The Role of Directors in an Organization
Question:
Discuss about the Relationship Between the Experience of Directors and Company.
The topic of the paper is the relationship between the directors’ experience and company profits. The literature review will attempt to find out what (if any) the existing literary sources say about the topic being investigated. However, as the literature review has been completed, it has been observed that there is no specific study which particularly explores the connection between the experience of directors and company profits (Gul & Leung, 2004). As there is little literary information regarding this topic, the current literature review concentrates on finding out how the directors’ experience influence the board of directors’ activities, size, and composition affects the performance or profit of a company (Baysinger & Butler, 1985). As all of these themes are associated with the director’s experience and the subsequent company profits, it will help in establishing a solid base for the study.
The directors, as well as the managerial executives of a company, hold an imperative responsibility in current and modernized companies. The essential duty of the directors is to screen the administration for the investors’ sake and in this manner, the directors exhort the administration and have the power to make choices or take decisions(Scherrer, 2003). This power incorporates setting the association’s technique and official remuneration, designating the best administration and choosing new chiefs(Ferris, Jagannathan & Pritchard, 2003). Since the governing body is vested with the duty of guaranteeing that the investors’ cash is not squandered, investors should have a genuine enthusiasm for guaranteeing that the board is staffed with well taught and experienced executives(Keay, 2007).In this context, studies led by consultancy firms as often as possible suggest the hard and delicate individual profile variables of the directing executives to be essential for a company’s productivity and subsequent profits. The individual factors incorporate work experience, the ability of critical thinking to manage problems, educational standard, respectability, efficiency as a leader or believability (Klynveld Peat Marwick & Goerdeler, 2001). Comparable reports suggest that the significance of ability, for example, money related, industry-specific or experience have an immense influence on a company’s performance and profits (Executive Insight, 2010).
It has been demonstrated that the oversight of specific characteristics, for example, professional ability and experience, may lead to issues while surveying the inclination of different profiles regarding a particular post or for making some critical decisions in problematic situations(Epps & Ismail, 2009). The professional variables, for example, the place where the directors have gained their education and the extent of their professional experience might be more applicable than statistic traits in clarifying the level of performance and company profits(Solomon, 2010).
The Importance of Director’s Experience
The activity of the directors might be determined as per the experience gained by them. An experienced director will potentially use the lessons learnt in the past in order to take critical decisions regarding various complex issues (Bai, 2013). In this context, it is also important to see how the activity of the directors impacts a company’s level of performance and its profits too. Vafeas (1999) has demonstrated that organizations with less frequent gatherings or discussion sessions of the directors show the most elevated cost to add value to the company and ensure profitability. The fundamental reason behind such outcome is that an excessive number of gatherings or discussion sessions are a flag of less effective and merely experienced directors who might face several problems regarding correspondence among themselves (Vafeas, 1999). This might be due to their lack of knowledge and experience on how to properly communicate an issue with less complexity and how to decide the actions individually when needed. The outcomes of the study support the past results yielded by Yermack (1996) who described that higher experience levels and efficiency to provide effective leadership might potentially influence the performance and profits of a company.
Furthermore, the aspect of the directors’ experience is closely related to the size of the boards. The companies would want to appoint experienced and efficient executives in order to not only make sure that board size is small but also to ensure that it performs better than the large boards consisting of less experienced directors (Alnaif, 2014). Consequently, the size of the board will also have an impact on the company value and profits. As indicated by Jensen (1993), the organizations that have larger than average board sizes seem to turn out to be less efficient and this issue directly impacts the company profits. It is clear that the inclusion of excessive members in the boards or any advisory group may decrease their exertion and offer ascent to a certain level of free-riding leading to reduced performance and productivity of the companies. A decreased level of productivity will definitely influence the company profits in a negative manner (Patterson, Warr & West, 2004).
In a similar way, Yermack (1996) has discovered that, for sure, having fewer members in the board upgrades an organization’s execution and impacts decidedly the behavioural approach of the investors as well as the organizational esteem. Thus, the overall value and performance of the company are also affected. However, Adams and Mehran (2008) neglect to locate a negatively constructed impact of the extent of the boards for the execution of the companies when they conducted a study on the banks in the USA. The outcomes recommend that there is a positively identified connection amongst the size of the boards and organizational execution or benefits.
Impact of Board Composition and Size on Performance
Further secondary sources from ICAEW (2017) guidance pages suggest the accounting or financial nature owned by the directors not only further imly the general duties and responsibilities but also the good practice which is minimum requirement in further defining the organizational performance (profits) from time to time. There are different industries that have viewed the relationship, firstly Tufani and Sevick (1997) and Dann et al. (2003) highlights the funds return dependence to focus on relationship between expense ratios and boards of independent directors. Also, Brickley and Horn (2000) believed to have estimated relationship between hospital performance and CEO turnover based on samples for non-profits and profits hospitals such as there is positive yet strong relationship between the two variables.
The research question can be further defined through aim illustrating that director’s experience and influence effects the profits of the organization. To further elaborate it is to study whether the directors’ experience indeed influences (negatively or positively) the company profits and its further implications.
