Journal of Contemporary Accounting & Economics 10 (2014) 16–31

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Journal of ContemporaryAccounting & Economics

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Corporate board and board committee independence,firm performance, and family ownership concentration:An analysis based on Hong Kong firms

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⇑ Corresponding author. Address: Department of Accountancy, City University of Hong Kong, Hong Kong. Tel.: +852 34427924; fax: +852 3442E-mail addresses: acsleung@cityu.edu.hk (S. Leung), grant.richardson@adelaide.edu.au (G. Richardson), jaggi@business.rutgers.edu (B. Jaggi).

1 Tel.: +61 8 83130582; fax: +61 8 82234782.2 Tel.: +1 732 445 3539; fax: +1 732 445 32091.3 The assumption of the effectiveness of independent boards and directors is derived from agency theory. Agency theory posits that the agents

managers) in firms with dispersed ownership require supervision and monitoring to ensure that they operate in the best interests of the principalsshareholders) (Fama and Jensen, 1983; Jensen, 1993). It also emphasizes the superiority of internal supervision and monitoring provided by indecorporate boards. Furthermore, the independence of audit committees is also considered important in ensuring effective external monitoring byindependent auditors and in providing reliable information to shareholders and other stakeholders.

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Sidney Leung a,⇑, Grant Richardson b,1, Bikki Jaggi c,2

a City University of Hong Kong, Hong Kongb The University of Adelaide, Australiac Rutgers University, United States

a r t i c l e i n f o a b s t r a c t

Article history:Received 19 July 2012Revised 30 September 2013Accepted 31 October 2013Available online 4 December 2013

Keywords:Family firmsBoard independenceCommittee independenceFirm performance

This study examines whether the relationship between corporate board and board com-mittee independence and firm performance is moderated by the concentration of familyownership. Based on a sample of Hong Kong firms, we find no significant associationbetween the independence of corporate boards or board committees and firm performancein family firms, whereas board independence is positively associated with firm perfor-mance in non-family firms. Additionally, our findings show that the proportion of indepen-dent directors on the corporate boards of family firms is lower than that of non-familyfirms, but we find no significant difference in the representation of independent directorson the key committees of corporate boards between family and non-family firms. Overall,these results suggest that the ‘‘one size fits all’’ approach required by the regulatory author-ities for appointing independent directors on corporate boards may not necessarilyenhance firm performance, especially for family firms. Thus, the requirement to appointindependent directors to the corporate boards of family firms needs to be reconsidered.

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1. Introduction

In the 1990s, the Cadbury Report (Cadbury Committee, 1992) and several research studies (e.g. Greenbury, 1995; Hampel,1998) recommended the appointment of more independent non-executive directors (INEDs) to corporate boards and theirkey committees (i.e. audit, remuneration, and nomination committees) to improve board and board committeeeffectiveness.3 Several studies argue that board independence enhances board effectiveness and improves firm performance(e.g. Rosenstein and Wyatt, 1990; Choi et al., 2007). The findings of several empirical studies provide evidence supportingthe expectation that independent boards and board committees provide more effective monitoring of managerial decisionsand activities (e.g. Xie et al., 2003; Byrd and Hickman, 1992; Rosenstein and Wyatt, 1990), while other studies show that

0349.

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S. Leung et al. / Journal of Contemporary Accounting & Economics 10 (2014) 16–31 17

independent boards and board committees provide unbiased counsel and guidance to management (e.g. Anderson and Reeb,2004; Dahya and McConnell, 2005). These findings confirm that independent corporate boards and board committees resultin improved firm performance because they provide effective monitoring and guidance for management.

The Sarbanes–Oxley Act (SOX) of 2002 placed special emphasis on the independence of corporate boards and audit andcompensation committees in US firms. The enactment of SOX also led to modifications to the listing regulations of the NewYork Stock Exchange (NYSE) in 2003, requiring the appointment of independent directors on corporate boards and key cor-porate committees (e.g. audit, compensation, and nomination committees) of listed companies.4 The corporate governancedevelopments in the US encouraged the legislative bodies and regulatory agencies of several other countries (e.g. Australia, Can-ada, Hong Kong, Israel, Japan, and the United Kingdom) to modify their corporate governance regulations and to require theappointment of independent directors to corporate boards.

Lane et al. (2006), however, argue that the corporate governance reforms of publicly held firms may not be relevant forfamily-owned businesses because, unlike public companies, these firms have no agency problem. Consistent with the argu-ment made by Lane et al. (2006), we argue that the appointment of independent directors to corporate boards is not likely toenhance corporate performance in all firms across all countries, and especially not in family firms in countries with devel-oping economies. Moreover, we argue that there is likely to be a lower percentage of independent directors on the corporateboards of family firms because the controlling families may consider independent non-executive directors (INEDs) as anunnecessary interference in their decision-making processes and as a potential threat to their power. We therefore empir-ically test whether the relationship between corporate board and board committee independence and firm performance dif-fers between family and non-family firms. In particular, we examine whether family ownership and control moderates theassociation between firm performance and board independence, as documented in the existing literature. Additionally, weconduct a comparative analysis on the proportion of independent directors on the corporate boards and board committees offamily and non-family firms to examine whether the proportion differs between family and non-family firms.

We base our study on Hong Kong firms because a significant number of these firms are family owned and controlled (e.g.Ho and Wong, 2001; Claessens et al., 2002; Jaggi et al., 2009).5 Another important reason to use Hong Kong data is the signif-icant variations between Hong Kong firms in terms of the proportion of independent directors on corporate boards and theirsub-committees, which allows us to conduct comparative analyses of family and non-family firms within a single business envi-ronment.6 We use a sample of 487 firms traded on the Hong Kong Stock Exchange for which data are available from the GlobalVantage database for the financial year 2005–2006. This period is chosen because it represents the first year in which the newcode on corporate governance practice was fully implemented in Hong Kong.

Consistent with Anderson and Reeb (2003) and Jaggi et al. (2009), we label a firm as a ‘family firm’ if family ownership isgreater than 20%; otherwise, it is labeled as a ‘non-family firm’. Our findings show that there is a positive association be-tween board independence and firm performance for the non-family firms, but, consistent with our expectations, the posi-tive association is moderated by family ownership concentration. This finding suggests that the effectiveness of independentboards in improving firm performance is dependent on the ownership structure of the firm, and that independent corporateboards and board committees do not play any significant role in enhancing firm performance in family firms. In contrast, wefind that firm performance is positively associated with corporate board independence in the non-family firms.

Further analysis of the data in this study shows that the proportion of independent directors is lower in the family firmscompared with the non-family firms. However, there is no significant difference in the proportion of independent directorson audit, nomination, and remuneration committees between the family and non-family firms. An analysis of the back-ground of the independent directors shows that the family firms are less inclined to appoint independent directors with aprofessional background. Overall, these results suggest that family firms prefer non-independent corporate boards to avoidany threat to their authority and any potential interference in their decision-making processes.

This study makes several important contributions to the literature. First, although the current regulatory framework andrequirements for corporate governance practices and independent directors are based on the assumption that ‘‘one size fitsall,’’ our findings show that this approach is unlikely to improve firm performance for all firms. Our findings support thatargument by Corbetta and Salvato (2004) that the board’s roles and characteristics vary widely between different types offirms, implying that not all firms necessarily require similar kinds of boards and governance structures. Second, our findingsshow that although board and board committee independence is positively associated with firm performance in non-familyfirms, we find no significant association between board and board committee independence and firm performance in thefamily firms. Third, our findings suggest that board independence, which serves as a mechanism to mitigate the agency con-flict between managers and shareholders, may not be as useful in family firms compared with non-family firms because the

4 The appointment of independent directors to the corporate boards of US firms was also encouraged by institutional investors, especially the CaliforniaPublic Employees’ Retirement System (CalPERS).

