Professional Project In Business: Synthesis Of Knowledge And Research Methodologies

Background of the Research

This research makes immense contribution to the current literature in a variety of ways. Firstly, it would use a sample of the top ASX listed companies from 2016. Secondly, this study includes additional granularity on diversity of expertise on ASX boards. The objective is to investigate whether higher diversity increases the value of the shareholders through the utilisation of different expertise indices of diversity. Thus, this study would investigate the association between organisational value and the existence of particular skills on the board by depicting the industrial sectors of the various organisations.

1.1 Background of the research:

The traditional research suggests a strong association for firms facing major events like CEO turnover and takeovers. However, more nuanced features like the composition of board committee and industrial experience on particular sub-committees have identified that independent directors emphasise value on compensation committees and audit (Ararat, Aksu & Tansel Cetin, 2015). In addition, the global investors value diverse perspectives and talents, which the directors bring to their advising and monitoring duties. Thus, it could be stated that the professional diversity initiates higher coordination problems and challenges related to communication. However, these problems and challenges could be counterbalanced with the help of strategy formulation, enhanced problem solving and utilisation of resources (Hillman, 2015).

1.3 Literature review:

1.3.1 Introduction:

This section of the research would aim to focus on the various theories pertaining to the relationship between the experience of the directors and the organisational profits. The primary theories covered under this section include the agency theory and resource dependency theory. In addition, the corporate law has been discussed as well to find out the relationship between the two variables depicted above along with the board diversity of expertise. Finally, the section sheds light on identifying the gap in literature, which would help in identifying the limitations of the study as well.

1.3.2 Agency theory:

The board’s role in exercising provision and control which in turn has a relation with the observation of the management has been discussed here in accordance to the theory of agencies. Evidences have been received about the issue of principal-agent when the control of the assets along with its ownership has been isolated. In addition, it is not possible for the shareholders to influence practical control over management.

The board plays a major role in overseeing management, protecting the rights of the shareholders along with assuring equitable treatment (Terjesen, Couto & Francisco, 2016). The risk of morality and incomplete information has been surrounded by a conflict. The conflict involves the possession of greater information by the directors, gaining the trust of the principal. Hence, it can be said that the act does not contradict the principal (Low, Roberts & Whiting, 2015).

Thus, according to the theory, it is not possible for the managers to remain involved in a sort of opportunistic behaviour to the detriment of the organization. The shareholders’ values could be increased with help of the agents who were effective. Thus, the necessity of monitoring further will be minimized as this will increase the cost of transaction. On the other hand, it is not at all easy to impose total agreement in each of the potential situation. Forming an overarching mechanism in order to monitor the relationship of the stakeholders with the conflicts that are being minimized can be stated as an effective solution in this case. This is also the domain of the corporate governance (Adams et al., 2015).

Literature Review

1.3.3 Resource dependency theory:

It has been observed that the operating area of an organisation includes an ecosystem. In this ecosystem, the factors that are significant are the availability of raw materials, availability of capital and labour. The success of the ecosystem depends on the ones that are most nuanced. It is important to strengthen strategic relationship with different other companies. In relation to the matter of the connectedness of the community, the criticality, the regulators and the government of the company is inherent when it comes to labour force.

Of the four components that have been found out as the main responsibilities of the directors, two of them must be taken into account according to the theory (Kaczmarek, Kimino & Pye, 2014). The companies have been looking for advantages from the professional expertise because counselling and mentoring of the employees are being provided by the management. Connections can also be provided by the external directors by using their professional networks in order to deliver the necessary linkages to all the industries, regulators and government (Triana, Miller & Trzebiatowski, 2013).

The experienced board professionals could provide advice along with enhancing relationships with the people who provide for the organization and belong to a vast group of capabilities outside; thus, ensuring the success of the organisation.  The organisations can look for advantages which can be considered as an excess facet of the practical application which is in turn related to the dependency theory of the resources from the reputation that has been increased when the professional directors have joined the board (Ferreira, 2015).

1.3.4 Corporate law:

The management which has been built for the shareholders who have been overviewed by the directors when they were providing their total concern towards the safety measures, operational health, legal issues and the economic environment. Thus, this group of the shareholders have been given some freedom in order to balance with the condition that they will be considered accountable as they complete their duties that have been accumulated in the office (Harjoto, Laksmana & Lee, 2015). This being a corporate governance tool, a new law has been framed as time passed by. According to this law, applying standards on the directors of the companies and the effective suggestions given by them, have increased and as a result the firm will receive incentives so as to adhere to the promise of enhanced shareholder wealth in the form of reward (Lückerath-Rovers, 2013).

