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Archives of Business Research – Vol. 10, No. 11
Publication Date: November 25, 2022
DOI:10.14738/abr.1011.13348. Ismail, A. M., Fauzi, S. A. A., & Yatim, N. (2022). The Impact of Board Capabilities on Firm Financial Performance: A Resource-Based
View Perspective. Archives of Business Research, 10(11). 8-27.
Services for Science and Education – United Kingdom
The Impact of Board Capabilities on Firm Financial Performance:
A Resource-Based View Perspective
Aida Maria Ismail
Faculty of Accountancy, Universiti Teknologi MARA
Selangor Campus, 42300, Malaysia
Siti Aisyah Amirah Mohd Fauzi
BAC Renewable Energy Sdn Bhd
Kuala Lumpur, 59200, Malaysia
Normahiran Yatim
Faculty of Accountancy, Universiti Teknologi MARA
Selangor Campus, 42300, Malaysia
ABSTRACT
The study aims to examine the effect of board capabilities (board composition,
board gender diversity and board independence) on firm financial performance in
Malaysian public listed companies based on the Resource-Based View Theory
(RBVT). The board capabilities are crucial for the investors to create a better
organisational performance. The study also used regression analysis to determine
the relationships between the variables. The data were extracted from Thomson
EikonTM DataStream and annual reports of companies listed under Bursa Malaysia,
comprising five years’ worth of information. The results demonstrated a significant
impact of board capabilities on firm financial performance. Specifically, board
composition and board gender diversity significantly affected firm financial
performance. Conversely, board independence and firm financial performance
presented no significant impact. Ultimately, the study outlines the essential factors
that impact firm financial performance to restore public confidence towards the
companies. Hence, the corporate governance factors should be emphasised to
protect investors’ interests.
Keywords: Firm financial performance, board capabilities, board composition, board
gender diversity, board independence, Resource-Based View Theory
INTRODUCTION
Corporate governance is a system of rules, practices, and processes in directing and controlling
firms. Generally, corporate governance is vital to competitively develop established companies
or firms within the local and global industries. Singh and Zammit[66] stated that the 1997 and
1998 Asian financial crises seriously affected corporate governance, explaining the emphasis
in Asia. The financial collapse occurred due to an ineffective board of directors, weak internal
control, unreliable financial reporting, inadequate disclosure, lax enforcement in ensuring
compliance, and poor audits.[75] Hence, the United States (US) scandals and Asian financial
crises became the wake-up call for better corporate governance and transparency, particularly
among Malaysian firms.
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Ismail, A. M., Fauzi, S. A. A., & Yatim, N. (2022). The Impact of Board Capabilities on Firm Financial Performance: A Resource-Based View Perspective.
Archives of Business Research, 10(11). 8-27.
URL: http://dx.doi.org/10.14738/abr.1011.13348
Extensive studies performed on the topic commonly applied the agency theory perspective.[12]
Nonetheless, few studies used the RBVT by Wernerfelt[74] (1984), which focused on the
internal factors or firm resources affecting firm success the most instead of industry factors.
The RBVT describes that firm internal resources are used to create a competitive advantage to
survive in the industry with competitors. Thus, firms could achieve competitive advantages
with resources and capabilities that are valuable, rare, imperfectly imitable, and not
substitutable.[5] Therefore, the study emphasised firm intangible assets, the board of directors
as the human capital resources of the firm. Pugliese et al.[62] mentioned that the corporate
boards are essential in granting access to multiple resources and providing managers with
strategic advice to facilitate in gaining maximum profit for the firm. Directors must possess the
capabilities to ensure good decisions and management for the companies without issues from
the lack of capabilities. Franks[24] defined capability as “knowledge, skills, and attitudes of
individual directors, separately or as a board and their competence to undertake the legal,
fiduciary, and ethical responsibilities assigned to them”.