5 It is documented in the literature that ownership structure plays an important role in corporate governance and firm performance (e.g. Corbetta andSalvato, 2004; Lubatkin et al., 2005). It is also documented that the ownership of firms in countries with emerging economies is generally concentrated in thehands of a few families, with most also controlled by the ownership-dominating family (Claessens et al., 2002). This type of ownership structure contrasts withthat of firms operating in Western industrialized countries, where ownership tends to be widely diffused (Claessens et al., 2002). Given the differences inownership structure between firms operating in countries with emerging economies and those in the US, a study based on Hong Kong firms should provideuseful information for the evaluation of firms from countries with developing economies.

6 US firms are required by the NYSE to have 100% independent audit, remuneration, and nomination committees. Thus, there is little variation in therepresentation of independent directors on their key board committees.

18 S. Leung et al. / Journal of Contemporary Accounting & Economics 10 (2014) 16–31

agency conflict in a family firm is between the majority shareholders and the minority shareholders. Fourth, our results pro-vide useful insights to regulators and investors on the effectiveness of mandating the appointment of independent directorsto corporate boards and board committees in countries with emerging economies where family ownership is common (e.g.Indonesia, Malaysia, Taiwan, and Thailand). These findings suggest that separate guidelines for family and non-family firmswould be more useful.

The remainder of the paper is organized as follows. Section 2 discusses the background of the study. Section 3 reviews theexisting literature and develops hypotheses. The research design is presented in Section 4 and the empirical results arediscussed in Section 5. Section 6 presents our conclusions.

2. Background

2.1. Family ownership and agency problems in Hong Kong firms

To evaluate the monitoring role of corporate boards, it is important to understand the ownership structure of HongKong firms. Whereas ownership of many publicly traded firms in Western industrialized countries (especially the USand the UK) is widely diffused, the ownership of many Hong Kong firms is concentrated in the hands of a few families.It is reported that the 10 most prominent families in Hong Kong control around 32.1% of all corporate assets (Tsui andStott, 2004) and that approximately half of Hong Kong’s firms are controlled by families through family board members(Jaggi et al., 2009). Furthermore, evidence shows that the controlling families in Hong Kong routinely appoint family mem-bers as chairpersons or executive directors to safeguard their personal interests in their firms (Ho and Wong, 2001; Jaggiet al., 2009).

Given the family ownership concentration in Hong Kong firms, the nature of the agency problem in Hong Kong firms dif-fers from that experienced by firms in industrialized countries. Family shareholders have a long-term investment horizonand generally maintain ownership over several generations (Anderson and Reeb, 2004), so these firms routinely appointfamily members as senior executives and board directors (Jaggi et al., 2009). Given the alignment between the interestsof family shareholders and family managers, the usual agency problem pitting shareholders against managers is almostnon-existent. However the concentration of ownership in the family firms gives rise to another type of agency problem,namely the conflict of interests between majority and minority shareholders. This is referred to in the literature as the TypeII agency problem (Ali et al., 2007). The controlling family can exploit their ownership and control of the firm to expropriateminority shareholders’ interests. This problem is further aggravated by the lack of a market control mechanism. This situa-tion creates a special problem for independent directors seeking to protect the interests of minority shareholders in familyfirms.

2.2. Institutional and economic environment of Hong Kong

Despite the existence of well-developed financial markets and self-regulation, Hong Kong’s institutional environmentdiffers markedly from that of Western industrialized countries, especially with regard to external corporate controlmechanisms and debt. There are almost no hostile takeovers and mergers and acquisitions in Hong Kong (Tsui and Stott,2004). Whereas public borrowing is common in the US, private bank borrowing is customary in Hong Kong. Another impor-tant difference is the way that business is conducted in Hong Kong. The personal network system (guanxi), which emphasizestrust and informal relationships over formal contracts, is an integral part of the corporate governance structure in HongKong. Moreover, members of controlling families are often appointed to corporate boards and senior management positionsin family firms in Hong Kong (Jaggi et al., 2009).

2.3. The Code on Corporate Governance Practices on board independence in Hong Kong

A major provision of the Hong Kong Code on Corporate Governance Practices, which became effective from January 1,2005, aims at ensuring that corporate boards include a balanced composition of executive directors and independentnon-executive directors (INEDs). Under Rule 3.10, the board of directors of a firm must include at least three INEDs. The bestpractices further recommend that at least one third of board members should be INEDs. Previous studies define an indepen-dent director as an outside non-executive director who is not employed by the firm, is not related to any key employee, isindependent from senior management, and has never worked at the firm or any of its subsidiaries, or for its consultants or itsmajor suppliers or customers (e.g. Hooghiemstra and van Manen, 2004; Dulewicz and Herbert, 2004; Kang et al., 2007). Animportant role of the INEDs is to contribute expertise and objectivity in advising and monitoring managerial decisions andfirm performance. Moreover, Hong Kong firms are advised to establish three main board committees: (1) an audit commit-tee, (2) a compensation committee, and (3) a nomination committee. Committee independence refers to the extent of direc-tors’ freedom from potential managerial power and is measured by the proportion of independent directors on the boardcommittee (Yeh et al., 2011).

S. Leung et al. / Journal of Contemporary Accounting & Economics 10 (2014) 16–31 19

3. Literature review and hypotheses

3.1. Literature on corporate board independence and firm performance

The existing research provides mixed evidence on the association between board composition and firm operating perfor-mance, proxied by accounting measures such as the return on assets, the ratio of sales to assets, the ratio of operating incometo assets, the ratio of operating income to sales, and Tobin’s Q.

An early study by Vance (1964) documents a positive association between the proportion of inside directors and perfor-mance measures. The findings of other earlier studies report either no statistically significant association (e.g. MacAvoy et al.,1983; Baysinger and Butler, 1985; Hermalin and Weisbach, 1991) or a negative association. Yermack (1996) reports a sig-nificantly negative association between the proportion of independent directors on the board and contemporaneous Tobin’sQ, but no significant association for other key performance measures. Agrawal and Knoeber (1996) also report a negativeassociation between independent directors and Tobin’s Q. A study by Bhagat and Black (1999), which focuses on thelong-term relationship between board composition and firm performance, reports a significant negative association betweenboard independence (measured as the proportion of independent directors minus the proportion of inside directors) and dif-ferent firm performance measures. Their study particularly shows that boards with a supermajority of independent directorsare associated with poor firm performance.

The findings of a number of recent studies, however, provide evidence supporting a positive association between boardindependence and firm performance. For example, Dahya and McConnell (2005) show that firm performance in the UnitedKingdom is positively associated with corporate board independence. Their findings specifically show that the addition ofindependent directors to the board in response to the Cadbury Report resulted in a significant improvement in firms’ oper-ating performance both in absolute terms and in relation to a benchmark based on the firms’ peer group. Similarly, Choi et al.(2007) report the positive effect of board independence on the performance of Korean firms in the aftermath of the Asianfinancial crisis. They also find that external institutional ownership, and especially foreign ownership, has a positive influ-ence on firm performance.

3.2. Hypothesis on the association between board independence and firm performance

The agency and stewardship theories both suggest that independent directors have a positive role to play in enhancingfirm performance. Although there is no conclusive evidence on the association between firm performance and board inde-pendence, the findings of several studies based on firms from different countries suggest that independent corporate boardsprovide improved monitoring of managerial decisions and activities (e.g. Beasley, 1996; Dahya and McConnell, 2005). Thereare, moreover, strong theoretical arguments supporting the independence of corporate boards and board committees be-cause they are considered to play an important role in protecting shareholders’ interests (Fama and Jensen, 1983).

