Board members’ education and firm performance: evidence from a developing economy

Publication Type:
Journal Article
International Journal of Commerce and Management, 2013, 23, (2), pp. 113-135
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Purpose – The purpose of the present paper is to examine the influence of the educational qualifications of board members, including the CEO, on the financial performance of Indonesian listed firms. Indonesia is a developing economy that adopts a two-tier board system. Design/methodology/approach – This study employs a sample comprising 160 firms listed on the Indonesia Stock Exchange (IDX). Tobin’s Q and return on assets (ROA) are used as measures of financial performance. It uses four proxies for board members’ educational qualifications, namely postgraduate degrees, degrees obtained from prestigious universities, degrees obtained from developed countries, and degrees in financial disciplines. Regressions are performed separately for the supervisory board, management board, and CEO. Findings – This study provides empirical evidence that the educational qualifications of board members and the CEO matter, to a particular extent, in explaining either ROA or Tobin’s Q. For example, CEOs holding degrees from prestigious domestic universities perform significantly better than those without such qualifications. Practical implications – Even though intellectual competence should appear to be one of the considerations in the appointment of board members, educational qualification is not always a good proxy for superior advising or managerial quality. There may be many other factors that need to be considered, such as experiences, managerial skills, networks, and other skills obtained outside schools. As such, the establishment of a nomination committee, which is expected to provide independent recommendations on qualified candidates to serve in the boardrooms, plays an important role. Originality/value – Empirical studies focusing on the influence of the educational backgrounds of board members and the CEO on financial performance are still rare in the literature. This study is among the first to address such an issue in the context of a developing economy.
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