1.3.5 Board diversity of expertise:

The research studies that are based on the professional background of the directors and their area of expertise are limited. In the study by Gray and Nowland (2015), he has shown the summary of all the available studies on the politican and accounting area of expertise of the directors. Further, the expertise of the directors of the company can be categorized into eleven different categories such as accountants, bankers, engineers, executives, scientists, academics, consultants, doctors, lawyers, politicians and other CEOs (Nielsen & Nielsen, 2013).

Thus, the researchers have shed light to the fact that though the board of the directors can be categorized into 11 different groups, this diversity in the board does not affect the performance of the company. On the other hand, an inverse relation has been observed on the between the performance of the company and the expertise that is associated with the non-business activities (García-Meca, García-Sánchez & Martínez-Ferrero, 2015).

Agency Theory

1.3.6 Board heterogeneity and fit for purpose:

In the above sections, discussion of the agency theory and the resource dependency theory has been done. According to these two theories, the performance of the company and the wealth of the shareholders will be enhanced. Different new viewpoints have been achieved by the different backgrounds of the employees and the shareholders such as age, gender, expertise and ethnicity. These viewpoints were never taken into account by the homogeneous board of the directors (Perryman, Fernando & Tripathy, 2016).

In a particular organization, there are some directors who are very close to the CEO of the company or to the higher management level and some others who are not that close. The directors who are not that close to the CEOs and the higher managements, are usually kept under strict monitoring. In case, the boards of the directors are perfect for the purpose they are investigating on, the strict monitoring of the employees are cut a little loose. Thus, the measures through which the diversity of the board of the directors are measured along with the structure of the board are mainly in the form of two different types of variables – independent variables and dependent variables. This can give accurate results of the enquiry (Martín-Ugedo & Minguez-Vera, 2014).

1.3.7 Gap in literature:

The volume of the literature related to the composition of the board of the directors and the shareholders’ wealth is on the rise. The research project that has been considered here is related to the board structure of the company, the diversity of expertise of the board of the directors. The “UK Corporate Governance Code 2014”, “Sarbanes-Oxley Act 2002” and the “ASX Corporate Governance Principles and Recommendations 2014” improve the idea of the independent board directors. On the other hand, the literature also states that the boards that are actually independent are more likely to ignore the diversity of the expertise of the directors and their contributions to the technical knowhow of the company.

Thus, this study will investigate whether the firm-specific information and deeper insight that has been offered by professionals who have domain specific expertise are important for organizations that depend a lot on their corporate lifecycle phase. The concept of corporate lifecycle will be introduced in this research along with the interaction this lifecycle has with the board of directors as it relates to firm value and firm performance. In an extreme view, no two firms are exactly the same and hence each of them will have its own unique optimal board structure and composition. This study aims to uncover the factors of common success in order to improve the value of the firm and its performance.

1.4 Aims and objectives of the research:

The aims and objectives of the research include finding out the relationship between the experience of directors and company profits of top 20 ASX listed companies.

1.5 Research questions and/or hypothesis:

Based on the above research objective, the following research hypothesis has been framed:

Null hypothesis, H₀: There is no association between the experience of directors and company profits of top 20 ASX listed companies

Resource Dependency Theory

Alternative hypothesis, H₁: There is significant association between the experience of directors and company profits of top 20 ASX listed companies

2. Methods:

2.1 General approach:

This section of the research aims to concentrate on elaborating the details of the research strategy that the researcher has followed in carrying out the overall research. The research strategy primarily includes the research philosophy, research design and research approach.  The variable measurement has been described in this section as well along with the measures of descriptive statistics and the data analysis plan for carrying out the overall research.

2.2 Sampling and data analysis plan:

The data for the project has been collected using the top 20 ASX companies annual report. The study has highlighted two variables one is “Director’s Experience” preferably a CEO (Chief Executive Officer) of the organization in the company and in total. The second variable is “Company Profits”, which is ‘Net Profit after Tax (NPAT)’ for companies in the year 2016-2017 i.e. one year. The data has been evaluated using results derived from SPSS, the statistical tool.

2.3 Variable measurement:

The two variables that have been considered for this research include the experience of the directors and organisational profits of top 20 ASX listed firms. In addition, both the variables are ratio variables and they are numerical in nature (Vaioleti, 2016). Furthermore, the variables are measured with the various statistical measures, which are discussed briefly in the following section.

2.4 Descriptive statistics:

The researcher has used the various secondary sources like ASX website, company websites and other reliable statistical websites for accumulating the needed secondary data. The data collected has been evaluated with the help of descriptive statistics like measures of central tendency and measures of dispersion. In addition, the researcher has used both correlation and regression to find out the association between the two chosen variables.

2.5 Summary:

From the above discussion, it has been found out that the researcher has applied the philosophy of positivism, since this philosophy helps in linking the outcomes with the scientifically proven models and theories. In addition, the researcher has followed the deductive research approach, since the researcher has attempted to arrive at the outcomes of the study based on the secondary data. The researcher has used the various secondary sources like ASX website, company websites and other reliable statistical websites for accumulating the needed secondary data. The data has been evaluated using results derived from SPSS, the statistical tool.