The independence of corporate boards is also supported on the basis that it enables them to perform their decisioncontrol function effectively. It is argued that although the management is primarily responsible for corporate strategyand for making decisions on the firm’s day-to-day operations, corporate boards perform decision control functions thatinvolve the ratification and monitoring of managerial decisions (Fama and Jensen, 1983). This decision control functiontherefore requires corporate boards to be independent to maintain the necessary balance between the power of manage-ment and the monitoring of managerial activities so that managerial decisions enhance firm value. Consistent with thesetheoretical arguments, we expect that independent corporate boards will have a positive influence on firm performance,especially in the firms where owners are not involved in the management and control functions, namely non-familyfirms.

In contrast, family-controlled firms, which do not have a clear separation between management and capital providersresulting in a divergence of interests between shareholders and managers, experience a different type of agency problemthat creates a conflict of interests between majority and minority shareholders. Given the family ownership concentrationand management control of these firms, the expectation of a positive association between board independence and firmperformance becomes questionable. There is, however, no empirical evidence so far that shows how family ownership con-centration and control affects the association between independent corporate boards and firm performance. We argue thatthe appointment of independent directors to the corporate boards of family firms is unlikely to have a significant effect onfirm performance. Family managers or family-related managers in these firms are likely to make decisions which are in thebest interests of the family. Therefore, monitoring by independent outside directors is not welcomed by these managers. Infact, managers of the family firms may consider monitoring by or advice from outside independent directors to be a form ofinterference in their affairs and decisions. Instead, these managers prefer loyalty from outside independent directors andreward loyal directors by reappointing them to the board. Overall, we do not expect the presence of outside independentdirectors to improve firm performance significantly in the family firms. We propose the following hypothesis to test thisexpectation:

H1. The positive relationship between board independence and corporate performance is moderated by family ownershipconcentration.

20 S. Leung et al. / Journal of Contemporary Accounting & Economics 10 (2014) 16–31

3.3. Hypothesis on the association between key committee independence and firm performance

The board of directors generally conducts its work either through a full board or by delegating its authority to key stand-ing committees that are ultimately responsible to the board. Klein (1998) argues that independent directors can performtheir roles more effectively through key committees. Three types of committees are considered to be key committees inthe Hong Kong firms in this study. These are the: (1) audit; (2) remuneration; and (3) nomination committees.7 The auditcommittee reviews financial statements, the audit process, and internal controls to ensure that accounting information isunbiased. The remuneration committee determines and implements compensation packages for senior managers to align themanagers’ goals with those of shareholders. The main function of the nomination committee is to recruit high-quality directorsand senior managers. If the independence of the corporate committees results in improved operating performance, then firmperformance should be positively associated with committee independence. However, only a few studies have examined theinfluence of board committees on firm performance. Wild (1994) finds that the market reacts more favorably to earnings reportsif the firm has set up an audit committee, but there is no conclusive evidence on the relationship between board committeestructure and firm performance (e.g. Klein, 1998; Vafeas and Theodorou, 1998; Weir and Laing, 2001). Similarly to the argu-ments on the weaker effectiveness of INEDs in family firms, we expect that the positive association between the independenceof key corporate committees and firm performance is also moderated by the family ownership concentration. This expectationis tested by the following hypothesis:

H2. The positive relationship between the independence of key corporate committees and corporate performance ismoderated by family ownership concentration.

3.4. Analyses of the percentage of independent directors on corporate boards and committees of family firms versus non-familyfirms

The independence of corporate boards in Hong Kong and other developing countries received increased attention afterthe enactment of SOX in the US. Taking the lead from SOX, new corporate governance guidelines have been developed inthese countries to require a higher proportion of independent directors on corporate boards. The appointment of a higherproportion of independent directors is supported on the basis that independent directors should provide more effectivemonitoring and better advice to the management, which should improve the quality of reported information and enhancefirm performance. However, we argue that the shareholders and managers of family firms are not likely to have any incentiveto appoint independent directors and that there will thus be a limited need for independent directors.

Our argument suggests that, notwithstanding the regulatory guidelines, family firms lack incentives to appoint a higherproportion of independent directors. We present the following argument in support of our expectations. First, as discussedabove, the agency theory argument supporting corporate board and committee independence may not be relevant for familyfirms because the majority shareholders also manage and control these firms. Given the differences in the nature of theagency problem, it is questionable whether family firms are motivated to appoint independent directors to their boardsand committees. Second, it is argued that family firms are likely to appoint independent directors only if they agree withthe firms’ existing business philosophy and strategies rather than expressing independent views and opposing the familymanagers. Consequently, these directors may be independent in name only and will be loyal to the controlling family thatappoints them to the board (Lane et al., 2006). Third, the controlling family members are expected to have superior knowl-edge of the firm’s business activities compared with outside directors. Consequently, there is no motivation for owners toseek advice from these outsiders. This serves as another disincentive to appoint outsiders to the board. Fourth, family firmsare unlikely to consider the ‘‘checks-and-balances’’ role of independent corporate boards and committees to be important fortheir firms, and hence there is no compelling need for them to appoint independent directors. Fifth, the controlling familymembers may be unwilling to share information and power with outside board members, thereby reducing the cooperativeinteraction between family members and independent directors (Westphal, 1999). Thus, family members may worry aboutthe loss of control, autonomy, privacy and confidentiality that would result from the appointment of independent directorsto the board (Gersick et al., 1997).

We argue that the percentage of independent directors on corporate boards in family firms is lower than in non-familyfirms, and we test this expectation with the following hypothesis:

H3. Family ownership concentration is negatively associated with the proportion of independent directors on the corporateboards of Hong Kong firms.

Both SOX in the US and the Hong Kong regulations emphasize that audit committees should be independent. The inde-pendence of remuneration committees is also supported by the literature on the grounds that this committee should beunbiased in its recommendations on matters of executive compensation (Cadbury Committee, 1992). US firms are required

7 The Hong Kong Code on Corporate Governance Practices includes no recommendations for the establishment of finance and investment committees inHong Kong firms.

S. Leung et al. / Journal of Contemporary Accounting & Economics 10 (2014) 16–31 21

to appoint fully independent nomination committees to ensure that the nomination process is unbiased. We examinewhether Hong Kong firms, particularly family firms, recognize the importance of independent key corporate board commit-tees. Based on arguments similar to those concerning the comparatively lower degree of independence in the corporateboards of Hong Kong family firms, we expect that these firms are less likely to be in favor of independent directors onkey board committees. We test this expectation with the following hypothesis:

H4. Family ownership concentration is negatively associated with the appointment of independent directors on keycorporate board committees (i.e. the audit, nomination, and remuneration committees).

4. Research methodology

4.1. Sample selection

The latest Code on Corporate Governance Practices established by the Hong Kong Stock Exchange was first implementedby Hong Kong firms in the financial year ending December 2005. Therefore, we focus on Hong Kong firms and use data for theyear ending November 30, 2006, which was the first financial year in which the Code was implemented. We obtained finan-cial data from the Global Vantage database for 2005–2006. Data on family ownership, INED representation on corporateboards and committees, and other corporate governance variables were manually collected from the annual reports of sam-ple firms. We also manually collected data on the attributes of directors, including their degree of independence, from theDirectors’ Report section of the annual reports of sample firms. The details of INED representation on audit, nomination, andremuneration committees were manually obtained from the Corporate Governance section of the reports. Information onfamily ownership and control was collected from the Director and Management profiles of each firm’s annual report.