To strengthen the respective research aim, board of directors contributes to the organization significantly because of their legally mandated responsibilities. Also, they intervene in the business through venturing the interest of the firm’s shareholders, providing advice to the top management followed by using control mechanism by monitoeing of company and managerial performance (Zahra & Pearce, 1989) . In this regard, the study will try to find an answer to the following research question:
What is the relationship between directors experience and company profits of top 20 ASX companies?
The proposed research will be quantitative in nature. It will focus on only the secondary sources. This means that the proposed research will not focus on gathering data primarily from participants through surveys or interviews. Rather, it will focus on the existing data related to the topic being studied. The secondary sources will be the company-related financial and organizational information of the top 20 ASX listed companies. The required data will be gathered from the Central Queensland University library databases. In order to collect the data, the researcher will appropriately use some specific search terms as per the names of the listed companies. It would be ensured that all the collected information are relevant and up-to-date. The financial information will help in assessing the trends of profit or loss experienced by the companies. The financial data will be based on the annual reports published by the companies. On the other hand, the organizational data will help in finding out the experience level of the directors and if their experience has impacted the company profits. However, it will be ensured that the researcher does not twist or manipulate the gathered information. It is highly recommended that a researcher uses the collected data in its original form in order to avoid any kind of personal bias and enhance the reliability of the outcomes(O’Gorman, 2001). Therefore, it will be ensured that the researcher does not incorporate any personal bias into the research so that highest reliability and validity can be maintained. After the collection of data, a statistical analysis will be conducted with two variables namely (a) Director’s Experience and (b) Company Profits. In this regard the SPSS software will be used. There are several software programmes that are available for doing the statistical analysis but SPSS is considered to be the most efficient tool to perform a comprehensive evaluation (Arkkelin, 2014). Therefore, the validity of the data analysis will be ensured. The statistical outcomes will help to assess the relationship between directors’ experience and company profits, and how the directors’ experience might potentially impact the profits. Thereafter, the formulated outcomes will be comprehensively evaluated with regards to the evidence collected from the secondary sources (journals, books, and other relevant documents). In this manner, the study will address and answer the research question through generating statistically significant results and linking them to the existing knowledge.
Research Question and Methodology
The data analysis will be done through the use of SPSS software. All the collected data will be categorized and operationalized in order to make sure that they are ready to be inserted in SPSS. The two variables will be: (a) Directors’ experience, and (b) Company profits. The data will be associated with the top 20 ASX listed companies and the sample size will consist of the 20 companies as per their company profits in the last 1 year. A simple linear regression test will be conducted in order to find out the relationship between the two variables and how the variables might impact each other. The coefficient values, standard error values, t-values, confidence intervals, and p-value will be thoroughly assessed and properly interpreted in order to find out any statistically significant relationship between the variables. The formulated outcomes will also help to identify the limitations of the study. One potential limitation is that as the study will be purely based on the data collected from Australian organizations, the outcomes might not be applied to other settings of different countries because the organizational structures and culture would vary from one nation to the other. However, the results would help in developing a comprehensive understanding of how the directors’ experience and company profits are associated with each other and what the companies should do to improve that connection in order extends the business.
Conclusion
It has been observed that although the literature review could not find any particular research which specifically focuses on exploring the connection between directors’ experience and company profits, it has discussed the findings of the research works which concentrate on some significant aspects intricately connected to the topic being studied. Moreover, the directors’ experience seems to be intricately associated with various organizational aspects which subsequently influence company profits. The proposed research will be quantitative in nature and the data will be collected from the annual reports of the top 20 ASX listed companies. The simple linear regression test via SPSS software will help to find out the relationship between the two variables. Thus, the proposed research will help the professionals to focus on the aspects which might contribute to the enhancement of company profits and the academic experts will understand how the directors’ experience and company profits are connected within the organizational sphere so that broader studies can be conducted.
References
Adams, R. &Mehran, H. (2008). Corporate performance, board structure, and their determinants in the banking industry. Retrieved from https://poseidon01.ssrn.com
Data Analysis and Tools
Bai, G. (2013). How do board size and occupational background of directors influence social performance in for-profit and non-profit organizations? Evidence from California hospitals. Journal of Business Ethics, 118(1), 171-187.
Baysinger, B. D., & Butler, H. N. (1985). Corporate governance and the board of directors: Performance effects of changes in board composition. Journal of Law, Economics, & Organization, 1(1), 101-124.
Brickley, J. A., & Van Horn, R. L. (2000). Incentives in nonprofit organizations: Evidence from hospitals.
Del Guercio, D., Dann, L. Y., & Partch, M. M. (2003). Governance and boards of directors in closed-end investment companies. Journal of Financial Economics, 69(1), 111-152.
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Executive Insight. (2010). More Public Company CEO Succession Practice Data; Spencer Stuart Releases 2010 Board Index Study.. Executive Insight. Retrieved from https://executiveinsight.typepad.com/executive_insight/2010/11/more-public-company- ceo-succession-practice-data-spencer-stuart-releases-2010-board-index-study-.html
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