shareholders (Berle and Means, 1932).
This is due to inconsistency between managers and shareholder's goals. This divergence
of managers' and shareholders* objective may lead to acute conflict of interest in
decisions making regarding the strategic orientation of the firm. Therefore, one key
purpose of the board is to reduce the negative potential of the agency problem through
monitoring, representation and oversight responsibilities. Thus, the current study aims to
contribute in determining board characteristics of acquiring firms, which may response to
the agency problem. The current study examines the difference on board characteristics
between acquiring and non-acquiring firms and the associations between these
characteristics and Chief Executive Officer (CEO) ownership.
Three characteristics of board of directors are examined: board size, proportion of outside
directors and dual leadership (separation of the CEO and Chairman's roles). Based on a
sample of 62 acquiring and 62 non-acquiring firms (as control companies) in Malaysia
over a period of 1999-2000, the study finds that only board size is significantly difference
between acquiring and non-acquiring firms. In addition, the proportion of outside
directors is negatively associated with the company type. This indicates that less number
of outside directors on the board when the company acquires target company.
Furthermore, the study reveals that board size and outside directors is negatively
correlated with the percentage of shares owned by CEO. Finally, the study shows that
CEO ownership is affected if the number of independent non-executive director more
than non-executive director. These findings suggest that acquiring firms with larger
percentage of shares owned by CEO and small number of board members and also small
number of outside directors represented on the board would lead to greater agency
problems. Therefore, in order to mitigate these problems the number of independent nonexecutive
directors representing on the board should be increased at least to one third of
the total members of directors on the board as suggested by Malaysian Code on
Corporate Governance (MCCG).