We exclude financial institutions from our sample because they are regulated by the Hong Kong Monetary Authority andare subject to different rules. To mitigate the effect of outliers, we delete extreme observations that exceed four standarddeviations from the mean value of the respective variable. Our final sample comprises 487 firms.8

4.2. Measurement of key variables

We use two proxy measures for corporate board independence at the board level. First, we use the percentage of INEDs onthe corporate board (PIND) to reflect the extent of INED representation. Second, we use the ‘‘one-third’’ criterion recom-mended in the Corporate Governance Best Practices report of the Hong Kong Stock Exchange. A dummy variable for boardindependence is coded as 1 if more than one-third of the members on the board are INEDs (ONETHIRD), and 0 otherwise. Twoproxy measures are also used to reflect the independence of audit, nomination, and remuneration committees. The firstproxy measure relates to the independence of the committee chairperson. The dummy variables AC_CHIND, NC_CHIND, orRC_CHIND are each coded as 1 if the chairperson of the respective committee is an INED, and 0 otherwise. The second proxymeasure relates to the proportion of INEDs on the committee and is expressed as AC_PIND, NC_PIND, or NC_PIND. We use thefollowing two proxy measures for firm performance: return on assets (ROA) for accounting performance and the market-ad-justed annual stock return (RET) for stock performance.9,10

We differentiate between family and non-family firms based on the degree of family ownership, which is calculated asthe fraction of total ordinary shares held by family directors at the personal, family, and corporate levels, representingthe ultimate voting control of the family over the firm. We are, however, unable to measure the disparity between familyvoting rights and effective ownership rights because the information provided in the footnotes of the annual reports onthe corporate interests of directors is insufficient to map the effective ownership of family members.11 Consistent withAnderson and Reeb (2003) and Jaggi et al. (2009), we consider the firm as a ‘family firm’ if the family ownership is greater than20%; otherwise, it is considered as a ‘non-family firm’.

4.3. Regression models

To test whether family ownership control affects the association between board and board committee independence andfirm performance, we use the following regression model:

8 Notsample

9 Tha10 We11 We

We pre

PERFi ¼ b0 þ b1BIi þ b2FAMDUMi þ b3BI � FAMDUMiþ b4ROAit�1 þ b5RET VOLATILITYi þ b6SIZEi þ b7GROWTHi

þ b8SUBi þ b9BOARDi þ b10CEO OWNi þ b11IND SHAREi þ INDDUMMIESi þ ei ð1Þ

e that the number of observations for analysis of the independence of the nomination and remuneration committees is smaller than that for the full(i.e. 487 firms) because some of the sample firms have no such committees.t is, adjusted by the market return for the same period based on the Hang Seng Index.also use return on equity (ROE) and Tobin’s Q to measure firm performance, and report these results in the section on robustness checks of this paper.also use dummy variables for family ownership greater than 20% and the presence of family members on the board as proxy measures of family control.

sent these results in the section on robustness checks in this paper.

22 S. Leung et al. / Journal of Contemporary Accounting & Economics 10 (2014) 16–31

where the dependent variable PERF is firm performance, as proxied by ROA or RET, and the independent variable BI is thecorporate board independence variable. In the tests of full board independence, BI is measured by PIND (the percentageof INEDs on a corporate board) or ONETHIRD (the number of firms in which more than one-third of board members are inde-pendent). In the tests of committee independence, BI refers to whether the chairperson of a committee is an INED (AC_CHIND,NC_CHIND, or RC_CHIND), and the proportion of INEDs on a committee (AC_PIND, NC_PIND, or NC_PIND). FAMDUM is thedummy variable for family firms (FAMDUM equals ‘‘1’’ if family ownership is greater than 20%) and BI * FAMDUM is the inter-action term between BI and FAMDUM.

We also include several control variables in our regression model that have been used in previous research investigatingthe association between firm performance and corporate governance structure (e.g. Yermack, 1996; Klein, 1998; Bhagat andBlack, 2002; Anderson and Reeb, 2003).12 Following Klein (1998), the previous year’s firm performance is included to controlfor the previous-year effect. The inclusion of past performance (lagged dependent variable) helps to alleviate the potential prob-lem of endogeneity in the research design. When RET is used as the dependent performance (PERF) variable, the model also in-cludes RETt�1 in addition to lagged ROA. We control for firm risk (RET_VOLATILITY) using the standard deviation of monthly stockreturns for the previous 60 months (Anderson and Reeb, 2003). Firm size (SIZE), firm growth (GROWTH), and the number of for-eign subsidiaries (SUB) are used to proxy for diversification and complexity (e.g. Yermack, 1996). Moreover, board size (BOARD)has been shown to be related to firm performance (e.g. Yermack, 1996; Bhagat and Black, 2002). Similarly to Bhagat and Black(2002), we also control for CEO ownership (CEO_OWN) and outside director ownership (IND_SHARE). Finally, we control forindustry-specific effects by including 2-digit SIC dummy variables. The definitions of all of the variables in Eq. (1) are summa-rized in Appendix A of the paper.

4.4. Endogeneity problem and 3SLS regression

Endogeneity represents a potential problem when investigating the association between board independence, firmperformance, and family ownership. Anderson and Reeb (2003) argue that both family ownership and firm performancemay be endogenously determined. Moreover, instead of firm performance being the result of board structure, it is pos-sible that the board structure is decided based on firm performance. Hermalin and Weisbach (2003) argue that under-performing firms may hire more outside directors. To address the potential endogeneity between board independence,firm performance, and family ownership, we perform 3SLS regression analysis, allowing family ownership, firm perfor-mance, and board and committee independence to be jointly determined. Consistent with Demsetz and Lehn (1985)and Anderson and Reeb (2003), we use the following logistic regression equation to estimate the family dummyvariable:

12 Preavailab

FAMDUMi ¼ b0 þ b1PERFit�1 þ b2RET VOLATILITYi þ b3SIZEi þ b4SIZE2i þ ei ð2Þ

where the dependent variable, FAMDUM, is the proportion of shares owned by family members on the board; the indepen-dent variable, PERF is market-adjusted stock returns at the end of the previous year (RETt�1) or the return on assets, which isdefined as the ratio of income after tax to the book value of total assets at the end of the previous year (ROAt�1); the controlvariables, which are represented by the standard deviation of monthly stock returns over the past 5 years (RET_VOLATILITY),firm size (SIZE), which is defined as the natural log of the firm’s total assets at the end of the fiscal year (in thousands of HongKong dollars), and SIZE2 which is the square of the natural log of total assets at the end of the fiscal year (in thousands ofHong Kong dollars).

In the regression of board and board committee independence, we follow Bhagat and Black (2002) and regress BI on thefollowing variables in Eq. (3):

BIi ¼ b0 þ b1PERFi þ b2CEO OWNi þ b3IND SHAREi þ b4BLKHOLDi þ b5SIZEi þ ei ð3Þ

where the dependent variable BI is board independence, which is divided into the independence of the full board, the auditcommittee (AC), the nomination committee (NC), and the remuneration committee (RC); the independent variables are PERF– return on assets (ROA), which is defined as the ratio of income after tax to the book value of total assets at the end of thefiscal year, and market-adjusted stock returns (RET), which is defined as the market-adjusted stock returns at the end of thefiscal year; finally, the control variables are the percentage of CEO ownership (CEO_OWN), the percentage of outside direc-tors’ ownership (IND_SHARE), the proportion of substantial shareholdings other than directors (BLKHOLD) and firm size(SIZE), which is defined as the natural log of the firm’s total assets at the end of the fiscal year (in thousands of Hong Kongdollars).