Problem Statement
The Malaysian Code of Corporate Governance (MCCG) was amended in 2017. Bhatt and
Bhatt[12] stated that the high-level finance committee made efforts to reform corporate
practices to promote corporate governance among companies, specifically in Malaysia. The
listing requirements under the newly amended MCCG emphasised the company board of
directors. The directors are the pillars of the companies who need to use the resources and
capabilities to improve company performance.[52] International scandals such as the Enron
case, Xerox, and Worldcom occurred due to the directors and poor corporate governance
practices. The reasons for the corporate giants collapse include ineffective board of directors,
weak internal control, unreliable financial reporting, and inadequate disclosure.[45]
Recent events in Malaysia have increased interest in the board capabilities following the Felda
Global Ventures (FGV) Holdings scandal, whereby the directors were paid excessively high
salaries and bonuses.[56] Barrock[6] reported that despite the tremendously high salaries, the
directors failed to perform duties with reasonable care, skill, and diligence, resulting in huge
losses of RM17 billion until presently. The scandal caused the Securities Commission Malaysia
(SC) to implement new requirements for the MCCG 2017 whereby companies must disclose
directors’ remuneration to ensure transparency in organisations.
The RBVT explains that appointed directors should use capabilities, such as expertise, skills,
and experiences, to enhance firm reputation by enabling connections with external
organisations or resources to obtain competitive advantages over others.[61] Hence, the study
enhances existing studies on the board capabilities and firm financial performance in Malaysian
public listed companies using the RBVT. Accordingly, the main issue is whether board
capabilities influence firm financial performance. Is the answer “yes” or “no”, or does it depend
on the firm situation?
LITERATURE REVIEW
Resource-Based View Theory
Kraaijenbrink et al.[43] described RBVT as one of the most influential and cited theories in
management theorising. The theory outlines the internal sources of firms sustained
competitive advantage (SCA), involving profitability and the value factor of firms in various
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Archives of Business Research (ABR) Vol. 10, Issue 11, November-2022
Services for Science and Education – United Kingdom
industry sectors, as highlighted in Ismail, Ahmadi, Yatim and Ismail[34]. The RBVT highlighted
the internal factors or firm resources that affect firm success the most instead of industry
factors. Additionally, Wernerfelt proposed the significance of acquiring heterogeneous and
idiosyncratic firm resources for superior performance and presented firms ability to gain
competitive advantage in the capital market. Meanwhile, Barney[5] mentioned that competitive
advantage is achievable through the resources and capabilities controlled by firms that are
valuable, rare, imperfectly imitable, and not substitutable, as confirmed by Kraaijenbrink et
al.[43].
Cardeal and Antonio[54] added that the valuable, rare, and inimitable traits are divided into
two categories regarding organisation resources and capabilities. Firm routines and processes
are examples of firm capabilities. Therefore, the capabilities denote the “O” in valuable, rare,
inimitable, and organisation (VRIO) that demand organisations to use and transform resources
to achieve a sustainable competitive advantage. Thus, resources and capabilities is a set of
tangible and intangible assets, including management skills, the organisational processes and
routines, and the information and knowledge firms control. Hence, valuable, rare, and imitable
resources managed by unskilled people would not benefit companies.[41]
Kraaijenbrink et al.[43] divided resources into three resources: physical capital resources,
human capital resources, and organisational capital resources. Nevertheless, the study
emphasised the human capital resources: the board of directors. Notably, Wernerfelt[74]
argued that firms could gain a competitive advantage through tangible and intangible
resources. Specifically, tangible resources denote firm assets, while intangible assets are the
capabilities of individuals in the organisation, such as the board of directors.
Development of the Malaysian Code of Corporate Governance
The first MCCG code was introduced in 2000 and used as a tool to enhance the corporate
governance performance of Malaysian public listed companies.[45] The first MCCG mainly
referred to the United Kingdom (UK) code with changes on the internal governance structures
to suit the Malaysian context and accommodate the Cadbury report code of best practice. In
2001, the SC enforced all Bursa listed companies to comply with the MCCG listing requirements.
The MCCG 2000 established company principles and best practices to create an optimal
governance framework. The SC introduced a new amendment in 2007 and 2012 to achieve
better firm performance, enhance the MCCG governance and improve any weaknesses of the
previous MCCG.
A new code was established in 2007, which revised the MCCG 2000, highlighting the board of
directors, audit committees, and the internal audit function. The new code ensures the
effectiveness of the important roles in firms and that the roles and responsibilities are
conducted effectively.[11] Subsequently, a code was introduced in 2012 comprising eight new
principles and 26 new recommendations. The principles stipulate clear roles and
responsibilities of the board, reinforcing the board composition, strengthening independent
directors’ effectiveness and commitments, and enhancing financial reporting integrity to
identify and manage risks, ensure a high-quality disclosure and determine the relationship
between companies and shareholders. The MCCG 2012 required Malaysian companies to
comply with new principles and recommendations.