3. Results:

The data for the project has been collected using the top 20 ASX companies annual report. The study has highlighted two variables one is “Director’s Experience” preferably a CEO (Chief Executive Officer) of the organization in the company and in total. The second variable is “Company Profits” which is ‘Net Profit after Tax (NPAT)’ for companies in the year 2016-2017 i.e. one year. The data has been evaluated using results derived from SPSS, the statistical tool.

In addition, both the variables are ratio variables and they are numerical in nature. The data of 20 companies for the variables have been studied using descriptive statistics, correlation and regression to study briefly the nature of secondary data collected.

The director’s experience in the company on an average is 3.9 years with median being 3.3 years. This states that the variability lies between 3-4 years of the directors’ with the respective organizations they are CEO in. On the other hand, total director’s experience in the entire career shows normal distribution where the average, median and mode are 27-28 years with a deviation of 6.5 years. The second variable “company profits” has a variability 2909 million dollars depicting the nature of earning profits shows a wide fluctuation in the profits with the other organizations. Hence, mean being 2993.11 million dollars is the average of top 20 ASX companies producing in a year.

The company profits and directors’ experience in the organization is positively skewed but the total director’s experience in the entire career of CEO is a normally distributed data with slight positive skewness, which is negligible in nature. The graphs for the same can be given below.

3.2 Correlation:

The correlation studies the association between the two variables and as per the data the association will be studied using “Total Director’s Experience” with “Company Profits”. The table below highlights the relation between the two using Pearson Correlation.

The correlation from above table emphasizes the relationship between the two variables – “Total Director’s Experience” with “Company Profits” which shows a negative yet weak correlation (r = -0.325) as -1<r<0. This depicts that the association leads to change but is not direct which analysis that change in company profits lead to opposite change that is less experience of the director preferably CEO’s.

3.3 Regression:

Linear regression is usually carried out with the presence of a Dependent Variable – “Company Profits (NPAT)” and one or more Independent Variable – “Total Experience of the Directors (CEO)” (one independent variable in this case). The regression analysis has been done with the help of SPSS and display results of R squared results because only one independent variable is present in this study. The hypothesis that can be framed to carry out this analysis is given as follows:

From the model summary, it can be seen that he results of the regression are only 10.5% good fit because only 10.5% variations in the errors of the dependent variable can be explained by this regression model.Fro the ANOVA table it can be seen that the values of the F-statistic is found to be 2.123 which is less than the critical value of F. Thus, from here it can be said that there are more unexplained variations in the model in predicting the profits of the top 20 ASX companies. It can also be seen that the significant value (0.162) is greater than the level of significance (0.05). Thus, the results that has been obtained from this regression analysis is insignificant.

The regression line for the dependent and independent variables:

èCompany profits (NPAT) = 7061.982 – 144.286*Total Experience of the Directors (CEO)

This shows that the relation is negative between dependent and independent variable based on the negative sign as depicted through slope coefficient. However, as per the analysis as the directors get more experience, the rate of change in company profits will fall by 14.429% change. The t critical value at 95% level is -1.96 in terms one tailed results, in turn the results of t statistics is -1.427, which is not significant at the given level of significance. The p value for slope of coefficient came out to be 0.162, which is greater than the critical value at 0.05 levels, stressing that null hypothesis to be accepted. However, this will lead to opposite results than the literature framed. However, certain limitation needs to be emphasised to get the desired results.

4.1 Conclusion:

Based on the overall discussion, it has been found out that this research contributes to the current literature in a variety of ways. Firstly, it would use a sample of the top ASX listed companies from 2016. Secondly, this study includes additional granularity on diversity of expertise on ASX boards. The objective is to investigate whether higher diversity increases the value of the shareholders through the utilisation of different expertise indices of diversity. Thus, this study would investigate the association between organisational value and the existence of particular skills on the board by depicting the industrial sectors of the various organisations.

In addition, it has been evaluated that the directors oversee management on behalf of shareholders with a view to maximising shareholder value whilst giving due regard to the environment, fair-trading, operational health and safety matters, legal issues and the economic environment. The p value for slope of coefficient is greater than the critical value at 0.05 levels, stressing that null hypothesis to be accepted. Hence, this infers that the experience of the directors has little role to play in the net income of the 20 top ASX listed firms, which opposes the framed literature.

4.2 Limitations of the study:

Based on the outcome of the literature review, it has been found that given that the conduct of the board of directors and management have an impact on such wide ranging matters, the freedom given to this stakeholder group needs to be balanced with the need for holding them accountable, as they discharge the duties of their office. However, from the evaluation of the statistical tools, it has been observed that there is contradiction with the data outcomes, since it opposes the literature review.  

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