To evaluate the effect of family ownership concentration on the association between firm performance and boardindependence, we focus on the effect of the interaction between FAMDUM and the board-independence variables inEq. (1).

vious studies also examine the effects of R&D expenditure and capital expenditure on firm performance. However, such information is not publiclyle in the annual reports of Hong Kong firms, so we do not include these two variables in our regression models.

S. Leung et al. / Journal of Contemporary Accounting & Economics 10 (2014) 16–31 23

5. Empirical results

5.1. Descriptive statistics

The descriptive statistics for the dependent and independent variables are reported in Table 1. Panel A shows that 63.5%of the firms meet the Hong Kong Stock Exchange guidelines by having INEDs make up more than one-third of the boardmembership. On average, the proportion of INEDs on corporate boards is 40%. All of the firms have audit committees,92.2% of which are chaired by an INED, as recommended in the guidelines. However, only 117 firms (24%) have nomination

Table 1Descriptive statistics for all variables (N = 487).

Continuous variables N Mean Std. Dev. Minimum Median Maximum

Panel ARET 464 �0.09 0.45 �1.17 �0.15 2.29ROA 487 0.02 0.14 �0.79 0.04 0.58PIND 486 0.40 0.10 0.18 0.38 0.67IND_PRO 486 1.99 0.94 0.00 2.00 4.00AC_PIND 486 0.94 0.12 0.60 1.00 1.00NC_PIND 117 0.72 0.17 0.33 0.67 1.00RC_PIND 456 0.74 0.15 0.33 0.67 1.00FAMDUM 487 0.39 0.49 0.00 0.00 1.00RETt�1 470 0.60 0.79 �0.95 0.61 4.03ROAt�1 487 0.00 0.21 �1.99 0.04 0.38RET_VOLATILITY 487 0.04 0.17 0.00 0.01 1.47AGE 487 11.48 8.31 1.00 10.00 47.00SIZE 487 6.70 1.65 2.21 6.69 11.73GROWTH 487 0.28 1.05 �0.62 0.09 12.95DEBT 487 0.44 0.26 0.00 0.44 3.15SUB 487 1.46 0.94 0.00 1.39 4.26BOARD 487 2.09 0.26 1.61 2.08 2.88CEO_OWN 487 15.62 21.00 0.00 1.50 78.84IND_SHARE 487 0.03 0.10 0.00 0.00 0.52

Dichotomous variables Yes No

ONETHIRD 309 (63.45%) 178 (36.55%)AC_CHIND 449 (92.20%) 38 (7.80%)NC_CHIND 75 (64.10%) 42 (35.90%)RC_CHIND 301 (66.01%) 155 (33.99%)CEO 176 (36.14%) 311 (63.86%)

Family firms (N = 190) Non-family firms (N = 297)Continuous variables Mean Mean

Panel BRET �0.11 �0.08ROA 0.02 0.02PIND 0.39 0.40IND_PRO 1.88 2.07AC_PIND 0.93 0.94NC_PIND 0.72 0.71RC_PIND 0.73 0.74RETt�1 0.58 0.61ROAt�1 0.03 �0.02RET_VOLATILITY 0.06 0.03AGE 11.69 11.35SIZE 6.62 6.75GROWTH 0.15 0.37DEBT 0.45 0.43SUB 1.53 1.42BOARD 2.10 2.08CEO_OWN 22.28 11.37IND_SHARE 0.04 0.03

Family firms Non-family firms

Dichotomous variables Yes No Yes No

ONETHIRD 115 (60.53%) 75 (39.47%) 194 (65.32%) 103 (34.68%)AC_CHIND 174 (91.58%) 16 (8.42%) 275 (92.59%) 22 (7.41%)NC_CHIND 25 (60.98%) 16 (39.02%) 50 (65.79%) 26 (34.21%)RC_CHIND 111 (63.43%) 64 (36.57%) 190 (67.62%) 91 (32.38%)CEO 68 (35.79%) 122 (64.21%) 108 (36.36%) 189 (63.64%)

Table 2Correlation matrix.

Variable RETt ROAt ONETHIRD PIND IND_PRO AC_CHIND AC_PIND NC_CHIND NC_PIND RC_CHIND RC_PIND

Panel A: Correlation among board independence, family control and performance variablesROAt 0.24***

ONETHIRD �0.01 �0.09*

PIND �0.02 �0.14*** 0.77***

IND_PRO �0.06 �0.07 0.09** 0.15***

AC_CHIND 0.07 0.13*** �0.01 �0.06 �0.002AC_PIND �0.06 �0.13*** 0.28*** 0.30*** 0.16*** 0.03NC_CHIND 0.11 0.19** 0.22** 0.09 0.13 0.30*** 0.01NC_PIND �0.10 0.11 0.27*** 0.19** 0.09 0.17* 0.24*** 0.25***

RC_CHIND 0.01 0.03 0.10** 0.06 0.08 0.23*** 0.13*** 0.79*** 0.20**

RC_PIND 0.07 0.04 0.17*** 0.20*** 0.05 �0.02 0.22*** 0.16* 0.70*** 0.23***

FAMDUM �0.04 0.02 �0.05 �0.07 �0.10** �0.02 �0.05 �0.05 0.03 �0.04 �0.04

Variable RETt�1 ROAt�1 RET_VOLATILITY AGE SIZE GROWTH DEBT SUB CEO BOARD CEO_OWN

Panel B: Correlation among control variablesROAt�1 0.11**

RET_VOLATILITY �0.04 0.03AGE 0.15*** 0.08* �0.18***

SIZE 0.19*** 0.41*** �0.06 0.36***

GROWTH 0.02 0.01 0.08* �0.02 �0.01DEBT 0.02 �0.24*** 0.01 �0.05 �0.02 �0.01SUB 0.10** 0.04 �0.01 0.15*** 0.26*** 0.02 0.04CEO �0.07 �0.04 �0.03 �0.10** �0.11** �0.01 0.02 0.01BOARD 0.11** 0.22*** �0.06 0.20*** 0.55*** �0.01 �0.02 0.08* �0.24***

CEO_OWN �0.09** 0.08* 0.06 �0.10** �0.10** �0.13*** 0.04 0.05 0.55*** �0.20***

IND_SHARE 0.01 0.03 �0.04 0.20*** 0.11** �0.06 �0.02 0.11** 0.05 0.11** 0.04

* Correlation is significant at the 0.1 level (two-tailed).** Correlation is significant at the 0.05 level (two-tailed).*** Correlation is significant at the 0.01 level (two-tailed).

24 S. Leung et al. / Journal of Contemporary Accounting & Economics 10 (2014) 16–31

committees. On average, 72% of the nomination committee members are INEDs, and 64.1% of these committees are chairedby INEDs. Remuneration committees have been established by 456 (93.6%) of the firms and, on average, 74% of remunerationcommittee members are INEDs, and 66% have an INED as the chairperson.

Panel B of Table 1 indicates that the stock returns of family firms are lower than those of non-family firms whereas re-turns on assets are similar for the two groups. Firm size is similar for the two groups of firms. Firm growth is significantlyhigher for non-family firms than family firms. It also needs to be pointed out that the proportion of non-family firms havingmore than one-third of the board of directors held by INEDs is 65.3%, which is higher than the 60.5% in the family firms. Thenon-family firms have a higher probability of an INED serving as the chair of any of the three sub-committees (audit com-mittees, nomination committees and remuneration committees) than the family firms.

The correlation matrix for the dependent and independent variables is presented in Table 2. Panel A shows that, asexpected, RET is positively associated with ROA. Moreover, we find that firms with a higher percentage of INEDs on their cor-porate boards also have a higher percentage of INEDs on all three committees. Finally, we observe that FAMDUM is negativelyassociated with IND_PRO. The correlations among control variables in Panel B are low to moderate, suggesting that multicol-linearity is not likely to drive our empirical results.

5.2. Regression results

5.2.1. Family ownership, board independence, and firm performanceWe first run a regression analysis without differentiating between family and non-family firms. We use the model shown

in Eq. (1) but exclude the variable of FAMDUM and BI * FAMDUM. The OLS regression shows that the association betweenboard independence and performance measures is statistically insignificant (results not tabulated).13 The results for the com-mittees show that there is a positive association between the independence of the audit committee chairman and ROA, and alsobetween the independence of the nomination committee chairman and ROA. The independence of the remuneration committeechairman is positively associated with ROA and with RET.

We use an interaction variable between the family-firm dummy (FAMDUM) and board independence (IND) to examinethe effect of family ownership concentration on the association between board and board committee independence and firmperformance. We present the results on OLS and 3SLS in Table 3 (we do not include the results on control variables in theinterest of brevity).14

13 The three pages of results are not tabulated and are available from the authors upon request.14 These detailed results are available from the authors upon request.

Table 3Interaction effects between board independence and family control on firm performance.

Board independence ROA RET Audit committeeindependence

RET RET

Interaction results OLS 3 SLS OLS 3 SLS Interaction results OLS 3 SLS OLS 3 SLS

Panel A Panel BONETHIRD 0.02 (0.86) 2.15*** (7.32) 0.05 (0.65) 2.92*** (2.57) AC_CHIND 0.04* (1.57) 2.84*** (11.47) 0.15* (1.36) 2.59* (1.58)FAMDUM 0.01 (0.46) 0.002 (0.01) 0.02 (0.26) 0.95 (�1.11) FAMDUM 0.01 (0.13) �4.46*** (�6.17) 0.16 (1.01) 0.21 (0.04)ONETHIRD * FAMDUM �0.03 (�1.05) �1.72*** (�4.74) �0.05 (�0.50) �1.57 (�1.17) AC_CHIND * FAMDUM �0.01 (�0.30) 3.89*** (5.17) �0.19 (�1.12) �1.13 (�0.23)Control variablesa Yes Yes Control Variables Yes YesPIND 0.10 (0.76) �1.10 (�0.89) 0.01 (0.02) �3.09 (�0.66) AC_PIND �0.02 (�0.28) �13.73*** (�15.78) 0.10 (0.39) �11.73***

(�2.64)FAMDUM 0.07* (1.50) 1.23*** (2.38) 0.15 (0.84) 0.04 (0.02) FAMDUM 0.05 (0.54) 0.72 (0.60) 0.50* (1.49) �2.12 (�0.35)PIND * FAMDUM �0.21** (�1.70) �3.13** (�2.24) �0.42 (�0.94) �1.21 (�0.24) AC_PIND * FAMDUM �0.06 (�0.63) �0.62 (�0.47) �0.54* (�1.54) 1.93 (0.29)Control variables Yes Yes Control variables Yes Yes

Nominationcommitteeindependence

ROA RET Remunerationcommitteeindependence

ROA RET

Interaction results OLS 3 SLS OLS 3 SLS Interaction results OLS 3 SLS OLS 3 SLS

Panel C Panel DNC_CHIND 0.08** (2.08) 1.08*** (3.98) 0.05 (0.53) 0.07 (0.06) RC_CHIND 0.01 (0.38) 4.48*** (14.45) 0.05 (0.76) 2.65* (1.46)FAMDUM 0.10** (1.94) �0.58 (�0.97) 0.003 (0.02) �0.59 (�0.24) FAMDUM 0.003 (0.16) 1.72*** (3.24) 0.04 (0.47) �0.24 (�0.08)NC_CHIND * FAMDUM �0.09* (�1.56) 0.31 (0.41) �0.27** (�1.80) 0.27 (0.09) RC_CHIND * FAMDUM �0.01 (�0.53) �2.43*** (�3.03) �0.07 (�0.74) �0.32 (�0.07)Control variables Yes Yes Control variables Yes YesNC_PIND 0.15* (1.46) 5.04*** (13.98) �0.17 (�0.66) 0.56 (0.23) RC_PIND 0.15*** (3.18) 6.69*** (72.06) 0.25* (1.33) 5.05** (2.36)FAMDUM 0.15 (1.14) 1.69*** (2.50) �0.05 (�0.15) �4.95 (�1.11) FAMDUM 0.14** (2.35) 0.02 (0.14) �0.03 (�0.13) �0.01 (�0.001)NC_PIND * FAMDUM �0.18 (�0.99) �2.58*** (�2.75) �0.17 (�0.38) 6.94 (1.13) RC_PIND * FAMDUM �0.20***

(�2.47)�0.07 (�0.32) 0.03 (0.10) �0.79 (�0.15)

Control variables Yes Yes Control variables Yes Yes

Figures in parentheses denote t-statistics.a The control variables as in Eq. (1) are included in the regressions, but they are not shown for simplicity of presentation.

* Statistical significance at the 0.10 level, one-tailed test.** Statistical significance at the 0.05 level, one-tailed test.*** Statistical significance at the 0.01 level, one-tailed test.

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Table 4Univariate test for differences in board/committee independence between family and non-family firms.

Family firms Non-family firms P-value for t-test P-value for Wilcoxon rank test

PIND 38.8% 40.3% 0.05 0.07IND_PRO 1.88 2.07 0.01 0.01AC_PIND 92.7% 94.00% 0.15 0.15NC_PIND 72.3% 71.2% 0.17 0.38RC_PIND 72.8% 74.2% 0.17 0.18

P-value is based on the one-tailed significance.PIND: The percentage of the independent directors on the board.IND_PRO: The number of the independent directors with professional background on the board.AC_PIND: The percentage of independent directors on the audit committee.NC_PIND: The percentage of independent directors on the nomination committee.RC_PIND: The percentage of independent directors on the remuneration committee.

26 S. Leung et al. / Journal of Contemporary Accounting & Economics 10 (2014) 16–31

The results in Panel A, Table 3, on the independence of the corporate boards show that ONETHIRD is positively associatedwith ROA and RET, and that the coefficient is statistically significant. The coefficients for the interaction variable (both ONE-THIRD * FAMDUM and PIND * FAMDUM) are negative in all regressions and are statistically significant for ROA. This result isconsistent with our expectation that family ownership moderates the association between board independence and firmperformance. This finding supports our hypothesis H1 that family ownership and control weakens the association betweenboard independence and firm performance. In other words, the results confirm that there is no significant association be-tween board independence and firm performance for family firms.

5.2.2. Family ownership, key committee independence, and firm performanceThe results (Panel B, Table 3) for the effect of family ownership and control on the association between audit committee

independence and firm performance are mixed. The coefficient for the interaction term, AC_PIND * FAMDUM, is negative,whereas it is positive for AC_CHIND * FAMDUM. The results for the independence of the nomination and remuneration com-mittees are summarized in Panels C and D of Table 3. These results show that the coefficients for NC_CHIND, NC_PIND,RC_CHIND, and RC_PIND are significantly positive, suggesting that committee independence is positively associated with im-proved firm performance in non-family firms. The interaction terms between the family-firm dummy and the independenceof NC (NC_PIND * FAMDUM) and RC (RC_PIND * FAMDUM) are significantly negative, suggesting that family ownership concen-tration has a moderating effect on the positive relation between firm performance and the independence of the nominationand remuneration committees. Overall, these results are consistent with our hypothesis H2 and provide evidence in supportof our argument that the ownership concentration has a negative effect on the relationship between firm performance andcommittee independence. In other words, family ownership moderates the positive association between firm performanceand board independence.

The above results therefore show that a higher degree of independence for corporate boards and board committees, asrecommended by the Hong Kong regulators, is associated with improved firm performance only for non-family firms. How-ever, we find no evidence for the positive effect of board and committee independence on firm performance for family firms.

5.2.3. Percentage of independent members on the corporate board in family and non-family firmsWe conduct univariate as well as multivariate tests to compare the corporate board and board committee independence

of family and non-family firms. We use t-tests to evaluate the difference between the means of percentages of independentdirectors on the corporate boards and board committees in family and non-family firms. We also conduct non-parametricrank tests on the proportion of independent directors15 Additionally, we evaluate the professional background of independentdirectors (IND_PRO) in family and non-family firms, where an independent director is classified as having professional back-ground if he/she has considerable expertise and experience in the accounting, legal, banking, management, or investment pro-fessions, or has substantial technical knowledge of the industry.

The univariate test results are reported in Table 4. The mean PIND is 38.8% for family firms and 40.3% for non-family firms.The difference in the percentages of independent directors for the two groups of firms is significant, as indicated by the t-testand rank-test results, as reported in the Table 4. These results indicate that family firms have a lower percentage of indepen-dent directors, implying that they are less likely to appoint independent directors to their corporate boards. The averagenumber of independent directors with professional background (IND_PRO) is significantly lower in family firms (1.88) thanin non-family firms (2.07), suggesting that family firms place a lower value on the professional expertise of independentdirectors than non-family firms. An analysis of the details of professional background of INEDs shows that INEDs in familyfirms tend to have less professional expertise in the areas of law, banking, and investment, and more technical expertise inthe firm’s industry compared with INEDs in non-family firms. However, our univariate analyses of committee independence

15 We also use greater than zero or 50% as the cut-off point for family and non-family firms. The (untabulated) results are qualitatively similar to thosereported in Table 4.

Table 5Effects of family control on corporate board and sub-committees.

Board PIND IND_PRO

Coeff. (stat) Coeff. (stat)

Panel AIntercept 1.11*** (56.72) 2.75*** (7.30)FAMDUM �0.01* (�1.50) �0.18** (�1.98)ROAt�1 �0.02** (�1.70) �0.09 (�0.39)RET_VOLATILITY �0.01 (�1.00) 0.25 (1.02)AGE 0.001 (0.13) �0.003 (�0.51)SIZE 0.01*** (3.67) �0.04 (�1.14)GROWTH 0.001 (0.35) 0.07* (1.64)DEBT �0.004 (�0.51) 0.09 (0.54)SUB 0.004* (1.61) 0.02 (0.51)CEO 0.004 (0.87) 0.02 (0.23)BOARD �0.36*** (�35.43) �0.23 (�1.17)INDDUMMIES Yes YesN 486 486Adj. R-square 0.78 0.02

Subcommittee AC_PIND NC_PIND RC_PIND

Coeff. (stat) Coeff. (stat) Coeff. (stat)

Panel BIntercept 1.27*** (27.78) 1.10*** (7.83) 0.95*** (15.28)FAMDUM �0.01 (�0.77) 0.01 (0.37) �0.02 (�1.14)ROAt�1 �0.004 (�0.16) 0.08* (1.29) 0.05* (1.42)RET_VOLATILITY �0.06** (�2.07) 0.05 (0.64) 0.02 (0.51)AGE �0.003*** (�4.61) �0.001 (�0.26) �0.001 (�0.81)SIZE �0.002 (�0.36) �0.01 (�0.82) �0.02*** (�2.76)GROWTH �0.01 (�1.08) �0.02 (�0.89) 0.01 (1.22)DEBT 0.03* (1.43) 0.04 (0.61) 0.03 (0.93)SUB �0.01* (�1.43) �0.01 (�0.73) 0.004 (0.59)CEO 0.01 (0.60) �0.01 (�0.21) 0.01 (0.55)BOARD �0.13*** (�5.63) �0.15** (�2.01) �0.06** (�1.73)INDDUMMIES Yes Yes YesN 486 115 454Adj. R-square 0.17 0.01 0.05

Figures in parentheses denote t-statistics.* Statistical significance at the 0.10 level, one-tailed test.** Statistical significance at the 0.05 level, one-tailed test.*** Statistical significance at the 0.01 level, one-tailed test.

S. Leung et al. / Journal of Contemporary Accounting & Economics 10 (2014) 16–31 27

do not show significant difference in the percentages of INEDs on any of the three key committees. Overall, the findingsbased on the univariate analysis support the argument that family firms are less inclined to appoint independent directorsto corporate boards, but that there is no difference in committee independence between family and non-family firms.

We perform multivariate analyses to test our hypotheses H3 and H4 based on the following regression equation:

16 Wecoefficie

BIi ¼ b0 þ b1FAMDUMi þ b2ROAit�1 þ b3RET VOLATILITYi þ b4DEBTi þ b5SIZEi þ b6AGEi þ b7GROWTHi þ b8SUBi

þ b9CEOi þ b10BOARDi þ INDDUMMIESi þ ei ð4Þ

where the dependent variable is BI (corporate board/committee independence), as previously defined. The independent var-iable is the family-firm dummy variable, FAMDUM. Consistent with the literature, we control for firm-specific variables thathave been shown to be associated with board independence and composition (e.g. Fama and Jensen, 1983; Rosenstein andWyatt, 1990; Raheja, 2005; Linck et al., 2008), including lagged firm performance (ROAt�1), firm risk (RET_VOLATILITY), firmleverage (DEBT), firm size (SIZE), firm age (AGE), firm growth (GROWTH), the number of subsidiaries as a measure of firmcomplexity (SUB), CEO duality (CEO), and board size (BOARD). We also include industry dummies (INDDUMMIES) to controlfor industry effects on board independence. The variable definitions for this regression model are reported in Appendix B ofthe paper.

The multivariate regression test (Eq. (4)) results are reported in Table 5. The results contained in Panel A show that FAM-DUM is negatively associated with PIND, and that the coefficients are statistically significant. These results indicate that thecorporate boards of family firms are less independent than those of non-family firms. These results are consistent with ourunivariate results, and thus support our hypothesis H3. Additionally, our results show that FAMDUM remains negativelyassociated with IND_PRO after controlling for other firm-specific factors.16

conduct a sensitivity test using INEDs with professional background as a proportion of INEDs as the dependent variable. The results show that thent on FAMDUM remains negative and weakly significant at the 0.1 level, one tailed test.

28 S. Leung et al. / Journal of Contemporary Accounting & Economics 10 (2014) 16–31

The results in Panel B on committee independence show that none of the coefficients on FAMDUM are negatively and sig-nificantly associated with AC_PIND, AC_PIND, or RC_PIND. These results indicate that, consistent with the univariate test re-sults, there is no difference in committee independence between family and non-family firms. Thus, our findings do notsupport our hypothesis H4. These results imply that family and non-family firms are meeting the requirement of committeeindependence, even though their independence has no effect on firm performance for family firms.

5.2.4. Robustness checksWe perform two robustness checks to evaluate whether our main results change if alternative specifications of family and

non-family firms and different performance measures are used. In our first set of robustness checks, we use an alternativespecification of family firms. Following Jaggi et al. (2009), we identify a firm as a family firm if two or more members of theboard or the senior management come from the same family. The results (untabulated) for these alternative specifications offamily firms are similar to the main results reported in the paper. We also use 0% or 50% as the cut-off point of ownership toidentify family and non-family firms, and the results remain unchanged.

Second, we use the return on equity (ROE) and Tobin’s Q as the performance measures in place of ROA and market-adjuststock returns (RET) used in the main tests. The results for ROE are similar to those of ROA, but we find no statistically signif-icant association between Tobin’s Q and board independence (BI) either for boards or board committees. We also find nostatistical relationship between Tobin’s Q and either board independence or key committee independence. This lack of asso-ciation between Tobin’s Q and board or committee independence also holds for the family firm and non-family firmsubsamples.

6. Conclusion

Following the US lead, several countries around the world (including developing economies) have modified their cor-porate governance regulations and guidelines to increase the representation of independent outside directors on corpo-rate boards and key board committees (e.g. audit, nomination, and remuneration committees). The main objective of suchregulatory change is to strengthen corporate board monitoring, thereby enhancing firm value by improving firmperformance.

In this study, we examine whether the independence of corporate boards and committees is associated with firm perfor-mance in Hong Kong and whether this association differs between family and non-family firms. We also examine whetherthe representation of independent directors on corporate boards and committees differs between family and non-familyfirms. We use Hong Kong firms because of their unique institutional characteristics.

The results show that there is a significantly positive association between the independence of corporate boards andboard committees and corporate performance for non-family firms, but that this relationship is moderated by family own-ership concentration. These findings suggest that the mandatory corporate governance requirements for board and commit-tee independence are effective for non-family firms only, and that they are not effective in enhancing firm performance infamily firms. Consistent with the argument made by Corbetta and Salvato (2004), our findings show that the ‘‘one size fitsall’’ approach for board and board committee independence may not be appropriate for firms in countries with emergingeconomies. Our results also show that family firms are less inclined to appoint independent directors to corporate boards,but we find no difference in committee independence between family and non-family firms.

This study’s findings enhance our understanding of the relationship between family control, board independence, andcorporate performance. The appointment of independent directors is not likely to improve the firm performance of familyfirms in countries with emerging economies. Therefore, regulators and policy makers should reconsider the need andrequirements for the appointment of independent directors on corporate boards and board committees for family firms.

Our study also has certain limitations that are evident in other international empirical studies. First, although we includea number of control variables in our regression models, our results could still be subject to omitted variable bias. Second,although we use family ownership concentration as a proxy measure for family firms, it is possible that we do not fully cap-ture the level of family ownership and control, especially if the reported information on ownership is opaque in the annualreports. Third, the endogeneity problem generally encountered in corporate governance research may not have been fullyaddressed by the empirical procedures used in this study, which could affect the validity of our findings.

Although this study documents evidence that family ownership and control affects the effectiveness of independentboards and committees, additional research is needed in this area to evaluate the effect of other factors that may potentiallymoderate the association between board independence and firm performance in countries with emerging economies. Thesefactors include institutional ownership and other market-monitoring control mechanisms that are being introduced in thesecountries.

Acknowledgements

We are grateful to the constructive comments of the reviewer as well as the discussant and participants of the 2013 JCAEAnnual Symposium held in Hong Kong in January 2013. The corresponding author gratefully acknowledges financial supportfrom the City University Strategic Research Grant (project number: 7008125).

S. Leung et al. / Journal of Contemporary Accounting & Economics 10 (2014) 16–31 29

Appendix A. Variable definitions for Eq. (1)

Dependent variables

ROAt =Return on assets, which is defined as the ratio of income after tax to the book value of total assets at

the end of the fiscal year

RETt =Market-adjusted stock returns at the end of the fiscal year

Independent variables

BI =Board independence, which is divided into the independence of the full board, AC, NC, and RC FAMDUM =Dummy variable that equals ‘‘1’’ if family ownership is greater than 20%, and ‘‘0’’ Otherwise BI * FAMDUM =The interaction term between BI and FAMDUM

Full board independence is measured by

ONETHIRD =Dummy variable that equals ‘‘1’’ if the proportion of independent directors on the board exceeds one

third of the total number of board members, and ‘‘0’’ otherwise

PIND =The proportion of independent directors on the board

AC independence is measured by

AC_CHIND =Dummy variable that equals ‘‘1’’ if the chairperson of the audit committee is an independent director

and ‘‘0’’ otherwise

AC_PIND =The proportion of independent directors on the audit committee

NC independence is measured by

NC_CHIND =Dummy variable the equals ‘‘1’’ if the chairperson of the nomination committee is an independent

director and ‘‘0’’ otherwise

NC_PIND =The proportion of independent directors on the nomination committee

RC independence is measured by

RC_CHIND =Dummy variable that equals ‘‘1’’ if the chairperson of the remuneration committee is an independent

director and ‘‘0’’ otherwise

RC_PIND =The proportion of independent directors on the remuneration committee

Control variables

RETt�1 =The market-adjusted stock returns at the end of the previous year ROAt�1 =Return on an asset, which is defined as the ratio of income after tax to the book value of total assets at

the end of the previous year

RET_VOLATILITY =The standard deviation of monthly stock returns over the past 5 years FAMDUM =Dummy variable that equal to ‘‘1’’ if the proportion of shares owned by family members on the board

exceeds 20% and ‘‘0’’ otherwise

SIZE =The natural log of the firm’s total assets at the end of the fiscal year in thousands of Hong Kong

dollars

GROWTH =The average percentage growth in total assets for 2 years ending before the fiscal year SUB =The natural log of 1 plus the number of foreign subsidiaries BOARD =The natural log of board size CEO_OWN =The percentage of CEO ownership IND_SHARE =The percentage of outside directors’ ownership INDDUMMIES =The 2-digit SIC industry dummies to control for industry effects

Appendix B. Variable definitions for Eq. (4)

Dependent variables

BI =Board independence, which is divided into the independence of the full board, AC, NC, and RC

Full board independence is measured by

PIND =The proportion of independent directors on the board IND_PRO =The number of independent directors with professional background on the board

AC independence is measured by

AC_PIND =The proportion of independent directors on the audit committee

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30 S. Leung et al. / Journal of Contemporary Accounting & Economics 10 (2014) 16–31

NC independence is measured by

NC_PIND =The proportion of independent directors on the nomination committee

RC independence is measured by

RC_PIND =The proportion of independent directors on the remuneration committee

Independent variables

FAMDUM =Dummy variable that equals ‘‘1’’ if family ownership is greater than 20% and ‘‘0’’ otherwise

Control variables

ROAt�1 =Return on assets, which is defined as the ratio of income after tax to the book value of total assets at

the end of the previous year

RET_VOLATILITY =The standard deviation of monthly stock returns over the past 5 years DEBT =Firm leverage, measured as the ratio of the book value of total debt to the book value of assets at the

end of the fiscal year

SIZE =The natural log of the firm’s total assets at the end of the fiscal year (in thousands of Hong Kong

dollars)

AGE =The number of years the firm’s stock has traded on the Hong Kong Stock Exchange GROWTH =The average percentage growth in total assets for 2 years ending before the fiscal year SUB =The natural log of 1 plus the number of foreign subsidiaries CEO =Dummy variable that equals ‘‘1’’ if the chief executive officer is also the chairperson of the board of

directors, and ‘‘0’’ otherwise

BOARD =The natural log of board size INDDUMMIES =The 2-digit SIC industry dummies used to control for industry effects

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